As we already know, cost control is vital for any company that manufactures any type of product since this will help us determine both the sale price and the profit we want to obtain.
It is convenient to emphasize that keeping cost control under perfectly identified principles is not exclusive to large companies, it is also applicable to small or medium-sized businesses, both public and private, profitable or non-profit, since these principles can be adapt to the specific needs of each type of organization.
The main purpose of a cost control is to obtain a quality production with the minimum possible expenses, in order to in turn offer the public the lowest price and thus be able to compete in the market and try to obtain a balance between supply and demand for our products.
Cost accounting is also a tool that makes it easier for management to carry out its basic activities such as planning, organization, direction and control to achieve better decision-making, as well as an effective organization of the work team.
The degree of participation of cost accounting in the company depends on it, in some cases the cost department is dedicated only to the compilation of product costs; On the other hand, in others, a team of specialized accountants is established to provide all kinds of information related to the disbursements that are necessary for the manufacture of the product and the purpose or object they have for it.
In this work we will focus on standard costs, which have been adopted in numerous companies internationally because it is considered to be the result of work carried out with EFFICIENCY standards at a minimum cost.
DEFINITION AND CLASSIFICATION OF COSTS
Cost accounting.- It is the process of measuring, analyzing, calculating and reporting on the cost, profitability and execution of operations.
There are several ways to classify costs, below we will mention some of the main cost grouping systems:
- By function
- Production.- Costs applied to the elaboration of a product.Marketing.- costs caused by the sale of a service or product.– Costs caused in policy formulation activities. + - Costs related to financial activities.
- Direct materials.- Materials that are an integral part of the finished product Direct labor.- Labor applied directly to the components of the finished product Indirect costs.- Material costs, indirect labor and manufacturing expenses that cannot be loaded directly to specific units.
- - Costs charged to the product and that do not require further proration. - Costs that are prorated.
- Production.- A unit in which operations are executed on the part or product without their costs requiring subsequent proration. - A unit that is not directly engaged in production and whose costs are ultimately prorated to a production unit.
- - Costs included when calculating product costs. Product costs are included in inventory and cost of sales when the product is sold. - Costs associated with the passage of time and not with the product. These costs are closed against the summary income account in each period, since they are not expected to yield future benefits.
- - Costs whose total varies in direct proportion to the changes in their corresponding activity. The unit cost remains the same, regardless of the volume of production.– Costs whose total does not vary throughout a large volume of production. Unit costs decrease as production volume increases.
- - Costs that can benefit future periods and are classified as assets. - The total cost divided by the number of units of activity or volume.
- - The accumulated cost for the specific category. - The total cost divided by the number of units of activity or volume.
- - They are determined before they are carried out. Historical.- Costs that are determined when they have already been carried out. - They are determined before they are carried out.
We are going to focus only on the last group that refers to the classification according to the time in which they are determined, specifically on the predetermined costs, which is where the standard costs are found, of which we are interested in studying on this occasion.
Determination of Standard Costs
DEFAULT COSTS
The historical or real costs that are recorded until they have been made and this causes the total cost to be known until the end of the period or production, for which it has become necessary to design predetermined valuation techniques, which consist of knowing, Through certain studies, the cost of production is anticipated, which allows the cost of sales to be obtained at any time, in addition to providing greater internal control.
The default costs are in turn classified into estimated costs and standard costs.
Estimated costs are a technique that is based on experience, the estimated cost indicates what something may cost, which is why at the end of the period it is adjusted to the real costs.
Standard costs represent the planned cost of a product and are usually set long before production begins, thus providing a goal to be achieved. Now we will analyze more in depth these types of costs.
STANDARD COSTS
HISTORY
The standard cost technique had its origin in the early twentieth century, due to the doctrine called Taylorism; that is, the displacement of human effort by the machine.
In 1903, FW Taylor made the firsts in terms of research to achieve better control of production and productivity, which inspired Ing. Harrington Emerson (1908) to deepen on the subject, who in turn served as inspiration to the Accountant Chester G Harrinson for the emergence of the Standard Cost Valuation Technique in 1921, with Emerson being considered the forerunner and Harrinson the producer, whose first essay was made in the United States (1912).
The standard cost technique is the most advanced of the existing ones since it serves as an instrument for measuring efficiency, because its determination is based precisely on the efficiency of work in the economic entity.
THEORY
For the use of standard costs, two situations can be presented: one that considers the company at its maximum efficiency, which is when time losses are not calculated and the climax performance of the machinery is accepted, a utopian situation, but with a projection of overcoming. Another in which certain cases of loss of time are considered both in the use of human effort, as well as the productive capacity of the machinery, averages dictated by experience and by studies, which have been made on the subject by technicians in the field. (Industrial Engineers); therefore, by weighing these situations, it is possible to obtain an efficiency at its optimum point.
The Standard Cost indicates what an item should cost, based on the efficiency of the normal work of a company, so when comparing the historical cost with the standard, from which the deviations that indicate the deficiencies or exceedances perfectly defined and analyzed result.
In the case of the costs estimated at the difference between these and the historical ones, a generic name was given, variation, as the technique was not very exact, and adjusted to the Historical Cost; But the Standard is of high precision, it is a goal to be achieved, it is a measure of efficiency, in short, it indicates what something should cost, so the difference between the Standard and the Real Cost will be named deviation, for be more precise and give an idea that a line, pattern or measurement was left out.
CLASSIFICATION
Standard costs are classified into two groups:
- Standard circulating or ideal costs Standard basic or fixed costs.
Standard current or ideal costs.
