Costs and accounting systems. Cost accounting. Link and distinction with asset and managerial accounting.
Equity accounting has two fundamental objectives: to inform about the situation of the entity (Balance) and evaluate the changes that occur in capital as a result of the activities (Income Statement). Cost reporting affects both, as the cost of unsold products is reflected in the first and the cost of those sold in the second. Therefore, the cost accounting system is not independent from the equity accounts.
The cost accounting system deals directly with the control of inventories, plant assets, and funds spent on functional activities.
introduction-to-cost-theoryCost accounting deals with the classification, accumulation, control and allocation of costs. Costs can accrue across accounts, jobs, processes, products, or other business segments.
Costs serve, in general, three purposes:
- Provide cost reports to measure profit and evaluate inventory (income statement and balance sheet) Provide information for administrative control of company operations and activities (control reports) Provide information to management to support the planning and decision-making (analysis and special studies).
The formal cost accounting system generally provides cost information and reports for the accomplishment of the first two objectives. However, for management's planning and decision-making purposes, this information should generally be reclassified, reorganized, and supplemented with other pertinent business and economic reports taken from sources outside the normal cost accounting system.
An important function of cost accounting is to assign costs to manufactured products and to compare these costs with the income from their sale.
Cost accounting serves to contribute to the control of operations and facilitates decision making.
The characteristics of the accounting are the following:
- It is analytical, since it is planned on segments of a company, and not on its total. It predicts the future, while recording the events that have occurred. The movements of the main accounts are in units. It only records internal operations. It reflects the union of a series of elements: raw material, direct labor and manufacturing loads. Determines the cost of materials used by the different sectors, the cost of merchandise sold and the cost of inventories. Their periods are monthly and not annual as the of general ledger. Its underlying idea is to minimize costs.
Cost accounting is a branch of general accounting that synthesizes and records the costs of the manufacturing, service and commercial centers of a company, so that the results of each of them can be measured, controlled and interpreted, as through obtaining unit and total costs in progressive degrees of analysis and correlation.
Like general ledger it is based on double entry. It is a part of general accounting that requires to be analyzed in greater detail than the rest.
Although the accounting base can be dispensed with to establish costs, it is not recommended due to the deficiencies, errors and omissions that may arise.
A cost system integrated into the general accounting allows to operate with the perfect security offered by the balancing of the accounts.
The value chain taken by cost accounting is as follows:
| ¾® | Strategy / management | |||||||||
| Provider | ¾® | Investigation and development | Prod./serv design. | Production | Marketing or Sales | Distribution | Customer service | ¾® | Client | |
| | | | | | | |||||
| Cost accounting | ||||||||||
General concept of costs. Objectives of cost determination
Cost is a resource that is sacrificed or given up to achieve a specific goal.
The production cost is the value of the set of goods and efforts that have been incurred or will be incurred, which must be consumed by the manufacturing centers to obtain a finished product, in a condition to be delivered to the commercial sector.
Among the objectives and functions of cost determination, we find the following:
- Serve as a basis for setting sales prices and establishing marketing policies Facilitate decision-making Allow inventory valuation Control the efficiency of operations Contribute to the planning, control and management of the company.
Costs can be classified in various ways:
- According to the accounting periods:
- current costs: those incurred during the production cycle to which they are assigned (eg, motive power, wages). Expected costs: they incorporate the charges into the costs in advance of the moment in which the payment is actually made (eg: periodic social charges). deferred costs: expenditures that are made deferred 9ej.: insurance, rents, depreciations, etc.).
- industrial costs commercial costs financial costs
- direct costs: those whose monetary impact on a product or a work order can be established with precision (raw materials, wages, etc.) indirect costs: those that cannot be assigned with precision; therefore a proration basis (insurance, lubricants) is needed.
- variable costs: the total change in relation to changes in a cost factor. Fixed costs: They do not change despite changes in a cost factor. semi-fixed costs
Cost factor: Distribution basis for the allocation of costs, depending on the cost object.
Unit or average cost: It arises from dividing the total cost by a number of units.
The following table summarizes the cost classification developed earlier:
| Accounting periods | Role they play | Nature | Form of imputation to product units | Type of variability |
| 1.- Current costs
Driving force Wages Salaries Etc. 2.- Expected costs Periodic social charges 3.- Deferred costs Insurance Rentals Start-up costs Depreciation |
1.- Industrial
a) Producer centers Cost Center A Cost Center B Cost Center C b) Service centers - Direct Maintenance Power plant Boiler - Indirect Material warehouses Laboratory Administration 2.- Commercial 3.- Financial |
1.- Materials
Raw material A Raw Material B Raw Material C 2.- Workdays 3.- Factory loads Driving force Lubricants Royalties Depreciation Insurance Salaries Social charges. |
1.- Direct
Raw material Wages Royalties 2.- Indirect Driving force Lubricants Depreciation Insurance |
1.- Variables
2.- Fixed 3.- Semifixes |
Terminology
- Products in Process: It is the incomplete production; materials that are only partially converted into finished products that may be available at any one time. Costs: represent a portion of the purchase price of articles, properties or services, which has been deferred or which has not yet been applied to the realization of income. Expenses: are costs that have been applied against the income of a certain period. Losses: reductions in the company's share for which no compensating value has been received, not including capital withdrawals.
Cost elements
The three elements of manufacturing cost are:
- Raw materials: All those physical elements that it is essential to consume during the process of making a product, its accessories and its packaging. This with the condition that the consumption of the input must be proportional to the number of units produced. Direct labor: Value of the work done by the operators who contribute to the production process. factory load: These are all the costs that a center needs to incur in order to achieve its goals; costs that, except in exceptional cases, are indirectly assigned, therefore requires distribution bases.
The sum of raw materials and direct labor constitute the prime cost.
The combination of direct labor and factory cargo makes up the conversion cost, so named because it is the cost of converting raw materials into finished products.
The items that make up the sale price are as follows:
| MP | + | MOD | + | CF | + | Gs, Comerc. | + | Gs. Financial | + | Gain |
| Prime Cost | ||||||||||
| Conversion cost | ||||||||||
| Production cost | ||||||||||
| Cost of Sale | ||||||||||
| Total cost | ||||||||||
| Sale price |
Cost accounting cycle
The flow of production costs follows the physical movement of raw materials as they are received, stored, spent and converted into finished items. The flow of production costs gives rise to statements of income, cost of sales and cost of manufactured items.
Cost systems
A cost system is a set of procedures and techniques to calculate the cost of different activities.
