The systems of accumulation of costs can at a certain moment set the management guidelines and change the way of making decisions of those responsible for the financial area and senior management
Most of the people who do not have deep knowledge of the financial, accounting and administrative matters of the companies, believe that the handling of volumes of information supported in working documents are relatively easy. Organizations can handle thousands of requisitions, purchase orders, receipt reports, invoices, vouchers, checks, merchandise issues and all kinds of commercial documents at all times, thus it becomes clear that it is necessary to implement some systems within the company accountants that are effective at the time of requesting information on the business system in all its fields. This writing will deal primarily with cost accumulation systems that are of vital importance in the management of the company.
The accumulation and classification of the information regarding the costs of the products that the company produces are very important tasks in the consolidation of the company as a productive unit.
In general, the accumulation of costs could be classified as the systematic and organized collection of cost data through a set of procedures or systems. The cost classification would be given as the grouping of all production costs into various categories in order to meet the needs of management.
Unit costs facilitate the valuation of the cost of products sold and ending inventories
But it should be taken into account that an indeterminate number of data that only indicates the value of the total cost of production provides useless information about the productive and operational function, since the volume of articles produced varies from period to period. Thus, to find this flaw, a common denominator must be sought that clearly explains the behavior of costs within the productive phases.
Unit costs then arise as a response to the problem of implementing a cost system within the organization, since with these at any time various volumes and costs can be compared, also expressed in terms of measurement by production units as cost per ton, gallon or batch.
Below are the cost accumulation systems used mostly by manufacturing and large-scale production companies.
Cost accumulation
An adequate accumulation of costs provides management with a basis for forecasting the economic consequences of its decisions and allows it to make improvements in its production levels by asking questions such as: What products should be produced? Should a department be expanded or reduced? What sales price should be set? Should the product line be diversified? and many others that at a certain time help you improve your productive level.
Periodic cost accumulation system
This system provides fairly limited information on the cost of the product during a period and requires a series of adjustments to be made at the end of the period to determine the cost of finished products. These are done in the financial accounting system. Periodic physical inventories are taken to adjust inventory to determine the cost of finished products.
A periodic system is considered an incomplete system of cost accumulation, since the costs of raw materials, work in process, and finished products can only be determined after taking physical inventories. Due to this limitation, only small companies use these accumulation systems.
Cost flow in a periodic system of accumulation
In a periodic cost accumulation system, the cost of items used in production plus the cost of work-in-process inventory at the beginning of the period equals the cost of goods in process during the period. In order to determine the cost of the items produced, the cost of the ending inventory of work in process is subtracted from the cost of the items in process during the period. The cost of finished goods plus the beginning inventory of finished goods equals the cost of the items available for sale.
When the ending inventory of finished products is deducted from this figure, the cost of goods sold is generated. Total operating costs are calculated by adding selling, general and administrative expenses to the cost of products sold.
This is represented like this:
Costs can be accumulated under a periodic or perpetual system of cost accumulation.
Perpetual cost accumulation system
In this system the continuous accumulation of information regarding the costs of the products, compared to raw materials, work in process, finished items, the cost of manufactured items and the cost of items sold. This cost system is generally used by medium and large companies.
A system of this type is designed to provide relevant and timely information to management, in order to assist in planning and control decisions. The main objective in this system, as in the case of the periodic system, is the accumulation of costs, it is the accumulation of total costs and the calculation of unit costs.
In this system the information related to the inventory of materials, inventory of work in process, inventory of finished items, the cost of manufactured items and the cost of items sold, is continuously available, instead of only being at the end of the period. as happens in the periodic system of accumulation of costs.
Cost flow in a perpetual accumulation system
In a perpetual system, the cost of direct materials, direct labor, and indirect manufacturing costs flow through the work-in-process inventory to the finished item inventory. The total costs transferred from work-in-process inventory to finished item inventory equals the cost of the items produced. Ending inventory of work in process is the balance of unfinished production at the end of the period. As products are sold, the cost of goods sold is transferred from finished goods inventory to the cost of goods sold account. Ending inventory of finished items is the balance of unsold production at the end of the period.Total expenses are equal to the cost of the items sold plus selling expenses, general expenses and administrative expenses.
This is represented like this:
The application of each of these systems is free will for those responsible for the cost area of the company, but it is much more advisable to apply a perpetual accumulation system due to the advantages it has over the periodic system. This becomes evident in the sense that the information must be provided in an efficient and fast way, since it is on this that the management makes decisions.
Bibliography
Polimeni, Ralph S.; Fabozzi, Frank J.; Adelber, Arthur H.; Kole, Michael A. Cost Accounting. Third Edition, 1997. McGraw-Hill.
