We can ask some questions in order to increase interest in the subject before summarizing the development of this work, to have a general idea:
What is the real utility of cost accounting? What is the objective of today's companies working based on strategic cost management?
In the development of this report, we will review the importance of implementing a cost system that is autonomous from the central accounting system, due to the help it gives us to control the main expense item of the company's operation.
Then we will explain why it is necessary to implement information technologies - such as ERP administrative systems - to achieve efficiency in the management and control of costs, until reaching the enablement of a Balance Score Card that will be fed directly from the entry of the purchase documents and its immediate effect on the company's results.
All this in order for the Board of Directors and Management to know as quickly as possible all the information necessary to make the corresponding decisions to align the company with the achievement of the proposed objectives.
That is, how information technologies operate to make the operation of the company more efficient today.
goals
This paper presents the main reasons that lead a company to invest in ERP systems, to control cost accounting separately from the central module, focus it towards the management perspective given the main item that it means to obtain success.
It will also explain how the main cost items are determined: Operations, Labor and Administration and Sales.
How this information is integrated into the single accounting module.
The objective that the cost system helps to achieve, does it fit strategically with the overall purpose of the company?
How the accounting, results and financial reports of the company are generated, on the dates and periods determined by the same company
How this information is compared with the projections and budgets generated to know if these results are as expected
How this information is made available to the Company's Management and Board of Directors through the available technological means.
Introduction
To get deeply into the subject, we will seek to know and clarify below 2 concepts: Cost Accounting and ERP systems.
Cost accounting
The cost is defined as the value sacrificed to produce and / or acquire goods or services by reducing the assets themselves or by incurring liabilities at the time the expected benefits are obtained.
Senior managers, management and administration, with the information provided, are constantly faced with different situations that directly affect the operation of the company, therefore it is of vital importance for the decision-making process to know this information in a clear way, fast and effective, this makes cost accounting take great relevance today in the face of the needs of information users.
The information required by the company can be found in the set of daily operations, clearly expressed in cost accounting, from which the evaluation of administrative and managerial management is derived, becoming a fundamental tool for the consolidation of the entities.
Due to this last explanation, companies today must at least study the possibility of implementing information technologies to help control these daily operations.
ERP systems
The Enterprise Resource Planning (better known as ERP for its acronym in English "Enterprise Resource Planning") are management information systems that integrate and manage many of the businesses associated with the operations of administration, production and distribution aspects of a company engaged in the production and / or marketing of goods or services.
Its history dates back to the 1960s, since that date there have been many radical changes in the information management of each business organization, at that time, companies were just beginning to use the first management software packages, designed mainly for inventory management.
Ten years later, the Material Requirements Planning systems (known as MRP, “Material Requirement Planning”) were coupled, which assisted in the planning of the needs regarding raw materials and components in the manufacturing industries.
Then in the '80s, the concept continued to evolve to encompass the management of production and distribution activities, and it became known as Manufacturing Resource Planning, but when its scope was extended to other critical areas of the company such as finance, human resources, purchases, sales, etc., was just the moment in which the term of Company Resource Planning, better known as ERP, was established.
ERPs are working widely in all kinds of modern businesses. All the departments that are involved in operation and / or production are integrated into a single system, in addition to manufacturing or production, including strategic management.
ERPs integrate everything necessary for the operation of the company's business processes. We cannot talk about ERP when only one or a small part of the business processes is integrated. The very definition of ERP indicates the need for "availability of all information to everyone all the time"
Fundamentals
Below we will indicate the main fundamentals for which we believe it is necessary to carry out this work, indicating only a couple of questions:
Does traditional accounting fulfill its function of informing the people in charge of directing, so that they meet the objectives set by the business and the company today?
The answer is simple: NO
Is it necessary to implement a cost system?
Is it necessary to invest in information technology today?
The answer is again simple: YES
Does this action increase the chances of achieving the Objective-Company for which it was selected?
Obviously, to achieve success in achieving objectives, companies are obliged to implement information technologies available in the current market and work according to the results that it generates.