- According to the treatment of fixed costs:
- Absorption Costing: All manufacturing costs are included in the product cost, as well as all non-manufacturing costs are excluded. The basic characteristic of this system is the distinction that is made between the product and the costs of the period, that is, the costs that are manufacturing and those that are not. Variable costing: Manufacturing costs are allocated to manufactured products. The main distinction under this system is the one between fixed and variable costs. Variable costs are the only ones that are incurred directly in the manufacture of a product. Fixed costs represent the ability to produce or sell, and regardless of whether or not the products are manufactured and carried to the period, they would not be inventoried. Total fixed manufacturing costs remain constant at any production volume. Total variable costs increase in direct proportion to changes that occur in production.
The amount and presentation of profits varies under the two methods. If the variable costing method is used, variable costs must be deducted from sales, since they are costs that would not normally be incurred if the items were not produced.
- According to the form of cost concentration:
- Costing by orders: It is used when it is manufactured according to special customer orders. Process costing: It is used when the production is repetitive and diversified, although the items are quite uniform among themselves.
- Historical or resulting costing: First it is consumed and then the cost is determined by virtue of the actual inputs. It can be used for both order costs and process costs. Default cost: Costs are calculated according to estimated consumption. Within these predetermined costs we can identify 2 systems:
- Estimated cost or budget: it only applies when working by orders. They are costs that are set according to previous experiences. Its basic objective is the fixing of sales prices. Standard costing: It is applied in case of work by processes. Standard costs can be scientifically based (if you want to measure operational efficiency) or empirical (if your goal is to fix sales prices). In both cases, the variations are considered inefficiencies and are settled by gains and losses.
Raw Material or Materials
Concept. Definition and treatment of main and auxiliary materials.
The materials that are actually part of the finished product are known as raw materials or main materials. Those that do not physically become part of the product or are of secondary importance are called auxiliary materials or materials.
Keeping an inventory investment properly balanced requires planning and control. Excess inventory leads to higher costs including losses due to spoilage, additional storage space, and the opportunity cost of capital. Stock shortages lead to production interruptions, excessive machine setup costs, and high invoice and order processing costs.
Raw material is the only element of the sharply variable manufacturing cost.
Valuation and accounting of raw materials and materials
There are different factors that influence the choice of the most appropriate valuation method:
- types of manufactured products cost system employed replacement policy months of stocks normally available storage forms need to control the performance of certain materials degree of inflation or deflation suffered by the economic situation of the company in the market obligation that the valuation of inventories be a faithful reflection of reality, avoiding over or undervaluations.
Some of the methods that are used more frequently for the valuation of materials are:
- Specific cost:. consists of valuing each item at its real entry price. It requires being able to physically distinguish the income of the same product, at one price or another. P. PS EPS PP: It is the least sensitive to price variations. If these are on the rise, the valuation is made at figures lower than those of the market. With prices falling, it is the other way around.
The cost flow pattern does not necessarily match the actual material flow pattern; For example if the FIFO method is used, this means that the oldest costs are used first for accounting purposes, regardless of the actual flow of materials.
The methods for the valuation of inventories are of interest to management because they determine the amount that the company must invest in inventories and, also, because they influence the amount of profit that the company declares.
Under the FIFO method, the increase in the cost of materials due to an increase in the acquisition price is reflected as an increase in ending inventory. Under the LIFO method it is reflected as an increase in the cost of articles manufactured and sold and, therefore, as a decrease in the profit margin.
An additional method of assigning a monetary amount to inventories is cost or market in lesser. Inventory, whether of materials, work-in-process or finished products, is assigned the lower cost or market figure. The market can be less than cost when price levels are declining (depression) or when inventories are falling into obsolescence.
Waste or shrinkage: It is the loss of raw material after a process. It has no accounting or economic value (eg: evaporation in chemical processes). They are considered within the normal cost.
Waste: They are those that are produced with respect to the transformation process; Unlike waste, it has a recovery value (eg: steel shavings in the metallurgical industry) but the raw material is not recovered for the industry in question.
Recovered raw material: It is what an industry recovers for itself, being able to use it in the manufacture of new products.
Defective production: It is one that in some department, for some reason, is poorly conceived. It must be subjected to a reprocessing, which implies an additional cost, and it must not be charged at the original cost or at the sale price; rather, it must be attributed to the department that generated it. If it is very important, it is charged as a loss or expense for the period.
Structure of the organization dedicated to the purchasing process
- Purchasing department:
- Requirements regarding the purchase of productive elements:
- That there is a department where the acquisitions are centralized that the materials are acquired by virtue of the specifications that the suppliers are required to comply with a series of requirements necessary for the correct accounting and payment settlement (delivery of the invoice together with the merchandise, adaptation of deliveries to the days and hours of receipt). That a copy of the purchase orders issued be sent to the centers that will control the reception and those that will carry out the accounting records and the settlement of payments. That the Purchasing sector be organized administratively according to In such a way as to be able to supply information related to their functions both to the cost department and to other sections of the company (market prices, pending purchase orders, etc.)
- Cancel them against gains and losses Distribute them among the sectors benefited by the Purchasing procedures Incorporate them in the costs of the merchandise sold
- Responsibilities:
- Receive only the merchandise authorized by the purchase order, one of whose copies remains in your possession Check that the quantity delivered does not exceed the requested amount Make the deliveries and start the corresponding administrative work Take the relevant measures for which department Control of Quality approve the entry as soon as possible Send the merchandise to the destination indicated in the purchase order Report the goods received to: Purchasing, Quality Control and Accounting Issue the corresponding receipt (with: date of entry, quantity, amount, quality approval, etc.)
- Features:
- Control and locate the items received, which will be used later in the new production cycle. Save and care for the goods in charge. Make deliveries, subject to the pertinent authorization.
- Requirements regarding the purchase of productive elements:
| Actions | Documents | Functions involved |
| Purchase | Purchase order
(defines the conditions of the purchase) |
Supplier - Finance - Production Planning - Raw Materials Warehouse - Purchasing - Accounting. |
| Reception | Notice of receipt;
quantity control and verification against original purchase order |
Purchasing - Warehouse - Production Planning - Accounting - Finance |
| Quality inspection | Quality report | Purchasing - Warehouse - Production Planning - Accounting - Finance |
| Storage | Permanent inventory | Warehouses - Planning - Production |
| Utilization | Materials requirement | Production - Warehouses - Cost control - Planning. |
| Resupply | Purchase Order | Purchasing - Production planning |
Essential aspects to consider in the treatment of materials. Inventory management
The types of inventories are as follows:
- Permanent: The best known valuation systems are FIFO, LIFO and PPP Physical: it involves a detailed count of all merchandise stocks, including materials, at the end of each fiscal year.
