Currently, there are several softwares or ERP that involve various areas of the company; However, many of them ignore the importance of identifying costs and only offer basic costing systems that do not allow easy identification of variations in real costs vs. the planned ones and much less when the standard costing system is used as predefined in companies.
Most of the time, information systems are implemented in companies according to their needs, so it is of utmost importance that personnel from accounting areas participate in the design and implementation of the software that will be used to obtain financial information related to costs.. Many times the software only has the mode of determining costs, based on the defined method, but does not manage to carry out the "State of production and sale cost" in such a way that it is not possible to reconcile the total balance of manufacturing costs of the month with the figures resulting from the differences in initial and final inventories or even with the most important data of the financial statements: the cost of sales.
In the absence of this reconciliation, a critical information gap begins to be created between manufacturing costs and the company's basic financial statements. However, it should not be forgotten that the most important items in the financial statements of an entity are inventories and cost of sales, in addition to fixed assets in the case of manufacturing companies and therefore it is extremely important that costs are identified in as much detail as possible.
Keywords: Costing systems, ERP, Activity-based costing, ABC, Production and sale cost statement, information systems.
1. Introduction
The Enterprise Resource Planning Systems or what is the same, ERP Enterprise Resource Planning have had a boom in recent years due to the ease that they promise to integrate almost all the processes of an organization in a single system. These systems have been developed mostly for large organizations that have the ability to pay for this type of development, most small companies still do not have the structure of a department that allows them to know or coordinate the implementation of a tool of this level. There are some software for small and medium-sized companies that work successfully but do not yet have the possibility of using the data they store to generate useful information for more complex or strategic decision making.
It seems that the ERPs that are in large companies satisfy all the control and information needs of users; Despite this, there are always gaps in these systems that give rise to important improvement opportunities to be developed.
In determining the cost of products, there are several costing systems generally approved by accounting areas: direct costing, absorbing costing, standard costing, activity-based costing, among others. Regarding inventories, there are valuation methods also approved by the financial accounting union: FIFO first entries, first exits, LIFO last entries, first exits, averages, retailers, identified, and so on.
The selection of the best method of costing and valuation of inventories depends on the manufacturing process or operations of the entity, but once selected these must be supported and supported by information systems in a way that allows easy capture, clear processing, agile consultation and flexibility in the generation of timely and reliable information to carry out an analysis that helps better decision-making that in turn generates competitive advantages.
The costing systems that traditionally have current ERP implemented only allow obtaining the cost of the product through a distribution of the cost of the materials or defined amounts that will be part of the cost of the product, once this cost is obtained, there is a unit quantity per product that serves to value inventory. When we are already talking about the value of inventories, the total unit value is considered but no longer in its breakdown of each of the items that served as the basis to arrive at that value, the same happens when the transfer is made to cost of sales at the time the sale of inventories; that is, a charge is made for the quantity obtained by multiplying the units sold by the unit cost, dissipating the unit breakdown of materials, labor,production overhead, etc.
This breakdown mentioned in the previous paragraph is essential to determine variations against what was planned in gross or operating profits to accurately identify the point of improvement in the corresponding item.
2. State of cost of production and sale, its omission in current ERP
Next, in figure 1, the state of production and sale cost is shown, which is generally omitted in current costing systems, since they only consider the manufacturing or production cost but usually omit the difference in initial and final inventories.:
Production and sale cost statement
= Total available raw material
- Final inventory of raw materials
= Raw material used
= Production cost
= Total cost of production available
- Final inventory of production in process
= Cost of items produced
= Total cost of finished product available
- Final inventory of finished product
= Cost of sales
Figure 1, State of cost of production and sale
3. Competitiveness in companies
We agree that the cost of the processes carried out in an organization is the fundamental and primary basis for good decision making. Good decision making is considered to be one that helps to achieve competitive advantages and therefore increases the profitability of the company. It is true that there are other kinds of variables that affect when deciding, but the most controllable is the one that we have data and information to analyze in detail and this refers to the cost of the manufacturing process, inventories and products sold. Although it might be thought that these concepts are the same, they are different due to the fact that their value changes over time (warehousing, maneuvering, etc.) and perhaps due to the inventory valuation method used.
Amerino (1996), points out that “… as can be seen in table 1, Edward Deming (1992), supporting the ideas of Crosby, Ohno, and Jurán, affirms the following:“… as quality improves, productivity and, consequently, competitiveness. ""
Table 1, Competitiveness of companies
Amerino de Piñero, María A., 1996
4. Obsolete costing systems
It is inescapable to have an ERP or some other information system that allows to have a harmonious costing system with the current business and globalization environment that organizations live. Some entities have additional software to the ERP or domestic developments that allow reprocessing information to have an additional distribution of the production cost; however, there is no association of that detail with the auxiliary to the financial statements.