Development
Where is Cost Accounting located?
Financial Accounting together with Management Accounting constitute the two most important branches of Accounting, both arising from the need for specialization and fulfillment of clearly defined purposes in each company.
Financial Accounting
It is mainly interested in Financial Statements for external use by investors, creditors, financial analysts, government agencies and other groups interested in profitability and its results.
Management Accounting
It is a part of accounting that aims to capture, measure, record, assess and control the internal circulation of values of the company, in order to provide information for decision-making on production, internal price formation of cost and on the sales price policy and analysis of the results, by contrasting with the information revealed by the factor and product market, based on the technical laws of production, the social laws of organization and the economic laws of the market.
Management Accounting not only covers the internal decision-making of the company, but is also used for the external analysis of the company about its behavior with respect to the competitive environment.
Cost Accounting is a branch of Management Accounting that is fundamentally related to the accumulation and analysis of cost information for internal use by managers, in inventory valuation, planning, control and management. decision making.
It is also the one that synthesizes and records the costs of the different business units - whether they are producers of goods or services - and commercial units of a company, so that the results of each of them can be measured, controlled and interpreted, through obtaining unit and total costs in progressive degrees of analysis and correlation.
Classification of costs
We will mention the main classification criteria for costs in the company:
- Regarding the accounting periods: anticipated, current and deferred expenses. In relation to the elements that comprise it: production, distribution and administration costs. Regarding the form of concentration: costs for work orders or for processes. In relation to the volume of production: fixed, variable and mixed costs. In relation to production: prime cost and conversion cost. In relation to its possible allocation: direct and indirect costs. Regarding the degree of control: controllable and uncontrollable costs
Basic elements in the classification of costs
In some cases, the cost elements are understood and worked in the same way, they only differ in the way of presenting the analyzed information, but we see that 2 large groups always appear and are distinguished:
- Production Costs Administration and Sales Costs
Below we present in detail the explanation of each one of them:
Production costs:
They are those expenses in which are incurred directly and indirectly during the process of transformation of raw materials and indirect materials into finished products, it is also recognized as the sum of the three cost elements:
+ Direct Materials (MD)
+ Direct Labor (MOD)
+ Indirect Manufacturing Costs (CIF)
Selling and administrative expenses:
They are those that originate in the operation, direction and control of a company.
When detailing this last group there is a series of sub-classifications that depends on the company's management to give them a categorization, below we indicate some examples and in some cases the explanation of some of them:
Indirect Labor and Personnel Salaries, in this case it can reach advertising personnel, but as mentioned above, it depends on the decision of the Management and / or Board of Directors.
Fixed Expenses that correspond to the area of the company where the administrative offices operate (rent, patents, basic services, etc.).
Supplies and stationery consumed in administrative units, such as Treasury (expenses, checks, receipts, etc.), Accounting (Purchase-Sale Books, Seniors and Auxiliaries, Account Analysis, etc.), Internal Audit, General Management, Supply, etc.).
Distribution and / or Sales Expenses: It is the cost that is generated in the sales process, starting with the finished product until the product is delivered from the company to the customer, such as: sales commissions, freight, fuel from the delivery vehicles, maintenance costs for said vehicles, vehicle leasing for the distribution of the products sold, etc.
Financial Expenses: They are related to obtaining funds for the operation of the company, they include the interests paid for the loans and the expenses incurred in the process of requesting and approving credits for the company.
Objectives of cost accounting
Taking production as a fundamental aspect and what was explained above, we present below the main objectives that Cost Accounting must meet:
- Serve as a basis for determining the prices of products or services Classify expenses according to their nature and origin Evaluate the efficiency in terms of the use of material, financial and workforce resources used in the the activity Analyze the expenses and their behavior with respect to the standards established for the production in question Analyze the costs of each structural subdivision of the company, based on the Expense Budgets that are prepared for it Analyze the possibility of reduction of expenses, we remind you that the systematic reduction of the cost of production is one of the sources of accumulation of data on the basis of which the rates of expansion and reproduction depend and the subsequent rise in the material standard of living of the company (growth).Facilitate the assessment of possible decisions to be taken, which allow the selection of that variant that provides the greatest benefit with the minimum of expenses.
