Cost definitions
- It is the sacrifice that must be made to obtain a benefit (optimization of resources). The sum of the necessary disbursements that go into the manufacture of a good or in the provision of a service and its sale.
The cost is closely linked to the economic activity.
Economic activity: assigning limited resources to alternative uses with a defined purpose is also closely related to opportunity cost.
Opportunity cost:
a.- choose one of several alternatives.
b-. stop doing something to do something else
c-. the best discarded alternative (this is the one you use in economics)
For there to be an Opportunity Cost, 2 conditions must be met:
a.- that the resource is limited
b.- that the resource is susceptible to alternative uses
Cost accounting objective
- Determine unit cost: to be able to determine my sales value At least maintain and as much as possible increase the company's profits Maintain strict control over all activities and functions that the company has.
Cost Accounting is part of general accounting:
The General Ledger delivers the information to cost accounting for it to process the information.
There is information that provides the cost accounting and not the general accounting, since it only provides the global information of the companies, instead the cost accounting provides the information for each product or product lines that the company has.
What are the factors that influence a company to implement a cost system?
The factors are five and must be given simultaneously:
- The size of the companies (if the company is large, perhaps a cost system will be necessary.) The number of products it manufactures (if it is a small company, it will not need a cost system if it were a large company with several products, perhaps A cost system will be necessary Complexity in manufacturing (if the company is small with a single product, it may not require a cost system and if it is large the other way around, if necessary, it may be able to implement it. the costs; (if the company is large with many products and complexes to manufacture and if the manager does not want it, the cost system will never be applied) The costs that will be incurred to implement the cost system, that is, in the cost-benefit ratio, where the cost system will only be implemented when the benefit is greater than the cost.
Classification of costs
1. According to the function that originate the costs
a.) Manufacturing or processing or production costs
They are all those directly or indirectly related to the production process (it is the transformation of raw materials into finished products through work.)
Manufacturing or processing cost elements or PP.
- Raw Materials and / or Direct Material (MPD) Direct Labor (MOD) Indirect Manufacturing Cost (CIF) Raw Materials and / or Indirect Materials (MPI) Indirect Labor (MOI) Others
MPD are all those easily assignable and measurable in economic terms with a product and are physically incorporated into the product, for example: leather for shoes, wood for furniture.
MOD is any payment made to workers, provided that it is paid by the company, who are directly related to the production process, for example the shoemaker, the furniture maker.
CIF are heterogeneous in nature and cannot be easily measured or assigned to any product, example: glues
MPI are difficult to assign in economic terms to the products although they are physically incorporated into it, example: glue, electricity.
MOI is the auxiliary work necessary for the manufacture and that is not identified with any product, for example the production supervisors, the guy who packages the shoe.
Other indirect costs: are those not defined above, but are necessary in manufacturing, for example depreciation of factory or production machinery, production leases, production maintenance, production insurance.
b.) Operating expenses
Comprised of administrative and sales expenses.
a-.) Administration expenses
It refers to the entire administrative part of the company, for example the salary of the accountants, the salary of the clerks, the salary of some secretaries, the management, stationery.
b-.) Selling expenses
They are all those related to sales or marketing, for example the salary of sellers, sales promotions, advertising, product dispatch, packaging, etc.
2. According to the opportunity in which the costs are calculated
a.) Historical costs
It is the obtaining of the cost of the product once the production process is finished.
b.) Default costs
It is obtaining the cost of the product before the production process begins and companies are obliged to base their prices on the basis of advance estimates of costs.
3. According to their identification with an activity or department or product
a.) Direct costs
They are those that can be easily identified and measured with an activity or department or product, for example MOD AND LA MPD
b.) Indirect costs
They cannot be easily identified or measured with an activity or department or product. For example CIF
4. According to its variability in relation to the production volume
a.) Variable costs
They are those that vary in a directly proportional way with production volumes, but in unit terms they are fixed, graphically it is the relation quantity of money with quantity, but always a unit costs me the same.
- in total or global terms they are variable in unit terms they are fixed the MPD and MOD are always variable
b.) Fixed or constant costs
They remain unchanged whatever the quantity or volume of production, but in unit terms it is inversely proportional to the volumes of production, graphically it is the same relation of value to quantity, no matter what I produce, I will always spend the same money, example lease. (Administration and sales expenses)
- in total or global terms they are fixed in unit terms they are variable
c.) Semi-fixed or semi-constant costs
They have a fixed part and another variable which increases or decreases in a directly proportional way with the variable considered. Example the salary of the vendors, telephone, electricity, water, gas.
a.) Intervariable costs
They are those that are forming part of the company's inventories.
are those that have become an expense and are taken against results in the period in which they are incurred, for example operating expenses
6. According to the time they are faced with income
a.) Period costs
They are identified with a time interval and not with the products, for example, fixed costs of rent.
b.) Product costs
They are taken against income only when they have contributed to generating this income directly, for example, inventory costs.
7. According to the authorization on the incurrence of the cost
a.) Controllable costs
They are those where a person or a department has the authorization to decide whether or not a cost is consumed, for example the overtime of a department, since they are controllable for that department.
b.) Uncontrollable costs
The decision on the incurrence of the cost does not depend on the department that originates it, but rather on a superior, for example overtime cannot be authorized by the department but by management.