Workforce
Introductory concept
Production labor is used to convert raw materials into finished products. Labor is a service that cannot be stored and does not demonstrably become part of the finished product.
Over the years and the advancement of technology, labor has been losing weight within the cost of production.
Classification of labor
- According to the main function of the organization: There are three general categories: production, sales and general administration. Production labor costs are allocated to produced products, while non-manufacturing labor is treated as a period expense. According to departmental activity: Separating labor costs by department, better control over these costs. According to the type of work: Within a department, labor can be classified according to the nature of the work being performed. These classifications are generally used to establish salary differences. According to the direct or indirect relationship with the products made: the production labor that is directly engaged in the manufacture of the products is known as direct labor. Factory labor that is not directly engaged in production is called indirect labor. Direct labor is charged directly to work-in-process, while indirect labor becomes part of manufacturing burden or manufacturing overhead.
Forms of remuneration
Labor can be remunerated on the basis of the unit of time worked (hour, day, week, month, year), according to the production units or according to a combination of both factors.
- Day labor: The time that the worker remains in the plant is paid, regardless of the volume of production achieved. The unit of time is the hour or the day. Its advantages lie in the fact that it is a cheap method, its calculation is simple and it provides the operator with the security of a known and calculable salary. Its disadvantages are that it does not provide real stimuli for the development of a greater effort. Piece work or incentivized: In this system the operator receives a daily remuneration in accordance with the number of units produced. It requires determining what production a worker can carry out in a given time and defining an established method of operation, rewarding all surpassing the normal level. Its advantages are that it guarantees the operator a minimum hourly gain and that it is an ideal system when standardized jobs are carried out. The disadvantage is that it represents a drawback when the products require the use of delicate machinery that require special attention; In addition, if the material is valuable, the waste caused by the greater speed in the operation can cancel out the benefits that this system provides to the employer.
Piece work can be with:
- Free production: the worker remains in the factory his entire shift, being credited with the work carried out in that period. Limited production: the operator is awarded a specific production; once completed, you can withdraw; the incentive lies in the possibility of working less time.
Incentive systems
- Piece-rate pay - The employee receives a guaranteed hourly rate to produce a standard number of production units or parts. If you produce in excess of the standard number of pieces, you earn an additional amount per piece, calculated at the rate of hourly wages divided by the standard number of pieces per hour. Taylor: This is a piece rate plan that uses one piece rate for the lowest production rates and another for the highest hourly production rates. Gantt - grants the employee a bonus, calculated as a percentage of the hourly pay that is guaranteed, when their hourly performance reaches a certain norm. Halsey- The employee has a guaranteed minimum hourly wage and is paid an additional amount as a reward for the actual production time saved compared to their standard production time. Emerson: Offers a bonus scale, calculated as a percentage of the guaranteed minimum wage, which is graduated to match a scale of efficiency factors. The efficiency factor is calculated as the average real time it takes to produce a unit divided by the standard time. Bedeaux: Production is measured on the dot, which is the measurement that corresponds to one minute of work. The employee earns, in addition to the guaranteed minimum hourly wage, a bonus for each point earned in excess of standard production.
Social charges. Concept. Generalities. Current legislation
Social benefits are a part of the cost of direct and indirect labor, salespeople salaries and administrative staff salaries.
Social charges can be:
- Direct: they are generated in proportion to the direct labor costs, therefore they can be faithfully applied to the article (retirement contributions, social work, family allowances). indirect: they act independently of the previous group, for which estimates must be made (severance payments, annual leave, paid holidays, sick leave, death, etc.)
Payment of salaries and social charges. Accounting
The information necessary to record the costs associated with the payment of operating personnel comes from the corresponding payroll receipts.
If, due to the type of tasks, an operator works in several centers, the cost must be assigned in proportion to the effort that has been devoted to each center.
Many companies accumulate vacation, holiday and bonus payments throughout the year based on estimates. If this is not done, the period during which these extra payments or lower production occurs receives an undue burden, which produces unsatisfactory comparative data.
The accumulation is based on estimates. During the year, as direct and indirect manufacturing costs are incurred, vacation pay accumulates and is charged to Work in Process or Manufacturing Cargo, as appropriate.
Essential aspects to consider in the treatment of labor. Treatment of preparation time, idle time and overtime
- Preparation time: Preparation costs are those that, consuming a considerable amount of time and money, are necessary to start production. Preparation occurs when a plant or process is opening or reopening or when a new product is introduced to the market. Setup costs include expenses for the design and setup of machines and tools, worker training, and initial abnormal losses resulting from lack of experience. There are three different methods for managing setup costs:
- Inclusion of direct labor; In other words, preparation costs are treated as direct labor costs. Inclusion in manufacturing loads. Consider them as a charge to Orders in process and work; that is, setup costs are charged directly to work in process and orders, but as a separate and identifiable cost rather than as part of direct labor.
Factory Cargo
Concept. Terminology
Factory charges are all costs of production, except for raw materials and direct labor.
Raw material and direct labor give rise to disbursements, which are part of the manufacturing charges. The first involves handling, inspection, conservation, insurance costs. The second requires the setting up of social services, personnel offices, time study offices, etc.
Classification of manufacturing overhead costs
Indirect manufacturing costs can be subdivided according to the object of expenditure into three categories:
- indirect materials indirect labor general manufacturing overhead costs.
In addition to indirect materials and indirect labor, factory charges include the cost of acquiring and maintaining facilities for production and various other factory costs. Included within this category we have the depreciation of the plant and the amortization of the facilities, rent, heating, electricity, motive power, real estate taxes, insurance, telephones, travel, etc.
All indirect manufacturing costs are direct with respect to the factory or plant.
The classification of costs according to the department that has the main control over their incurrence is useful for the administrative control of operations. Classification according to the object of expenditure can be useful to analyze the cost of production of a product in its different elements.
Classification into fixed and variable costs is useful in preparing budgets for future operations. Costs classified as direct or indirect with respect to product or department are useful in determining the profitability of product lines or a department's contribution to company profits.
For product costing purposes, all costs incurred in the factory are eventually allocated to the production departments through which the product circulates. The accumulation and classification of costs by departments is called distribution or allocation of costs. Costs that can be directly attributed to the department are assigned directly. Indirect manufacturing costs and service department costs are assigned on some basis to production departments and are also assigned to production as it passes through the departments.