Calculation of actual costs of sales
The determination of the real cost of sales is of great importance for the Company Management, since it allows them to determine the profit of the company, in addition to calculating the monetary values of the inventories of raw materials, production in process and finished production, establish or demonstrate the profitability of the sales price lists, plan production in accordance with the level of activity foreseen for a period of operations, control inputs in the production process and make decisions for new production and sales alternatives.
In the vast majority of companies, the determination of the real cost of sales is calculated using the following formula:
(+) Initial inventory of the period (both raw materials and products in process and finished).
(+) Income and purchases of raw materials during the period.
(-) End of period inventory (both raw materials and products in process and finished).
(=) Real Cost of Sales
(Annex 1 shows example reports of both consumption expenses and operating results for a given period)
Below we will indicate in detail the concept and use of each of these terms, and their relationship and management under ERP environment
Inventory
The inventory is the set of tangible goods that are held for sale in the ordinary course of business or to be consumed in the production of goods and / or services for subsequent marketing.
It is often one of the largest existing assets in a company, it appears on the Balance Sheet in the group of current assets.
In the Income Statement, the ending inventory is subtracted from the cost of merchandise available for sale and thus be able to determine the cost of merchandise sold during a given period.
The inventory includes, in addition to raw materials, products in process and finished products or merchandise for sale, materials, spare parts and accessories to be consumed in the production of manufactured goods for sale or in the provision of services, packaging and containers, in addition to inventories in transit.
Efficiently controlling and accounting for the valuation of inventories is a very important part of accounting systems, because the sale of inventory is the heart of the business.
Under this last premise, we must be clear that we must necessarily determine the following parameters if we want to have a good information base for an accounting system under ERP environment:
Let's review again the concept of cost systems, its objectives and add some new ideas:
Cost systems are a set of methods, standards and procedures, which govern the planning, determination and analysis of cost, as well as the process of recording the expenses of one or more productive activities in a company
Within this last concept, the objectives of a Cost System are those listed below:
a) Establish guidelines to which cost allocation procedures are subject, such as:
- Assign an accounting account to each item for each business line (in case of having more than one in the company) and correctly assign to the business unit to which they belong.
b) Determine the criteria to be applied in the distribution and apportionment of expenses.
- Correctly determine the costs of the items in process and the finished items for that period.
c) Establish the opportunity or date on which the costs should be calculated, the calculation methods, the bases that can be used, how certain costs have to be treated, how to determine the total and unit costs, as well as the methodology for the generate cost budgets and determination of standards.
- Definition of inventory cycles by business unit (A physical inventory is carried out for each inventory cycle).
This information will allow the following operations to be carried out in an accounting system:
- Automatic accounting of inventory costs: Allows automatic transfer of products both between the different business units of the same company, and between the business areas of different companies.
(In both cases the system generates the pertinent legal documents either Dispatch Guides or Invoices; or vice versa).
Entry of Products to Inventory
- The entry of goods, in an ERP accounting system, is carried out in each business unit, and possibly both the values reported by the Supplier (according to the Guides or Invoices received), as well as the values registered according to the control of the reception in warehouses are recorded. and the current contract with the supplier according to the system itself.
(In the next point, the option of entering price contracts by supplier and period in an ERP accounting system will be reviewed)
- The difference calculated when entering both records, give rise to different types of postings and automatically generate procedures, such as requiring the supplier Credit Notes for the difference in the price charged as for weight and / or quantity control.
Workforce valuation
It is the physical or mental effort used to make a product.
It is the one directly involved in the manufacture of a finished product that can be easily associated with it.
In any case, it depends on the decision of the Management to incorporate this cost into the valuation of the product and of the inventories, the most correct thing is that this is the case, since it is part of the so-called prime costs.
