Cost Accounting Fundamentals: A Comprehensive Guide

Posted on Sep 8, 2024 in Economy

Cost Accounting

Introduction

Accounting aims to inform and control. The Cash Flow Statement shows the sources and uses of funds. A company is an agency or institution that has an internal structure, a certain distribution of elements in a certain internal order, and is independent of the legal form.

In this organization, initial elements, labor, and manufacturing costs make up the production process of goods and/or services. These goods or services meet the needs of a community. Examples of companies include furniture stores, hospitals, and educational institutions.

In accounting, we can split into two branches:

Financial accounting
Cost Accounting

Financial Accounting vs. Cost Accounting

Financial accounting is the processing functionality of the financial statements.

Cost accounting’s role is helpful to management for internal decision-making through proper planning, control of activities or management control, and operational monitoring.

Users

Users of financial accounting are primarily external, such as banks, government agencies, etc., i.e., people who are outside the organization.
The users of cost accounting are internal, i.e., within the company.

Restrictions on Reporting

Financial accounting has restrictions and principles that are based on accounting and tax rules for the development of accounting standards for the preparation of financial statements.
Cost accounting is not subject to such restrictions as it is used by internal users who determine the format of such reports.

Analytical Overview

Financial accounting, through financial statements, provides a condensed view of the organization as a whole.
Cost accounting generally provides a detailed overview of the activities of the entity.

Unit of Measure

Financial accounting uses monetary units. In our country, the monetary unit is the first step; therefore, the states are expressed in that currency.
Cost accounting, in addition to monetary units, uses physical units such as tons, kilos, liters, gallons, etc. At times, it even uses units of measures based on qualitative concepts.

Costs

A cost is:

The financial sacrifice made to obtain a good or service.
The value sacrificed for a good or service.
The investment made to obtain a good or service, measured through the reduction of assets and/or increased liabilities.

Investment
Bank cash (credit)
Cash or bank Credit providers
Assets (-) Liabilities (+)
Loss: It has produced a cost benefit.
Income: Is the selling price of products sold or services rendered.

Income Statement

Operating Income
= Sales
(-) Cost of sales
(=) Operating margin or contribution
(-) Selling and administrative expenses
(=) Income or loss

Non-operating Income
(-) Non-operating expenses
= Non-operating income (1)
= Result from that of monetary correction
(-) Monetary correction
(=) Earnings before tax
(-) Tax
(=) Net income

Correction monetary assets
Accounting
Assets
Restatement

Passive monetary correction
Monetary correction
Liabilities

Purpose of Cost Accounting

Provide information required for operations planning, evaluation and control, safeguarding the assets of the organization, and establishing communication with stakeholders outside the company.
Participate in making strategic, tactical, and operational decisions, helping to coordinate their effects throughout the organization.

Cost Elements

In general, the cost elements are as follows:

Materials or raw materials
Labor
Manufacturing costs and manufacturing overhead costs (CIF)

Materials

The materials are the main goods used in the production process. These materials are transformed into finished products with the addition of labor and manufacturing costs.

The cost of materials is classified as:

Indirect material cost
Direct material cost

Direct material is one that can be identified in the production of a finished article, can be easily associated with it, and represents the increased cost of materials for that product.
Indirect materials are those that are not direct. The cost of indirect materials is included in the cost of manufacture or CIF; therefore, the first element is the direct materials.

Labor

Labor is the physical or mental effort used in the manufacture of a product. The cost of labor is classified as the cost of direct labor and the cost of indirect labor.

Direct labor is all that is involved in the manufacture of a finished product that can be easily associated with it and represents the largest labor cost for that product.

Indirect labor is all that is involved in the manufacture of a product that is not considered direct labor. Indirect materials and indirect labor costs are part of the manufacturing of a product, with the exception of direct materials and direct labor, among which are mentioned as follows:

Indirect materials
Indirect labor
Lease
Basic consumption (electricity, water, telephone, heating, gas, etc.)
Insurance
Depreciation
Other manufacturing expenses

Then the cost of a product is determined by:

The cost of direct materials
Direct labor
Processing costs or CIF costs.

Classification of Costs

1. According to its connection with production

Prime costs: The sum of direct materials and direct labor.
Conversion costs: The sum of direct labor and manufacturing costs or CIF.

2. According to its relationship with production volume

Fixed costs
Variable costs
Mixed costs
- Semi-variable costs
- Staggered Costs

Fixed costs are those in which the total fixed cost remains constant within a range of activities or production, while the unit fixed cost varies. This variation is presented in reverse with the level of production. Beyond the relevant range, total fixed costs and variable costs per unit vary.

The relevant range is defined as the range of activity within which total fixed costs and variable costs per unit are held constant.

Example:

Home
Rent: $500,000
5 people: $100,000 unit fixed cost
4 people: $125,000

Variable costs are those in which the total cost changes in direct proportion to changes in the level of activity or production, while the variable cost per unit remains constant.

Total variable cost

1 unit = MP = $100
2 units = MP = $200
3 units = MP = $300

The unit cost is always $100.

Mixed costs have the characteristics of fixed costs and variable costs. There are two types of mixed costs: semi-variable costs and staggered costs.

Semi-variable costs have the following behavior: the fixed part of the cost generally represents a minimum charge to elaborate a product or service.

Example:

Telephone Account
CF = $1,000
CV = long-distance calls, cell called, number of calls

Staggered costs have the feature that they change abruptly at different levels of activity because they are acquired as indivisible. For example, if a production program includes a supervisor who can only be responsible for supervising 10 workers, it implies that if the company has to be expanded to recruit two supervisors, it must double the fixed cost of remuneration of supervisors.

