Cost Accounting and Financial Accounting
Financial Accounting and Cost Accounting
Financial Accounting
Financial accounting analyzes, records, and reports the financial and economic operations of an economic entity. This process interprets and reports matters relating to assets, liabilities, income, and expenditures.
Financial accounts provide information related to property, rights, and obligations to third parties. Its main function is to record, classify, and summarize the economic and financial operations of businesses, aiding management in decision-making.
Cost Accounting
Cost accounting, a branch of general accounting, measures the factors of production of economic goods and services. It manages raw materials, labor, processing costs, and distribution costs (administration, sales, and financial).
Its function is to analyze, record, and report the total and unit costs of production for decision-making.
Cost accounting is internal. For this reason, companies are very careful about the formulas, technical, manufacturing, and control aspects of cost accounting.
Accounting Systems
Accounting Tier
This system combines financial accounts (Class 1 to 8 PCGE) with analytical accounting or operating costs (Class 9 PCGE), recording them in one ledger.
Dualistic Accounting
In dualistic accounting, cost accounting is recorded independently of financial accounting. Each accounting system maintains its own financial status, recording transactions in different books.
Factors of Production Cost
The factors or elements of production cost are:
- Materials: Also called raw materials or inputs, these are goods transformed into other goods for use or consumption.
- Labor: The work involved in the formation or manufacture of goods or services.
- Other Expenditures: Processing costs, including disbursements like electricity, water, office supplies, telephone, insurance, depreciation, and wear of tools and machinery.
These cost factors are further classified as:
Direct Costs
Materials: Assets easily identifiable and valued, transformed into finished goods. For example, wood for a chair.
Labor: Work directly involved in changing the raw material’s form. For example, the carpenter making the chair.
Manufacturing Costs: Expenses necessary for production, including energy, repairs, maintenance, depreciation of machinery, rentals, and other necessary costs.
Indirect Costs
Materials: Complementary goods necessary for the product’s appearance. For example, paint for the chair.
Labor: Staff whose participation is not directly noticeable but contributes to the production process. For example, security personnel.
Processing Costs: Necessary expenses to achieve the final product, such as rent.
Some authors classify both indirect materials and indirect labor as processing costs, as they are not directly identifiable in the finished product.
Cost Classification by Variability
Costs can be classified by their variability in the total cost:
- Fixed Cost: Costs that remain constant regardless of production volume. Rent is an example, although it can become semi-variable if rent increases with increased space needs.
- Variable Cost: Costs that increase or decrease with production volume. For example, the amount of leather needed to produce shoes.
- Total Cost: The sum of fixed and variable costs.
- Average Cost: Total cost divided by the number of units produced.
- Marginal Cost: The difference in total cost between two consecutive production levels. It helps determine the breakeven point.
Service Costs
Other types of costs include replacement cost, incremental cost, engineering and reengineering cost, opportunity cost, differential cost, associated cost, scheduled cost, absorption cost, and committed cost.
Chapter II: Administration and Accounting of Production Cost Elements
Materials
Concept: Materials are natural or manufactured resources acquired by industrial companies for transformation into finished products. They are classified as:
Direct: Materials that form the finished product and can be identified and valued before, during, and after the production process.
Indirect: Complementary materials that contribute to the product’s presentation but whose participation is not easily determined.