There is a variety of formulas to control and incorporate, for example, for serial production it is part of the variable costs, depending entirely on the volume its importance in the final cost of production.
Deepening at this point is not the reason for this report so we will only name it.
Price contracts
In a multi-company ERP system whose objective is to keep track of the different collection items that make up the purchase and / or service contracts that the company establishes with its creditors.
These contracts can be formal (real estate rental contracts, purchase contracts via financial leasing, equipment maintenance contracts, etc.) or they can be informal (basic service expenses, cable TV, etc.).
Below we will indicate in detail how to calculate a real estate lease and the suggested concepts for this type of control:
Basic information:
Contract Item: Contract Item Code.
It must correspond to one of those defined below in the following table.
Provider: RUT of the issuer of the invoice / ticket in which the collection of the item will be credited.
Currency Type: Code of the currency in which the item is valued.
Change Day: Day of the month, for which the conversion factor of the type of currency encoded into pesos must be used.
Invoice Day: Day of the month on which the item should be charged
• For each Contract Item indicated below, there are specific data for its form of calculation, and others that are common to all of them:
Fixed Value: Corresponds to a fixed value to be applied in one or more months, subject to readjustment or discount conditions to be applied in one or more months.
This value can be specified in different currencies (Peso, Dollar, UF, etc.).
Percentage on sales: It has different ways of operating, which varies according to the definition of the contract, below we will review some examples:
With reference item:
It consists of specifying the item that will be used to calculate the percentage of sales.
The calculation method is as follows:
Value Collected = (% of Net Sale) - (Referenced Item, for example, Fixed Value)
With value (Balance sales):
It consists of applying the percentage to the difference of the Net Sale with the Balance Sales.
There is the possibility of applying a different percentage when net sales are less than equilibrium sales.
The calculation method is as follows:
• If the net sale is greater than the equilibrium Sales:
Lease Item = x% on (Net Sale - Equilibrium Sales)
• If the net sale is less than the equilibrium Sales and greater than the lower limit:
Item Lease = y% on (Net Sale - Lower limit)
• If the net sale is less than the lower limit:
Item Lease = 0
Payment Item: It consists of comparing a rental item against a certain limit so that the indicated percentage is applied to the difference.
There are two calculation procedures depending on whether only the Lower Limit is used or whether both the Lower Limit and the Upper Limit are used.
Control by Range: It consists of the definition of a valid range for the item, in this way when entering the payment document (invoice or ticket), the system will validate that the amount is within the specified range, it is generally used for basic services.
Percentage of Common Expenses: It consists of defining a percentage to be paid on the total of reported common expenses.
Interaction with the single accounting module
The Contract Control System interacts automatically with other modules, highlighting for example the following:
- In the Payment Control System, automatic validation of Invoices or Lease Receipts, according to the established conditions. Automatic accounting of expenses, according to the accounts associated with each Expense Item.
(Annex 2 shows example reports for Expenditure Item Income (Lease + Services) by Premises, Lease Contract income with a minimum value surcharge according to calendar and Projected Expenditure Item Inquiry v / s Actual Expenditures by Premises)
The transfer of information from the cost control modules to the single accounting system is shown below:
Cost control
In an accounting system under an ERP environment, it is allowed, and it is even one of its main virtues, to control costs in different ways, mainly the following:
Budget Control
Budgetary control is a process that allows evaluating the performance and performance or result obtained in each business center, for which comparisons are established between the achievements and the initial objectives included in the budgets, which are usually called variations or deviations.
Budgets and control are therefore complementary processes since they define the planned objectives, which have value when there is a plan that facilitates their achievement, while the defining characteristic of budgetary control is the comparison between programming and execution, being due perform methodically and regularly.
The fundamental axis of budgetary control focuses on the necessary information about the desired level of performance, the actual level and the deviation, in addition, action is necessary to implement plans and modify future activities.
Budgetary control, therefore, goes far beyond the mere location of a variance.