8. According to the importance of decision making:
a.) Relevant costs: are those that can be changed or modified according to the decision adopted by the company examples: variable costs (According to the product to be manufactured, the raw material can be varied.)
b.) Irrelevant costs: they remain unchanged against any decision adopted by the company, example: fixed costs (rent, depreciation linear method.)
9. According to the type of cost incurred
a.) Disbursement cost: implies a movement of cash, cash or funds in the short, long term. (I buy raw material immediately or on credit, you still have to pay.)
b.) Non-repayable cost: does not imply movement of cash, since they are only accounting imputations (depreciation, monetary correction as long as it is negative.)
c.) Opportunity cost:
- choose one of several alternatives stop doing something to do something else the best discarded alternative (this is the one you use in economics)
10. According to the nature of production
a.) Cost per manufacturing order: it is used by companies in discontinuous production processes that seek to satisfy a special order from an example client: printers.
b.) Cost by processes: used by companies with a continuous manufacturing process that seek the accumulation of stock (example: cigarettes, dairy company, beverages)
11. According to changes in activity level
A.) Activity level (current production level of the company.)
B.) Installed capacity (maximum level of production in a period)
a.) Differential costs: are those in which there is a variation in the total cost or in any of the elements of the manufacturing cost as a result of a change in the activity level of the company.
a1. Incremental costs: it is caused by an increase in the level of assets of the company example: incorporating a new product.
a2. Decremental costs: are those caused by a decrease in the level of activity of the company, example: eliminating a product.
b.) Submerged costs: they remain unchanged, in the face of any change in the activity levels of the company, for example: fixed or constant costs (leases.)
Cost, expense and loss
Cost: produces direct benefits
Expenses: produces indirect benefits (operating and sales expenses)
Loss: does not produce any benefit (waste of raw material)
Formulas
Prime or primary cost = MPD + MOD
Conversion cost = MOD + CIF
Manufacturing Cost (Make) = MPD + MOD + CIF
Prime cost + CIF
Conversion cost + MPD
Commercial cost (Make and sell) = Manufacturing cost + Operating expenses (ADM. And Sale)
Net selling price = Commercial cost +% Profit.
Manufacturing cost elements
MPD. It refers to the income, records, accounting entries and necessary cost reports that affect direct raw materials, from the moment they are requested from the supplier until they are finally included in the finished products and all costs in order to know how much each costs. product by concept of MPD is essential to carry out a control on it in attention to certain aspects.
- They generally represent a high percentage of the total cost of production They can give rise to losses and / or losses They have a high degree of impact on the result of the economic management of the company, in view of their direct relationship with production volumes It is an item that It requires companies large investments and financial outlay. If the stock levels are very high, they can represent a more or less significant opportunity cost. It also originates disbursements for concepts such as insurance (of raw materials), storage, transportation, transportation, etc. (hauling, transportation of raw materials to the production process)
Valorization of MPDs
The same type of MPD may present a different unit cost depending on the dates of purchases, the quantities purchased, market conditions, etc., and an appropriate price must be chosen that allows the specific outputs of the winery to be valued to the process productive, there are several methods among which we have:
- FIFO OR FIFO: first in is first out LIFO O VEPS: last in first out PPP Highest purchase price Replacement price, etc.
Other factors that are part of the cost and that affect direct raw materials
- The freight: the cost of this is added to the cost of the MPD The container: in some cases it is of decisive or great importance in the total cost of manufacture, in other cases its value is almost negligible example: perfumes with glass bottles, in where the container is more expensive than the product in other cases the container has a value of almost zero Defective product: they are produced by failures in the production process and there are two types:
a.) Normal loss: percentage determined by the company
(technology, labor, raw materials, etc.) that you accept as loss.
b.) Abnormal or extraordinary loss example:
- The total or general: it is carried out once a year generally on 12/31/x and covers 100% of the inventories, this is mandatory and prevails absolutely. The form of the fixed inventory prevails over any internal stock control that the company has Partial or rotating: it is carried out several times a year, it is generally surprising and is selective, that is, it only covers a part of the inventories
Direct Labor (MOD)
It corresponds to the remunerations that are paid to the personnel working in the production process (see type of accounting remuneration)
Indirect manufacturing cost (CIF)
The total or global amount at the end of the period is known, the problem is to distribute these costs to the different products manufactured by the company. There are several methods to make the distribution which we will see as the cases are presented.
Equivalent production
It consists of expressing all the production of a period or its equivalence as if they were finished products, to carry out this expression it is necessary to know the degree of progress or the degree of completion of the unit that is in the manufacturing process, that is, they are the products in process (made in MPD, MOD AND CIF).
It is the form of the cost of seeing, treating and analyzing the different elements according to the classifications, according to the function that originate the costs and the variability in relation to the volume of production according to the objective of the company
There are two focusing methods
- Direct, variable or marginal method Absorption, absorbent or traditional method
1. Variable or marginal direct method: it is based on the theory that a company having a certain installed capacity generates fixed or constant costs by itself, therefore it separates variable costs from fixed or constant costs, by this characteristic, it is that this method or approach is used in decision making.
How this method is presented in the income statement
2. - Absorption, absorbent or traditional method: the only thing you want to know is how much it costs to produce a unit, therefore it separates production costs from operating expenses.
How it is presented in the income statement
(Variable selling expenses are only incurred when they are sold because only there are they incurred.)