3. According to the department where costs are generated

A department is a major administrative division. As the company is manufacturing, there are two types of departments:

Production departments
Service Departments

Production departments are those who are responsible for product development and thus identify with the elements of cost. It is in these departments where the transformation of raw materials into finished goods occurs.

Service departments are not directly related to the development of the product. Their function is to provide services to both service departments and product departments. Examples include Human Resources, the department of finance, maintenance, nurseries, etc.

4. According to the company’s functional areas

Manufacturing firm

Production area: Manufacturing costs
Management Area: Management Costs
Marketing area: Marketing costs
Finance Area: Financial costs

Manufacturing Costs: Are generated from the production process. It is the sum of materials, labor, and manufacturing.
Administrative costs: Are generated during the administration, control, and/or operation of a business. They include the salaries of the firm and formal administrative people.
Marketing costs: Are generated by the sale of a product or service, for example, sale commissions, the local lease sales, among others.
Borrowing costs: Are generated when the company obtains loans or credits from banks or other suppliers. These financial costs relate to interest, fees, and bank charges in general.

5. According to the company’s ability to associate costs

A cost may be direct or indirect depending on the discretion of management for departments to associate them with specific orders or territories.

Direct costs are those that management can identify with specific items or areas, such as direct materials and direct labor.
Indirect costs are common to many items or services and therefore are not identifiable with any item or specific area.

6. Its relationship with planning, controls, and decision making

Precalculated or predetermined costs: Costs are those estimated costs and standard costs.

The difference between estimated costs and standard costs is simply the degree of preparation of cost estimates.

Standard costs are generally scientifically calculated through engineering studies and go on to become a model or standard of what the costs should be if you work efficiently. However, if the predetermined costs do not have a degree of processing such as to constitute a model, they are called cost estimates.

Controllable costs and uncontrollable costs:
- Controllable costs are those which have authority over a certain level of management.
- Uncontrollable costs are those for which there is no authority, such as in the case of depreciation.
Authorized fixed costs and discretionary fixed costs:
- Authorized fixed costs necessarily arise when there is a basic organizational structure, for example, the location where it will operate the equipment and staff or commodities.
- Discretionary fixed costs are generated as they pass the company’s operations, such as machinery, repairs, staff training, advertising, etc.
Opportunity costs: When making a decision to pursue an alternative, leaving the benefits of other options, the benefits lost by discarding the next best alternatives are the opportunity costs of the action taken.
Plant closing costs: The costs generated by the companies even though there is no production, such as leases, basic consumption, insurance payments, salaries, etc. These costs generally occur in seasonal periods where there is usually no production.

Terms

MD: Direct material
MOD: Direct labor
CIF or GF: Manufacturing costs
AD: Administrative
FIN: Financial
COM: Marketing

Prime costs: MD + MOD
Conversion costs: MOD + CIF
Product Cost: MD + MOD + CIF
Costs of the period: AD + COM + FIN
Materials: Direct material + Indirect material

Nature of Cost Accounting System

The basic objective of a cost accounting system is the determination of unit costs of manufacturing products or providing services. Management uses this basic information to guide decisions that need to be taken to maintain or increase the profits of the company.

The cost accounting system consists of a series of forms or models, daily administrative reports, or higher integrated within a procedure so that costs can be obtained quickly and are used in decision-making. Among the most commonly used forms are the following:

Production orders that tell the boss what needs to be manufactured.
Applications or requests for materials that specify the quantity, characteristic, and cost of materials that are used in the production process.
Ballots or time sheets of employees indicating the number of hours and the cost of which are used by a worker in a specific task.
The cost sheets for specific orders or reports from the plant production department or processes that accumulate the costs of direct materials, direct labor, and manufacturing costs between the books that make up the cost accounting system are the following:
- The journal of manufacture, which is similar to the general journal, is used in the accounts summarizing accounting records through operations relating to costs.
- The general ledger and subsidiary ledgers for materials, labor costs, and manufacturing, in addition to the subsidiary ledger for finished products.

Rating Systems Costs

Under the cost approach:
- Absorption cost system (considers that the cost of the product is made up of fixed and variable elements (MD, MOD, CIF))
- Variable cost system (considers that the cost of the product is made up of variable elements (MD, MOD, CIF))
According to the period of cost generation:
- Historical cost system (actual, executed after a period of cost)
- Default or precalculated cost systems (calculated before the start of period costs)
Depending on the type of production:
- Cost systems for specific orders or work orders (OT)
- Process-cost system

Accounting for Acquisitions

Shopping Journal

Purchases are normally recorded in a daily journal whose function is to accumulate the values of all invoices received from suppliers during a period of one month, after which the totals give rise to a global entry in central accounting.

Date	Invoice No.	Ruth provider	Provider	Net Worth	Iva	Total
Total

Accounting

Materials
Iva Credit
Related Searches
Gloss: Centralization daily purchases)

Materials Order Request

Posting of orders to warehouse

For accounting purposes, it is necessary to enable an order to be held daily to collect all the solid material for a given period, the total of which gives rise to a central place in accounting.

Centralization
Products in process – direct materials
Processing costs (indirect materials, CIF)
Materials
Gloss: Centralization hold orders daily)

Accounting for Labor

The accounts of the workforce have two specific purposes:

Collecting remuneration earned by staff to attend monthly payments involved.
Charging such fees to the various functions that are developed.

Elements to Control the Time Worked

To control the time worked in the production process also requires knowing the specific activity to which work was devoted during the day to make assignments and corresponding costs. For this, ballots and time cards are used, which can be per worker or per task.