(In detail annex 3 a BSC query is shown to show differences in the actual results versus budgets).
The implementation of a control mechanism through the budget implies comparing the results with the corresponding programs, and if they do not coincide, the causes of such differences must be analyzed. In this context, therefore, to exercise effective control, the following considerations must be made:
- Everything that has been the subject of a schedule must be subject to control. Any deviation between programs and budget execution has a reason that must be analyzed and that may be due to a programming failure, a defect in the execution or both reasons. Any deviation must be assigned to a specific person in charge, which will require a thorough analysis of the deviation. Deviations may require corrective measures; In other words, the ultimate goal of budget control is not to convey fear to managers, but to make them see the deficiencies that have occurred and suggest the corrective actions to take.
Control Over Theoretical Costs
The cost control based on theoretical costs through the system's formulation is capable of comparing the theoretical costs (according to recipe) against the real costs, obtained from the cost control system.
It allows the definition of recipes for the different commercialized products, obtaining the cost of inputs required according to the formulation of each recipe.
The module could also make purchase requests or dispatch requests to suppliers, based on a projection of inputs required for a sales projection.
Recipe registry features:
Recording the components of a recipe with the preparation instructions.
You might also consider registering the finished product image associated with the recipe to facilitate preparation instructions.
The system considers that a recipe is composed of one or more ingredients, and that an ingredient can in turn be a recipe itself.
The system incorporates the management of differentiated prescription sale prices by business unit, allowing to differentiate recipes by business lines.
(In detail annex 4 an example report is shown for Income and consultation of recipes, for purposes of calculating differences in the results)
Benefits of an ERP system
The virtues and capabilities of managing a cost system with ERP systems are described below:
- Efficient recording and updating of information
Each ERP system allows you to obtain updated information "online", so that any erroneous - or unexpected - record of information is detected immediately (note that we use the term "effective" due to the speed with which the information is detected, which which does not mean that it is efficient).
- Flexibility to prepare queries:
The system allows a wide variety of queries to be made, in such a way that queries can incorporate different search and ordering criteria.
- Ability to export information:
Each and every one of the queries and reports that make up the system have the functionality of exporting to spreadsheets (such as: MS-Excel), text documents (such as PDF or Microsoft Word) or web environment (HTML and others)
- Sending reports by email.
Directly from the report printing window, these can be printed, generated as a text file or sent by email.
- Remote printing over the Internet:
In the case of users connected in web mode, the system is capable of recognizing the local printers that the user has defined.
- Transaction audit:
Registration of a “log” of transactions (by user, date, time, etc.), in which for each option that the user executes, the system records said event. This record can be consulted in order to audit access to the system by users.
- Security: user and role management:
The System manages its own security scheme which complements the security levels of the database and allows the definition of access profiles to each of the menu options.
- Definition of supplemental privileges:
Each module implements additional levels of security, relative to the role each user performs. This is how it is possible to restrict user by accounting entity, by treasury office, etc.
Limitations of an ERP system
Some of the limitations and main disadvantages of implementing an ERP system are described below:
- High cost of implementation:
Generally, along with purchasing the basic software and program licenses itself, hardware upgrades and complex data networks must also be considered.
- Adaptation of administrative processes:
Despite the flexibility shown by these systems, generally consensus must be reached regarding the adaptation of some operational processes to comply with the recording of accounting events.
- Changes in personnel selection processes
It is the obligation of companies that enable ERP to implement selection processes that include a high motivation to use information technologies.
- Unique vendor dependency
You must choose a particular product, so then maintenance and updates are "tied" to this single provider, having to accept its conditions.
Conclusions
As a conclusion we can develop the following idea:
The need to implement administrative cost management systems is aimed solely and exclusively at improving the information for the use of those who must determine the courses of action in each Company, for which the following concept explained below, and already indicated above clearly graphs it:
Administrative systems are a business management tool that continuously shows when a company and its employees achieve the results sought by the strategy.