Predetermination of a share of manufacturing overhead costs
When selecting the base, it is necessary that it be related to the type of service provided. The distribution bases that can be used are the following:
- Occupied area: Endowment: Volume occupied in warehouses: Quantity of raw material orders: Consumption of driving force: Kilage transported: Time taxi: is the time occupied by each employee of the service departments destined to attend the tasks related to the areas manufacturing, service and commercial.
The available application modules are as follows:
- Units produced: The unit manufacturing loads are obtained by dividing the monthly amount by the number of units processed. It is applied when only one item is produced, without variations of any kind (size, color, quality, etc.) or where although several products are manufactured, they require the same processing time. Raw material costs: Links the monthly cost of the factory loads of a center with the value of the raw material consumed in that period:
The resulting percentage is applied to the raw material unit costs of each product.
- Man-hours: Relates the amount of the monthly manufacturing loads with the necessary hours of direct labor to complete the production carried out in that period. This value is applied to unit costs based on direct labor hours required by each item. Machine hours: The aliquot arises by linking the monthly factory loads with the number of hours that the machines must work to carry out the production of the period. This aliquot is applied to the product units based on the elaboration time of each article. It is considered the most accurate basis. Direct wages: The allocation rate arises from the relationship between the amount of monthly manufacturing loads and direct monthly wages, which are obtained by multiplying the units produced by their respective direct labor costs. The application fee applies to direct unit wages.
When a monetary measure of production activity is used (eg, direct wage) the rate is expressed as a percentage of the cost in pesos of direct labor.
When a non-monetary measure of production activity is used (eg, man-hours) the rate is expressed in pesos per hour ($ / h).
By associating indirect manufacturing costs with various products, an attempt is made to choose a base that is common to all products and that is indicative of the productive performance or the benefit of the product (generally it is machine hours).
The application rate is obtained as follows:
The application or distribution rate must always be applied to the budgeted costs of the service department; in no case is it justified for the service department to distribute its real costs, that is, it does not have to transfer its inefficiencies to other departments.
Accumulation process, primary and secondary distribution
- Indirect manufacturing costs are distributed on some basis to production and service departments (primary distribution) Indirect costs of service departments are allocated to production departments (secondary distribution)
After the second allocation, all manufacturing overhead will have been allocated to the overhead accounts of the manufacturing departments.
Over and under application of expenses. Analysis of variations. Accounting
The over and under application is the evaluation of the relationship between applied and actual manufacturing overhead. The costs applied are those budgeted adjusted to the real level of production. That is, the variations reflect the differences between actual costs and budget estimates of what should have been spent.
The capacity variation occurs only in the fixed factory load.
Variation in volume or capacity: this is due to an over or under-utilization of the plant's facilities compared to the budgeted level of operations. It is represented by the difference between the budgeted fixed manufacturing overhead and the fixed manufacturing overhead allocated to production.
Quantity variation: Reflects the cost of using excessive raw materials to obtain a certain amount of production.
Variation in price: It is the cost of using materials that are too expensive for a given amount of production.
Efficiency variation: It is the cost of the excessive time used to fulfill a certain amount of production.
Rate Variation: The cost due to employing categories of labor that are too expensive to perform a given amount of activity.
Distribution Costs
Concept
They are all those costs that are not of production; that is to say, they cannot be assigned to the product in a specific way, so they are distributed according to the cost object.
Their existence is as real as that of production costs and is ultimately paid by the consumer; an expensive distribution makes the product more expensive.
Distribution begins from the moment the items are delivered to the finished goods warehouse and ends the moment payment is received for the item sold.
Therefore, distribution includes all the activities necessary to convert the manufactured item into money and includes selling expenses, administrative expenses and financial expenses connected to this distribution activity.
The distribution process generally considers the following four basic points:
- The creation of demand, which implies awakening interest in the product, using all means, among which advertising stands out Obtaining the order, which means converting the demand into a real sale through the order of the client or the respective contract.. Includes payments for the services of the sales department. Handling and delivery of the product, which covers all activities related to the storage, packaging, shipping, transport and delivery of the product. Control of the sale, which includes the investigation and opening of the credit, the accounting routine for its registration, the preparation of the account statements, the collection service and all the other inherent functions until the sale is translated into money received by the company.
Accumulation. Classification of distribution costs
The accumulation implies the previous classification of the expenses. The classification must be functional, that is, in relation to the function whose cost is to be obtained. Within this, the direct costs will appear first and the indirect costs second.
Distribution costs are functionally classified as follows:
- Direct Selling Expenses: Salespeople Salaries, Sales Office Expenses, etc. Advertising and sales promotion expenses: advertising, market research. Transportation or delivery expenses Storage: total expenses in warehouses and warehouses as well as the handling of the products. Credit granting and collection expenses: investigation costs of the credit and collection subjects, and losses due to uncollectible accounts.. Financial expenses: discounts for prompt payment and interest paid on the capital borrowed. Administration expenses: su content represents an indirect cost.
Analysis of distribution costs according to different parameters
The analysis of these costs serves to investigate particularly:
- products, customers, and sales methods that are most convenient from the point of view of their respective returns.
The analyzes by products and by territories are the ones with the greatest application.
- Analysis by products: Its purpose is to determine which products make a profit and which do not. When there is a great variety, these can be grouped by lines, and within them, the analysis of their productivity can be continued.
The analysis can be based on the unit produced or the volume of units sold in a given period.
When the analysis refers to the volume of units sold, productivity is determined globally, verified with accounting data. In other words, the result would be determined as follows:
| Net sales |
| Less: Cost of what is sold |
| Gross profit |
| Less; Distribution cost |
| Utility |
This requires the analysis of sales and their costs by products.
The problem lies in finding the bases for apportioning the expenses to each of the products that, although functionally classified, their nature is joint, which makes it almost impractical to try to separate them at the time they are caused. One way is to study each item of expenses and find the functional basis for its apportionment. Another way can be to use a different base for each game.
As already mentioned, expenses accumulate based on your role. The functional unit cost is obtained by dividing the amount of expenses between the functional units. The most simplified procedure is to determine the distribution cost for each weight of sale or each weight of cost of sale.
- Analysis by territories of distribution costs: Used when you want to know the degree of productivity of each of the territories. In other words, both sales and the cost of what is sold must be separated by territory in order to accumulate the corresponding distribution costs for each territory.
In order to apportion the expenses to the territories, when said expenses cannot be applied directly to each one of them, various bases are used, such as:
- salaries and expenses of agents based on the time spent in each territory, propaganda based on territorial extension, transportation based on kilometer traveled;
The simplified procedure consists of prorating the distribution costs based on each sales weight in each territory.