They are those that represent goals to be achieved, under normal conditions of production, on the basis of efficiency; That is, they represent patterns that serve as a comparison to analyze and correct the Historical Costs, of course, the Standard Costs of this type will be continuously subject to rectifications, if the circumstances that were taken, if the circumstances that were taken as the basis for their calculation have varied.
Basic or fixed standard costs.
They represent fixed measures that only serve as an index of comparison and do not necessarily have to be changed, even when market conditions have not prevailed.
Standard Costs
STEPS FOR THE DETERMINATION OF THE STANDARD COST
Like the Estimated costs, it is also necessary to formulate a cost sheet for each product, considering the Cost Elements, which can be specified as follows;
- Determination of Direct Materials: Techniques on the quality, quantity and yields of direct materials are determined, as well as losses and waste, using statistical data that experience and accounting records can provide both in quantity and price per unit.
IN QUANTITY: It is determined by the company's engineers, considering: type of material, quality, performance, and a production project for the calculation of waste and waste. Semi-annual reviews are recommended.
IN PRICE: It is determined by the purchasing department, considering: an estimate of the price that will prevail in the period, which is acquired in the quantities set at a standard price, contracts with suppliers. They are modified only for justified reasons, constant review is recommended.
- Determination of direct labor cost: A study is carried out to determine the amounts of time necessary to obtain a certain volume of production, achieving higher performance with the minimum of effort and cost.
To determine the study of work or study of methods it is necessary:
- Select the work to study Record the current method.
It is then examined to determine possible failures, considering:
- The purpose pursued. The place where it is, and where it should be. The succession in operations. The people who work. The means available.
This done, we proceed to develop a better method including a time study.
- Determination of indirect production expenses: The production volume is budgeted according to the studies on the productive capacity of the company, taking into account the Sales budget, indirect expenses are determined, using statistics from previous periods.
Having determined the elements of the standard cost of production it is possible to draw up the cost sheet.
Example:
| STANDARD COST SHEET | ||||
| Product "X" | ||||
| Concept | Quantity | Cost p. und | Partial | Total |
| MP
TO B |
10 us. 20 us. |
$ 12.00 $ 10.00 |
$ 120.00 $ 200.00 |
$ 320.00 |
| MO
TO B |
23hr. 9hr. |
$ 2.00 $ 8.00 |
$ 46.00 $ 72.00 |
$ 118.00 |
| MP
TO B |
23hr. 9hr.. |
$ 6.00 $ 20.00 |
$ 138.00 $ 180.00 |
$ 318.00 |
| Standard cost per unit | 756.00 |
OBJECTIVES OF THE STANDARD COSTS
- Timely comprehensive information Control of operations and expenses Reliable determination of unit cost
- Set the sale price. Evaluation of finished production, in process, damaged, defective, etc.
- Policies of exploitation, production, exchange, etc.
- Unification or standardization of production, procedures and methods. Analysis of deviations, in attention to their cause.
ANALYSIS OF DEVIATIONS
Because the standard costs are the costs that a specific product must have at the end of the period, it is necessary to carry out an analysis to determine the causes for which this deviation in costs has been had and these analyzes are carried out taking into account each element of the cost.
The deviations of raw material and labor are made in the same way taking into account the price and quantity, both standard and real. Comparing the signs shown below according to the data we have.
Example: MP or MO
| Price |
| - Standard |
| + Real |
| Quantity |
| - Standard |
| + Real |
In the case of manufacturing costs, the analysis is prepared differently; taking into consideration budget, capacity and efficiency.
| Budget |
| - Standard |
| + G. Real |
| Capacity |
| + Budget |
| - Real |
| Efficiency |
| - C. Standard |
| + C. Real |
DIFFERENCES BETWEEN STANDARD AND ESTIMATED COSTS
| Every standard is an estimate at heart, but not every estimate is a standard. | |
| DEAR | STANDARD |
| Estimated costs are in line with historical ones. | Historical costs are up to standard. |
| Variations modify the estimated cost by rectifying the affected accounts | The deviations do not modify the standard cost, they must be analyzed to determine their causes. |
| The estimate is based on experience and knowledge of the company. | The standard does in-depth scientific studies to set its fees. |
| It is cheaper to implement and more expensive to sustain. | It is more expensive to implement and cheaper to sustain. |
| Estimated cost indicates what a product “can” cost. | The standard cost indicates what a product “should” cost. |
| Estimated cost is the default primary valuation technique. | Standard cost is the default maximum valuation technique. |
| For the implementation of the estimated cost, an extraordinary internal control is not essential. | For the implementation of the standard cost, extraordinary internal control is essential. |
CONCLUSION
After having carried out this work, I can conclude that in order to have a better control of the costs in any industrial company, it is convenient to have a standard cost system since it will allow us not only to determine an anticipated cost of production, but also the cost that really owes stay during the production process and thereby analyze the deviations that may have arisen in the period to avoid them in the next.
We must not forget that the implementation of this system is very expensive because it has to be done with great caution, taking care not to exclude any important aspect that should be considered in determining the cost per unit. Due to the above and according to the capacity of the company, great care must be taken when deciding to implement this type of system; otherwise it would be convenient to establish the estimated cost system.
BIBLIOGRAPHY
- From the González Cristóbal River. “Costs II, Predetermined, of Operation and of Production in common or Joint”. Editorial ECAFSA. Chapter I Cashin James A. / Polimeni S. Ralph. "Cost accounting". Schawn series. Editorial. Mc Graw Hill.
CP Raúl Cárdenas Naples. "Cost accounting 2" IMCP. Chapter III
STANDARD COSTS
Contributed by: Beatriz Zamarron
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