Cost Accounting Basics, Objectives, and Methods
Definition and Objectives of Cost Accounting
Cost accounting, a subset of internal accounts, addresses a company’s technical-economic aspects. Its main objectives include:
- Collecting, measuring, valuing, and representing internal transactions.
- Valuing outputs from production.
- Analyzing and controlling production costs.
- Calculating the differential contribution to cost achievement.
- Providing information for management decisions.
- Determining the necessary accounts for achieving these objectives.
Specified Price as an Endpoint Criterion
Using a specified price as an endpoint criterion is suitable when considering the purchase of items where the material consumed can be factored into the purchase price. This is often advisable for perishable goods.
Work in Progress and Semi-finished Products
Work in Progress (WIP)
WIP refers to items undergoing transformation at a business location at year-end, excluding semi-finished products, byproducts, waste, or recovered materials.
Semi-finished Products
These are manufactured by the company but not for general sale until further processing or incorporation.
Production in Progress and Semi-finished Production
Production in Progress
These items are in an unfinished state of production.
Semi-finished Production
These have not reached their final stage in the production process. Unlike WIP, which is within an operation in a state of transformation, semi-finished production is at a midpoint between two successive processing operations.
External Magnitudes: Concepts
- Purchase: Goods and services acquired externally, subject to the buyer’s will, as defined in the purchase agreement.
- Spending: The monetary value of purchases.
- Sales: Products sold externally by the company.
- Income: The monetary value of sales.
- Payment: Money transferred by the company to external parties.
- Recovery: Money received by the company from external parties.
Internal Quantities
- Consumption: Number of items used in production during a given period.
- Costs of the Period: Monetary value of consumption.
- Production: Number of items produced during the period.
- Value of Production: Monetary value of production.
Cost of Labor
The cost of labor represents the monetary value of human effort applied to the production process. Components include wages, salaries, company-paid social security, training costs, and other benefits.
Calculating Daily Labor Cost
Effective Daily Labor Cost = Total Cost of Period / Total Actual Days in Period
Total Actual Days = Calendar Days in Period – Days Not Worked
Days Not Worked = Sundays, holidays, half of Saturdays, etc.
Direct vs. Indirect Labor
- Direct Labor (MOD): Labor directly identifiable with a specific product, work, or process.
- Indirect Labor (MOI): Labor not easily identifiable with a specific product, work, or process.
Homogeneous Hours in Cost Accounting
Homogeneous hours are used for internal cost calculations, representing an hour at 100% capacity. They are determined as follows:
Hh = He * Y * C
Where:
- Hh = Homogeneous Hour
- He = Effective Hour
- Y = Yield Coefficient
- C = Capacity Percentage
Perpetual Inventory and Cost Statistics
- Perpetual Inventory: A document recording the movement of items in a business.
- Cost Statistics: An informal method for indirect cost allocation, often a double-entry table showing the distribution of indirect costs.
Interest Cost Phenomenon and Semi-Irreversible Costs
The interest cost phenomenon relates to semi-irreversible costs. Reaching a certain production level incurs a total cost. Decreasing production doesn’t follow the same cost trajectory; it returns along a higher plane.
Remuneration Systems
Taylan Discontinuous Piecework System
Compensation is granted when production exceeds a threshold. This is often a percentage of the maximum remuneration. A drawback is that employees may only strive to exceed the threshold.
Time-Based Remuneration
Workers are paid based on time spent working, regardless of production. This is easy to administer but doesn’t incentivize output.
Quantity-Based Remuneration
Workers receive a fixed amount per unit produced, based on a normal production rate. This allows unlimited earnings but can lead to machinery overuse.
Rational Allocation Method
This method includes variable and fixed costs in the final cost, but only to the extent of the ratio between actual and normal production volume. Fixed costs related to actual capacity used are charged to production, while remaining fixed costs are charged to the period.
Process Costing
Accrual
Costs are allocated temporarily. All revenues and costs are included in the income statement and relate to the same time unit for comparison.
Classification, Detection, and Attribution
- Direct costs are charged to the final product cost.
- Indirect costs are distributed to cost objects.
Rational Allocation Scheme
- Direct costs are allocated to cost objects.
- Indirect variable costs are allocated.
- Fixed costs are allocated.
Correcting a False Statement
It is false that buying always implies spending without consumption. Buying often involves both spending and consumption, and the expense incurred corresponds to the purchase price or production cost.
Unit of Work and Distribution Key
A unit of work measures the activity of a cost center and aids in creating cost centers and allocating indirect costs. Distribution keys are used to estimate the consumption of indirect costs by each cost center.
Correcting Another False Statement
It is false that the unit of work distributes direct costs among products. Direct costs are directly charged to cost objects. The unit of work relates the cost of cost centers to cost objects.