Other analyzes can be obtained for control and management purposes, such as the study of the distribution subjects: wholesalers, retailers, direct clients. This requires the prior accumulation of statistical data based on documentation and accounting records. The central problem of the apportionment of the functional expenses corresponding to the particular aspect that is studied, is solved by looking for the most adequate functional base or bases to do it.
Control of distribution costs
The way to control expenses is to make a budget for them before spending them, because once they have been incurred there can no longer be appropriate control over them.
The tendency is to monitor real expenses as they are being disbursed, comparing them with the respective budgets, which are calculated for the distribution of a volume expressed in units or in values, in a given time.
The budget is linked to the volume of the sale, expressed, either in physical units or in their monetary values. The distribution cost coefficient per weight sold is the one with the greatest application.
The budget study of expenses leads to the standards of distribution costs. These distributive standards are the consequence of investigations to determine efficiency measures that will be purchased with the real costs to locate the deviations from the standard and investigate their causes. From the accounting point of view, this constitutes the most complete control method.
Standards can be calculated:
- for each weight sold for each weight of gross profit for each unit sold for each functional unit.
Regarding the accounting of distribution expenses, the most common thing is to apply the total expenses incurred in the month. It has the disadvantage that part of these expenses are made in profits for future months and must be absorbed in subsequent periods. On the other hand, these expenses must be applied in proportion to the sales made. The use of the standards alleviates these difficulties.
Cost Systems according to the form of concentration of the same
Cost system for specific orders
System caracteristics. Assemble. Lots. Assembly line. Lessons. Combinations
- Used when production consists of work-to-order; It is also used when the time required to manufacture a unit of product is relatively long and when the sale price depends closely on the cost of production It can be adopted when each job can be clearly identified throughout the entire process from the issue of the Manufacturing order until production is complete Demand tends to anticipate supply Emphasizes the accumulation of actual costs for specific orders Manufacturing is planned to supply customers with a specified number of units, or at an agreed selling price. The recipient of the goods or services is known before production begins. The unit of cost is the order. Each job represents different manufacturing specifications.(period of time for manufacturing, production path, machines to be used, etc.) The cost of the job is a basis for making a comparison with the sale price and serves as a reference for future price quotes on similar jobs. Production does not have a constant rhythm; Therefore, it requires planning that begins with the receipt of an order, which is usually the basis for the preparation and issuance of the manufacturing order. It allows you to easily know the economic result of each job. You can know the cost of each job. anytime. This simplifies the task of establishing the value of in-process inventory. Determining costs, while laborious, is simple to understand.) The cost of the job is a basis for making a comparison with the selling price and serves as a reference for future price quotes on similar jobs. Production does not have a constant rate; Therefore, it requires planning that begins with the receipt of an order, which is usually the basis for the preparation and issuance of the manufacturing order. It allows you to easily know the economic result of each job. You can know the cost of each job. anytime. This simplifies the task of establishing the value of in-process inventory. Determining costs, while laborious, is simple to understand.) The cost of the job is a basis for making a comparison with the selling price and serves as a reference for future price quotes on similar jobs. Production does not have a constant rate; Therefore, it requires planning that begins with the receipt of an order, which is usually the basis for the preparation and issuance of the manufacturing order. It allows you to easily know the economic result of each job. You can know the cost of each job. anytime. This simplifies the task of establishing the value of in-process inventory. Determining costs, while laborious, is simple to understand.Therefore, it requires planning that begins with the receipt of an order, which is usually the basis for the preparation and issuance of the manufacturing order. It allows you to easily know the economic result of each job. You can know the cost of each job. anytime. This simplifies the task of establishing the value of in-process inventory. Determining costs, while laborious, is simple to understand.Therefore, it requires planning that begins with the receipt of an order, which is usually the basis for the preparation and issuance of the manufacturing order. It allows you to easily know the economic result of each job. You can know the cost of each job. anytime. This simplifies the task of establishing the value of in-process inventory. Determining costs, while laborious, is simple to understand.although laborious, it is easy to understand.Although laborious, it is easy to understand.
Class or batch costs: These are costs for orders that are manufactured in clearly defined batches. Then the unit cost is obtained, dividing the total by the number of units produced.
Assembly and assembly line. Combinations: There are companies that manufacture parts that are stored in a semi-finished goods warehouse and buy others to assemble or assemble. In these cases, assembly orders are usually issued, indicating the elements to be assembled. The accumulated value of these orders is called "assembly cost" or "assembly" and is a modality of order costs. Sometimes they include only the conversion cost, since the material costs were included when the parts were manufactured (midway between orders and processes?).
Element approval
It is manifested in the production order, which is a written authorization for the manufacturing centers to carry out a specific job. This order must indicate:
- What will be done Who will do it When it will be done
Valuation of products in process and finished products
When a project extends beyond the close of a business, it is necessary to determine periodic income in some way, even if the project is not yet completed.
One method of doing this is to estimate the percentage of project completion in terms of the costs incurred to date relative to the total estimated costs for the entire project. Revenue can then be accumulated by the amount of the completion percentage multiplied by the total contract price. Partial payments are often made to the contractor as the contract is performed. These payments are recognized as income against which the costs incurred up to that moment are charged.
Process Costs System
System caracteristics. Sequential, parallel, selective
- It is used when the work is repetitive and specialized. Goods are manufactured for storage, in provision of a demand that was previously tried to promote. It emphasizes the accumulation of costs during a period and through the centers through which the products circulate, to then be assigned to them by pro-rata; or unit costs are established by virtue of normalized consumptions. The cost unit is the item. It can be used for one or more products. Costs that are directly related to products, are also directly related to processes.
In addition to the nature of the product and process design, the organization and layout of the plant also determines the relationship of the processes to each other, such as whether they are to be arranged as sequential or parallel processes:
- Parallel processes: they operate independently of each other. The production of one of these parallel processes does not become the raw material or input for the other. Sequential processes: it is the one that exists when a process receives the production of another process.
Valuation of production in process, finished products and wastage
Costs are allocated to completed or transferred production and work-in-process inventory when materials are added at the start-of-processing stage and under the assumption that conversion costs are added consistently and uniformly throughout processing..
When assigning conversion costs to finished products and work in progress, it is done based on the concept of equivalent units of production.
Waste or shrinkage: It is the loss of raw material after a process. It has no accounting or economic value (eg: evaporation in chemical processes). They are considered within the normal cost.