It is a method of measuring the activities of a company in terms of its vision and strategy, which provides managers with a comprehensive view of the business performance.
The concept of Balanced Scorecard (or Balanced Store-Card, BSC for its acronym in English) was presented in 1992, based on a work carried out for a semiconductor company (The company in question would be Analog Devices Inc.).
Its authors, Kaplan and Norton, propose that the CMI is an administration system or administrative system (Management System), which goes beyond the financial perspective with which managers usually evaluate the performance of a company.
It is also a tool that helps the company express the objectives and initiatives necessary to comply with the strategy.
The WCC suggests that we view the organization from four perspectives, each of which must answer a certain question:
• Of the customer (Customer) - How do customers see us?
• Internal Business - What should we excel at?
• Innovation and Learning - Can we continue to improve and create value?
• Financial (Financial) - How do we see ourselves in the eyes of shareholders?
The information that the company can obtain and use, depending on its nature, may be valid for one or the other Dashboards.
Obviously, Cost Accounting is an important part for the conformation of the last point indicated.
Companies are increasingly concerned with having organized, agile and fluid communication systems between all levels of responsibility.
Said communication must be given through the channels that are established and make it possible for the staff, through a clear knowledge of the issues that affect them, to feel more involved in their daily tasks.
Final thoughts
Adapting to changes
Why in today's companies is there an emphasis on constant review and fostering the control environment?
Previously, a control system was efficient for a long period of time, therefore, the function of the internal auditor was only to analyze the items and accounts generated by daily transactions in a stable control environment.
The struggle of companies to survive is caused by a whirlwind of changes (technological, consumer preferences, market characteristics, owner expectations, among other causes), and the reactions of companies to these new realities, to their At the same time, they also provoke modifications in the applied administrative processes (implementing new technologies, acting on the production processes assimilating the changes of their consumers, etc.), therefore, an effective control environment today may become obsolete tomorrow.
The control and internal audit systems must identify the need to modify it as circumstances require.
In themselves, accounting professionals must rise to these challenges and feed back on these systems as they do, in order to be able to meet requirements and adapt to ideas such as the following:
"Preventive" internal audit
Companies today are mainly oriented to prevent and, secondly, to increase the efficiency and effectiveness of administration and operation.
The procedures used, the events that occurred and the internal and external framework in which the company operates are analyzed in order to propose improvements.
Prevention is obtained through the improvement of the internal control environment, proposing new tools or improving existing ones, that is, it is intended that the processes make the realization of illicit or errors as difficult as possible through the establishment of a control prior to make effective the patrimonial damage.
It collaborates in improving the efficiency and effectiveness with which the organization operates through studies and analysis of the processes.
Although the issue of efficiency is not its main focus, a first approach is made, aimed at saving resources and increasing their quality.
If it is determined that an in-depth study of the situation is necessary, specialists should be assigned and in some cases outsourced those services of the subjects which are detected shortcomings.
Bibliography
Websites:
Gestiopolis
www.gestiopolis.com
“Cost Accounting”
Yusneidys Paz Ramírez - October 2007
"Nature of Cost Accounting"
Jorge Montao J. - October 2006
Monographs
www.monografias.com
"Budgets"
Johanna Córdova - May 2005
"From Financial Accounting to Cost Accounting"
Eliécer Castiñeira López / Yaima Brito Ibarra - June 2006
Wikipedia
"Business Resource Planning"
"Balanced Scorecard"
Annexes
Appendix 1:
(Annex 1 shows example reports of both consumption expenses and operating results for a given period)
Appendix 2:
In detail, annex 2 shows example reports for Income of Expenditure Items (Lease + Services) by Local, income of the Lease Contract with a surcharge in Minimum Value according to the calendar and Consultation of Projected Expenditure Items v / s Real Expenses by Local
Annex 3.
(In detail annex 3 a BSC query is shown to show differences in the actual results versus budgets)
Annex 4.
(In detail annex 4 an example report is shown for Income and consultation of recipes, for purposes of calculating differences in the results).