Chan, Suk-Yee (2003) noted that Cooper had identified 11 symptoms that indicated potential problems in costing systems:
1. Front-line managers, such as marketing and production managers, want to seemingly abandon profitable product or service lines
2. Marginal profits are difficult to explain
3. Hard-to-make products show great profits
4. Departments have their own cost systems
5. The accounting department spends a lot of time on special projects
6. You have a high margin of a whole niche to yourself
7. Competitors' prices are low and unrealistic
8. Customers don't care about price increases
9. Quote results are difficult to explain
10. Sellers' quotes are lower than expected
11. Cost reports change due to new accounting and financial regulations.
For example, the vast majority of manufacturing companies use the standard costing system because it has been defined that way previously and they have not carried out an evaluation of that system to analyze whether it is still appropriate to continue with it. In the past, the highest cost of a product was represented by the raw material and its labor, but with the increasing use of machinery, production processes have been optimized and automated, which has led to indirect manufacturing costs or expenses. general applicable to cost represents a significant quantity that would not be convenient to distribute on the basis of units produced.
5. Costing Based on ABC Activities
Currently, the activity-based costing system, also known as ABC for its acronym in English: Activities Based Cost, has begun to flourish.
Jong, Kleiner (1997) indicated that ABC is a more relevant method to pay for products than some older methods, because it requires tracking the cost of products based on the resources consumed by the activities that were needed to produce the products. individual. The key drivers are the activities and their associated indicators. In the event that a product does not require an activity, it will not absorb any costs related to that activity. Common costing methods currently in use, for example, may reconcile overhead distributions to direct labor so that some products are being costed with resources they never used.
They also noted that in summary, the ABC system uses a two-stage procedure (first and second stage cost indicators) to assign costs to products. First, costs are tracked to activities and then to products. That is, under the ABC system the cost of a product is equal to the cost of the materials plus the sum of the costs of all the activities required to manufacture the product.
As can be seen, there is a need to adapt the current costing systems for the one or those that not only serve to value inventories, but also help management to make good decisions, that is, a single costing system must be implemented or combined that also serves as information to control, measure and optimize the production process.
6. Conclusions
Given that today information technology can provide sophisticated data processing tools with which it is possible to obtain information in exhaustive detail, it becomes important that information systems are adapted so that they can provide information on real costs vs.. those budgeted but as detailed as possible to identify opportunities for improvement.
It is a fact that there are independent information systems that determine the state of cost of production and sale but that at the same time are not associated with the accounting system. When this gap is found, it is necessary to eliminate it through flexible information technologies in this type of situation.
When purchasing an ERP, these details must be taken into account to ensure that all the information that will be obtained will be useful and that there will be no absence of any type of information. It is a pity that excessive amounts of money and resources are invested when installing an information system and that when it is necessary to answer certain questions related to costs, we are simply faced with an uncertainty that is difficult to avoid.
In the competitive and globalized world that companies face today, there is no room for the omission of information due to the lack of computer technology. Systems engineers in conjunction with financial information experts must create work circles that originate systems that maximize the generation of strategic information.
Of course, the main competitive advantage that companies have is that related to the product or service they produce or offer, that is, their innovation, the satisfaction it gives to those who acquire it, its easy acquisition, etc.; But also, a real competitive advantage is that related to the availability of information for timely decision-making at the right time and in the right field. It is known that the costs of a company can be as complex as possible as desired, depending on the degree of analysis that is needed for the corresponding series of decisions that are normally taken in organizations.
Financial information executives should not limit themselves when asking systems technicians to develop software that meets all the information needs of each of the critical areas of the company. Thanks to information technologies, time and resources can be saved in analyzing information, as long as there are useful systems that help to have all the financial information of the company as automated as possible.
7. Bibliography
Amerino de Piñero, María A., 1996, "Importance of cost systems in the competitiveness of companies", Spaces. Vol. 17 (2)
Chan, Siu Y., Suk-Yee Lee, Dominica, 2003, “An empirical investigation of symptoms of obsolete costing systems and overhead cost structure” Emerald Fulltext. Managerial Auditing Journal.
Jong No, Joo, Kleiner, Brian H., 1997, “How to implement activity-based costing” Emerald Fulltext. Logistics Information Management.
Activity-based costing. 2004
Sánchez Rizo, Erving. Custom software. 2001.
Costing Systems. Concepts and Techniques
Mosse, Francisco. Introduction to cost theory. 2004
"Redesigning cost systems: Is standard costing obsolete?" Proquest. Accounting Horizons. Sarasota (December 1996).
"Updating Standard Cost Systems" Proquest. Management Accounting. Montvale (October 1993)