There are two ways to deal with the waste factor:
Production costs incurred during the period can be allocated to wasted material and credited out of the process account directly as loss or charged to manufacturing overhead. This method is convenient when the loss produced is abnormal; in other words, these losses are not a normal cost that should be assigned to products.
- All production costs incurred during the period can be allocated only to the good units produced. Under this method, incurring waste increases the unit and total cost of production. It is the method considered appropriate when waste is inevitable or normal.
Joint cost system
System concept and characteristics
Joint production is that which occurs when there are more than one product in the same production process, which comes from the same raw material. It is a unit up to a certain process (point of separation), from which more than one product arises. This entails the obligation to value each one of them.
The joint process includes all three cost elements. In addition, joint production costs can be historical or standard.
Related products or co-products: If the differentiation is based on relative sales, they are those in which the income from sales of each of the products is almost equal in quantity, or at least important in relation to the total income.
By-products: If the difference is based on the level of sales, they are those that generate significantly less income than their related product. It is therefore the incidental product obtained during the process of the main product for which a relative sale value has been achieved in the market.
Other criteria used to make the distinction include the stated objectives of the business, the desired profit pattern, the need for a higher degree of pre-sales processing, and the security of the markets. For example, a relatively important product, with an insecure market, could be classified as a by-product rather than a related product.
Costing of multiple, related or co-products
The object of cost accounting for related products is to allocate a portion of the total related costs to each co-product so that unit product costs can be calculated and the balance sheet prepared.
The problem lies in the allocation of costs. In practice, various methods are used, among which the most common are:
- Relative sale value of the production: Multiplying the number of units manufactured by the sale price, the sale value of the production is found. The portion of the total associated costs allocated to each product is equal to the ratio between the sales value of the production of each product and the sales value of all production.]
The use of this method presupposes the existence of a relationship between price and cost, which does not imply that the costs of the product are the basis for setting prices. Rather, prices of related products tend to be based on competition, in-stock supplies, market conditions, and other considerations.
- Physical measurement of production: Related costs are allocated to related products on the basis of physical units of production. This method generally cannot be used when production consists of different types of units (liquid and solid), unless they can be matched. The use of units of production to allocate related costs is seldom justified. Average unit cost measurement: No effort is made to calculate separate costs for each of the related products. Instead, an average cost is calculated for all products, which is used for inventory costing purposes.
The underlying premise is that since related costs cannot really be identified with specific products, average unit costs are as satisfactory as any other basis for measuring income, provided they are used consistently.
- Standard performance method: Raw material and process costs are allocated to related products based on standard returns.
There is another criterion for valuation, which is the one that is applied when any of the products requires an additional process. When the multiple product is sold after the point of separation, its unit cost obviously only includes the portion of the value assigned to it. If processed after that point, it contains that part and also the costs of the inputs added in the additional process.
Due to this it may happen that there is no market price at the break-up point. Then it must be established based on the sale price of the item, less the costs of the processes after the separation point, the marketing expenses and the eventual proportional portion of the profit corresponding to the subsequent processes. Thus, in theory, the market value of each of the multiple products is deduced.
By-product costing
It is assumed that at least one of the products that make up the company's production is of secondary importance in relation to the income derived from the relative sales or any other criterion that is applied. If the income from the secondary product is almost negligible, the product is called scrap or surplus material. Other tangible items that emerge from the production process but have no value are so-called waste.
The by-product accounting method assumes that the secondary product has some market value. Therefore, the method has application when the commercial value of the secondary product is quite important, but not as important as the sales value of the main product or products; and also when the sale value of the secondary product is relatively lower.
The estimated market or selling value of the secondary product is deducted from the total production cost incurred for the production of all items, major and minor. This residual quantity is then allocated to the main product (s), using the associated cost method if there are co-products. The secondary product is entered into inventory at its estimated market value.
The alternatives for the valuation of the by-products are the following:
- The by-product does not affect the cost of production of the article from which it is derived and, therefore, of the product line through which it is marketed, since its result is recorded in a special line. The by-product does not affect the cost of production of the article from which it derives, but the amount of its invoicing is added to that of deliveries of the line through which the main article is marketed, and its marketing expenses are also added to those of the main article The by-product does not affect the cost of production of the item from which it is derived, but the net result of its delivery is deducted from the consignment of the line for which the main item is traded The net market price of the by-product is deducted from the cost of production of the main item, creating a subaccount special in the producing center.The net market price of the by-product is deducted from the Raw Material subaccount of the main item. The by-product undergoes an additional process before being marketed.
Cost systems according to the treatment of fixed costs
Variable costing
Definition of basic concepts. Separation into fixed and variable costs
Under this system it is affirmed that the fixed costs of production are related to the installed capacity and this, in turn, is in function within a certain period, but never with the volume of production.
The fact of having a certain installed capacity generates fixed costs that, regardless of the volume produced, remain constant over a certain period; Therefore, the fixed costs of production are not conditioned by the volume of this, since they are not modifiable by the level at which it operates; Hence, to pay under this method only variable costs are included; the fixed costs of production must be carried to the period, which entails that no part of them is assigned to the cost of the units produced.
To value inventories, only look at variable costs.
This costing system focuses mainly on the contribution margin, which is the excess of sales over variable costs. When expressed as a percentage of sales, the contribution margin is known as the contribution rate or marginal rate.
Under this system, profit is correlated with sales and is not affected by the level of production.
Discussion and doctrinal aspects
Critics of this system argue that fixed costs, like variable costs, are recorded to make products and therefore should be applied to such products.
The exclusion of fixed manufacturing costs from inventories affects the balance sheet as well as the income statement. Opponents of the variable costing system claim that this would produce an even more conservative and less realistic balance sheet than is currently being prepared.
Although direct costs are important in short-term pricing decisions, opponents of the system point out that this method creates a tendency to neglect the need to recover fixed costs through the price of the product, as long-term continuity term depends on the replacement of assets.
This system has also been criticized for its extreme simplification: variable costs are almost never fully variable, just as fixed costs are rarely fully fixed.
Advantages and limitations in its application
- Advantages:
- Tends to offer greater control over period costs It is particularly useful in short-term pricing decisions Facilitates planning by using the cost-volume-profit model (see breakeven point) Eliminates cost fluctuations by effect of the different production volumes Eliminates the problem of choosing bases to apportion fixed costs, since their distribution is subjective Facilitates the rapid evaluation of inventories, considering only variable costs, which are measurable Provides a better budget of cash, since variable costs usually involve out-of-pocket costs. It clearly shows when an item is no longer remunerative. In a company where no cost system yet works, this method is more easily implantable than the comprehensive one.Its cheapness offers no doubts.
