Cost Accounting: Principles, Methods, and Break-Even Analysis
Financial and General Accounting: A technique or tool of the economy and administration that records the facts constituting the economic activity of a company.
Management Accounting: A technique to identify, collect, prepare, analyze, plan, and evaluate all kinds of economic, financial, and other data. This allows management to make decisions in planning and controlling operations, whether routine or special.
Cost Accounting
Concept: Cost accounting is a part of the company’s general information system that tracks, analyzes, and interprets the details of costs associated with producing goods or providing services.
- Provides information to management accounting and financial accounting.
- Deals with the classification, collection, control, and allocation of costs.
Objectives of Cost Accounting
- Improve operational efficiency
- Support decision-making, planning, and control
- Provide complete information for financial statements
- Inventory valuation
- Wholesale pricing
- Determine the most profitable items
- Decide to make or buy
- Reduce or minimize costs
- Plan and control operations
- Support special decisions and long-term planning
Cost: A sacrifice or loss incurred to achieve a specific objective. It is measured as the monetary amount paid to procure goods and services.
Cost Objects: The items for which costs are separately measured. Examples include products and projects.
Expenses: An accounting item that reduces the benefit or increases the loss of an entity.
Expenses are generally understood as spending on goods or services acquired for the normal operation of the organization and are not expected to generate future earnings.
Unlike costs, expenses, such as the purchase of raw materials, are likely to generate future income when processed and sold as finished products.
Generally, accounting standards require that expenditures are accounted for using the accrual basis. This means that expenditure should be recorded at the time the event generating the economic benefit occurs, regardless of whether it was paid or received, or formalized through a contract or other document.
A fundamental difference between costs and expenses lies in the fact that costs are incurred and expensed in the same accounting period, while expenses can be incurred in one period and expensed in one or more subsequent periods.
Cost Elements
To produce a product or process, raw materials are consumed to create goods or services.
A company requires a set of goods and services called elements, which are the components used to produce a product or service. These elements include:
- Direct Materials (MD) or Raw Materials (MP)
- Direct Labor (MOD)
- Indirect Manufacturing Costs (CIF)
Cost Schemes
- Prime Costs: The sum of direct material costs and direct labor costs.
- Conversion Costs: The sum of direct labor costs and manufacturing overhead costs.
According to the Function Where They Are Incurred:
- Production Costs
- Selling and Administrative Costs
According to Their Identification with Any Activity:
- Direct Costs
- Indirect Costs
As They Relate to the Volume of Activity:
Variable Costs
Fixed costs.
CONTROL SYSTEMS INVENTORY
The merchandise inventory is a detailed list:
• The products or items that are available for sale
• Those who are in production
• And those that will be used in the manufacture of other products
To resolve the effects of the technical problem posed by the fluctuation of the purchase price in the valuation of goods in stock and in determining the cost of sales, then study three methods of recovery, known by the acronym FIFO or FIFO LIFO and LIFO or PMP-all of which respond well to the principle of cost accounting and valuation basis.
These accounting tools sometimes are called methods of recovery of existence, suggesting their usefulness in valuing stock merchandise only, less importance to the valuation and costing of those that have been sold
FIFO
The acronym FIFO corresponds to the English first in first out that the Spanish equivalent of first in, first-out basis. This meaning has led to the abbreviation PEPS with
also called this method of valuation of goods. FIFO or FIFO method considered, for purposes of cost, the unit prices of the first units received are the first to be used, therefore, the cost of output or cost of sales corresponds to the old price, while units remaining in stock are valued at the latest purchase prices.
- LIFO
The abbreviation that identifies LIFO this method corresponds to the English last in – first out. The translation or expression in Spanish is to be last in, first-out and abbreviated as LIFO. With this method, the outputs of goods are valued at the last purchase price and inventory stocks are valued at the price first, preceded in reverse to the operation of the FIFO method.
- PMP method
This abbreviation refers to the weighted average price which is the third method in our study. With this method, are valued outputs and stocks to the same unit price, the average price. The PMP is obtained by dividing the total inventory cost by the total number of units in stock (balance of securities on the balance of units). The average price changes when there are new purchases to different unit prices to average with the units in existence, being calculated a new PMP as indicated above.
Balance Point
Refers to the amount or the amount of sales that makes total revenues equal total costs, the utility is zero.
This approach is based on the following assumptions:
Fixed costs constant in total and unit-level variables
Constant variable costs and variable unit level in unit terms.
Constant selling price
Is the amount of output sold in the total revenue equals total costs, ie, operating income is zero. For managers interested in the balance point because they want to avoid operating losses. The breakeven point indicates how much production will be sold to avoid the loss.
An equilibrium point is commonly used in businesses or organizations to determine the potential profitability of selling a certain product. To calculate the breakeven point is necessary to have clearly identified the behavior of costs, otherwise it is extremely difficult to determine the location of this point.
Sean IT total revenues, CT total costs, unit price P, Q the number of units produced and sold, CF fixed costs and variable costs CV. Then:
If the product can be sold in greater quantities to those from the balance point so that the company will receive benefits. If, however, is below breakeven, losses will
We find and analyze the point of equilibrium:
allowing a first simulation that lets us know at what amount of sales will begin to make a profit.
assess the viability of a project, to know if our demand exceeds our point of equilibrium.
see at what level of sales, I might want to change a variable cost for a flat fee or vice versa, for example, changing sales commissions, for a fixed income salesman.
know that the number of units or sales must be made to achieve some value.