- Difficulty in establishing a perfect division between variable and fixed costs Linearity in the behavior of costs The sale price, the fixed costs within a relevant scale and the variable cost per unit remain constant It allows knowing the lower price, but not the price to be achieved, the true sale price. The value of inventories of inventories in process and finished is not representative of the real equity of a business. This undervaluation can lead to inconveniences in obtaining credits.In times of price control, companies need to know the integral unit cost.It hinders the calculation of idle and start-up costs, when these events affect only a part of a company, since the total fixed costs of each center are unknown.
Costs as a management control tool
- Variable costing helps entrepreneurs understand that it is sales that generate profits, not the industrial process. Income statements by product lines are easier for managers to understand; By not being obscured by envelopes and sub-absorptions, they focus the reader's attention on the controllable aspects of the business. Familiarize entrepreneurs with the break-even point, and bring them closer to this tool. Variable costing clearly shows when an item stops being It is useful when making any decision that leads to increased profits.
Comprehensive absorption costing
Definition of basic concepts
This system tries to include within the cost of the product all the costs of the productive function, regardless of their fixed or variable behavior. The argument on which this inclusion is based is that, to carry out production, both are required.
The use of this system implies applying the totality of the monthly manufacturing loads to the production carried out in that period. This gives rise to the paradox of having high costs in periods of low volume and reduced costs in months of high production.
To value inventories, consider both variable and fixed costs.
Under this system, profit is affected by production as well as sales.
Advantages and limitations of its application
- Advantages:
- It allows to measure the incidence of sudden changes in fixed costs. It allows to know and specify the incidence of overhead costs in unit costs.
- It does not offer much control over period costs By giving more importance to long-term accounting profits than cash profits, it is not particularly useful for long-term pricing, in which case the data is more appropriate In multi-product industries, it makes it difficult to formulate an intelligent pricing strategy as it cannot discern the problem data with sufficient accuracy.
Relationship of both costing systems (Variable vs. Absorption) to provide information for different purposes
Under the absorbing costing method, profits can be changed from one period to another with increases or decreases in inventories. This difference, depending on the costing method used, can give rise to various situations, namely:
| SITUATION | VARIABLE | ABSORPTION |
| Sales volume> production volume | The utility is greater | Production and inventories of finished products decrease |
| Sales volume <production volume | Production and inventories of finished items increase | The utility is greater |
| Sales volume = production volume | Equal profits |
The substantial difference lies in how to consider fixed costs of production: if product or period costs, which originate different valuations in inventories and, therefore, in profit.
Breakeven
Concept, utility, limitations
The breakeven diagram or profit diagram is a graphic artifice where the delivery figures and the variable and fixed costs are represented, which highlights the profits before different volume alternatives. In short, it reveals the estimated profit that will be obtained with different sales volumes, as well as the minimum sales to avoid losses.
It is a useful tool for making short-term profit predictions based on sales volume, since it allows you to easily budget for expenses corresponding to any level at which the business operates.
Any level located to the right of the breakeven point provides profits, while those located to the left are unable to recover full costs. The further to the left the breakeven point, the more favorable the situation. (if it is further to the left, it is also higher)
This diagram can be prepared for a particular item, for a line of goods, for a sales area or agency, for a distribution channel, or for a company.
Normal sales volume: it is the one that provides the company with the profits it needs to face the vicissitudes of economic life.
Sales volume at breakeven point: indicates the minimum quantity that must be traded to avoid entering the loss zone.
Safety margin: It is the percentage in which the income can fall before it begins to operate at a loss.
A company must operate at a level above the breakeven point to be able to replace its equipment, distribute its dividends and take steps to expand.
The limitations of the profit diagram are as follows:
- It assumes that fixed costs remain unchanged, even when there are abrupt changes in the level of activity. It assumes that the unit direct labor remains static in the event of any volume contingency. It assumes that the degree of efficiency with which it operates is constant. that the productive capacity is always used to the same degree It assumes that the technical specifications and time studies are not updated It assumes that the functions are linear and that each of the factors is independent of the others (prices, under conditions imperfect competition tend to decrease as volume increases). By assuming linearity of the relationships, the most profitable level of production would be at the maximum limit of manufacturing capacity. It is not very useful to analyze a company as a whole,if that is done by virtue of global figures. Errors can occur if production volume is out of sync with sales. Stock accumulations distort the results. To use it as a decision-making tool, it must be permanently updated.
Results planning
The cost-volume-profit model helps the administration to determine the actions that must be taken in order to achieve a certain objective, which in the case of for-profit companies, is called profit or result.
The profits should be sufficient to remunerate the capital invested in the company. The way to calculate the sales volume necessary to achieve a certain result is simple:
Marginal analysis
Technique based on marginal contribution; It is based on the contribution that each item makes to the final profit of the company. Study the interrelation between 3 fundamental factors, which determine the benefits:
- selling price manufacturing, commercial and financial cost production volume
Default cost
Estimated costs
Introduction. Materials, labor and factory load budget
Estimated cost is the amount that, according to the company, a product or process operation will actually cost over a certain period of time.
They are predetermined costs; they represent actual, future costs, which are expected to coincide as closely as possible with the resulting ones.
It is often based on some average of actual production costs from prior periods adjusted to reflect changes in economic conditions, efficiency, etc. that are anticipated for the future. It can also be based on the estimates of specialists.
They typically include an amount that reflects anticipated waste and deficiencies that increase unit and total costs.
The estimated costs are used in cases where special orders are used and which are characterized by performing tasks of such importance that the fulfillment of each one requires a considerable time.
Budgets for each cost element are made as follows:
- Raw material: The budget is made at the market prices of the day or the prices that, it is assumed, will govern at the time the work is carried out. Direct labor: The budget arises from multiplying the times assigned to each operation by the respective salaries. Factory load: The budget must be calculated based on updated historical figures and based on a certain volume of jobs, priced using the "direct wages" module.
Accounting. Account system. Valuation of the inventory of products in process. Calculation and arrangement of variations
All movements are calculated and accounted for at updated historical costs (consumption valued at current costs) since this cost system is only used off the books, as a comparison guideline.
A debit balance of the Products in Process account represents the value of the orders in process at the end of each period, also calculated at updated historical costs.
Standard costs
Introduction. Terminology. Classification of standards. Implementation requirements
It is the cost that "should be" under normal conditions. They are predetermined costs that serve as the basis for measuring actual performance. This system consists of establishing the unit costs of the articles processed in each center, prior to manufacturing, basing them on more efficient production methods and relating them to a given volume of production.
They are the opposite of actual costs. The latter are historical costs that have been incurred in a prior period. Standard costs are determined in advance of production.
When using a standard cost system, both standard and actual costs are reflected in the cost accounts. The difference between the actual cost and the standard is called the variance. Variations indicate the degree to which a certain level of performance established by management has been achieved.
Standard costs are part of the information entrepreneur's needs for decision making. The better the relevant studies are carried out, the more useful the tool will be, and therefore there will be greater possibilities of making the best decision.
| Theoretical production maximum | ® Time that a machine stops (must be subtracted) | ||
| Normal maximum | |||
| Expected production level | ® Idle capacity | ||
The requirements for the implementation of standard costs are:
- Definition of production levels Departmentalization of the company, where each of the centers acts as an individual company Definition of the analytical chart of accounts that enables the game between budget and actual Selection of the type of system to be used Thorough determination of the specifications of the product at each stage Correct distribution of the manufacturing load Setting the manufacturing volume (business decision).
The types of standards are:
- Ideal or theoretical: they are rigid norms that in practice can never be achieved. One of their advantages is that they can be used for relatively long periods without having to change or adapt them. Yet perfect behavior is seldom achieved, so ideal norms create a sense of frustration. Average past costs: Tend to be flexible; they may include deficiencies that should not be incorporated into the standards. They can be established relatively easily. Regular: Based on future cost probabilities under normal conditions. They actually tend to be based on past averages that have been adjusted to take into account future expectations. One advantage is that they do not require frequent adjustments; They can be helpful in long-term planning and decision-making. They are less advisable from the point of view of measuring performance and making short-term decisions. High level of feasible performance: They include a margin for certain operating deficiencies that are considered unavoidable. Standards of this type can be met or exceeded through effective action.
Determination of physical standards for each cost element
- Raw material: The standards must include all materials that can be directly identified with the product. Generally, standard quantities are developed by professionals and consist of the most economical materials in accordance with the design and quality of the product. When many different kinds of materials are required, a so-called standard raw material list is produced.
These standards assume the existence of an adequate planning of materials, as well as control procedures and the use of materials whose design, quality and specifications are standardized.
Margins of impairment should be included in the standards only for amounts that are considered normal or unavoidable. Waste that exceeds these margins is considered a variation in material use.
- Direct labor: Standard production assignments can be based on a determination of what represents a good level of performance. Time and motion studies are often used to determine labor standards; or synthetic standards are used. These are based on tables that contain the standard time allocation for various movements and other elements involved in a job. Synthetic time standards require a very careful and detailed job description.
Averages of past performances are generally used as time standards.
Some companies use test runs as the basis for establishing labor time standards. Standards established on this basis are often unsatisfactory as it is difficult to simulate actual operating conditions on an experimental basis.
- Factory Load: They are determined and used in almost the same way as the standards for raw materials.
The greatest utility of this standard manufacturing overhead rate is in product costing and planning.
In general, variable factory loads are deliberately placed in direct relation to products through the use of an appropriate rate.
The fixed factory load consists mainly of the past due cost of the machines and installations that the company will incur regardless of the production level. Therefore the use of standards in this case is meaningless for purposes of control of operations.
Determination of monetary standards for each cost element. Effect of inflation
- Raw material: the type of standards depends on the management policy; It can be based on recent and past average prices, current prices, or expected prices for the period in which the rules will be in effect. Also, as they are particularly useful for short-term decision-making, many companies prefer to stick to future price changes, especially in times of inflation. Direct labor: To establish these standards it is necessary to know the operations that are going to be carried out, the quality of the labor that is desired and the average rate per hour that is expected to be paid. The hourly wage rate can be based on union agreements.
In general, variations in labor wage rates are not controllable. However, if the actual rate is based on a contract agreement, a rate variation may occur as a result of the use of higher or lower quality labor than is envisaged by the standard.
There may be several different kinds of unit labor costs. Salary rates can be based on different skills or experience, or both.
When wage rates are determined through union agreements, it is practical to recognize that the rate so established is, in essence, the standard rate.
- Manufacturing Load: It is a standard expressed in $ / hh or $ / hm, or as a percentage of direct labor costs or production costs.
The loss due to idle capacity occurs when the production activity is not sufficient to absorb all the indirect manufacturing costs incurred.
Determination of standard activity level
Practical capacity: Represents the level of production which, for all practical purposes, is the maximum feasible level. The difference between maximum and normal capacity lies in the unavoidable estimated factors.
Normal capacity: Represents the level of normal operations of previous periods. It is based on the ability to produce and sell.
Budgeted capacity: It is the level of activities for the following period based on the expected sales.
The normal level of production is the result of computing 3 factors:
- Working time, which represents the average number of days or shifts that each center works in a month Normal daily work hours Normal hourly volume.
Valuation of stocks in process and finished.
When there is a change in the standards it is necessary to revalue the inventories. Generally, it is desirable to cost inventories according to the old and new rules, so that the gains or losses discovered during the revision of the rules do not disappear in the accounts of changes. The difference is charged to a special account.
Whether it is semi-finished or finished articles, or unprocessed raw materials, the inventories of each sector must be valued at standard costs.
The finished production by a center can have 3 destinations:
- Another production area A warehouse for semi-processed articles Warehouse for finished products.
These transfers must be duly documented to ensure the correct accounting of the movements.
Accounting mechanism
There are 3 procedures for recording consumption in standard cost accounting:
- Cost elements are charged to the manufacturing centers at prices prevailing at the end of each month, while in-process inventories and finished products are credited at standard cost. The balance of the factory accounts, after adjusting the costs of the initial process, represents the variation of the month, which is canceled by income accounts. The cost elements are debited to Products in process, calculated at standard prices. Inventories in process and finished goods are valued at standard costs. The resulting variations are settled by income statement. The Products in Process account is debited at resulting and standard prices, crediting the stocks in process and the finished items at standard and resulting costs.
Role of the standard cost system in controlling the efficiency of the factory load in the budgeting process and in decision making
- Norms or cost standards can be an important instrument for performance evaluation Variations in norms lead management to implement cost reduction programs focusing attention on areas that are out of control Standard costs are useful to management for the development of their plans. The very process of setting standards requires careful planning in areas such as organizational performance, assignment of responsibilities, and policies related to performance appraisal.Standard costs are helpful in decision-making, especially if differentiated fixed and variable costs and whether material prices and labor rates are based on expected cost trends over the next period.
Standard costs can result in a reduction in office work.
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