Cost Accounting System: Construction Phases and Allocation

Posted on May 2, 2025 in Business Administration and Management (BAM)

COSTA 2 Construction Phases

Phase 1: Analysis and determination of production factor costs.

Phase 2: Analysis and determination of the cost of activities carried out.

Phase 3: Analysis and determination of the cost of products or services.

Downstream Process

Elaboration of a scorecard detailing costs and outcomes.

Preliminary Steps

Determination of the company’s functional organization.

Steps in Cost Construction

Cost Classification and Location

  • Classification: Direct Costs (DC), Indirect Costs (IC).
  • Location: Identifying where costs are generated (consumed).

Cost Centers

  1. Main Centers vs. Auxiliary Centers

    • Main Centers: Their activity is targeted towards obtaining products or services, by allocating their costs directly to them.
    • Auxiliary Centers: Support centers with shared costs among other ancillary or principal activities. These centers are necessary for the rest of the company’s value chain to function.

  2. Liquidation of Auxiliary Centers

    Allocate auxiliary center costs, shifting them to those centers they serve.

Cost Allocation Methods

  • Primary Allocation: Indirect costs are allocated among all centers (primary and auxiliary) using appropriate distribution keys.
  • Secondary Allocation (Step-down or Reciprocal): Auxiliary center costs are reallocated to the main centers they supported.

Cost Statistics

Financial accounting provides information at the end of each period about the monetary consumption incurred in each center/activity within the company’s value chain. This combines factor consumption with the activities and centers where they are consumed.

  • Representation: Typically a double-entry table:
    • Rows: Types of costs
    • Columns: Cost centers or activities of the value chain
  • Criteria for Inclusion:
    • Include all costs (direct and indirect).
    • Include only indirect costs.
    • Include all costs except raw materials.
    • Order centers: Main then auxiliary, or by process flow (e.g., provisioning, manufacturing, distribution, administration).

Operating Costs by Location

  • Define productive activities and cost object consumption.
  • Set units of work (cost drivers).
  • Assign sole responsibility for each activity.
  • Classify cost centers: Main and auxiliary locations.
  • Determine the total cost of each center.

Cost Units and Secondary Costs

Cost Units: Valued consumption (e.g., cash cost) of each cost class associated with operations performed outside the company and products.

Secondary Costs: Costs corresponding to internal services performed between different activities in the company’s value chain.

Cost Centers and Activities (ABC)

What are cost places?
Cost Place = Activity (as in the ABC – Activity-Based Costing system)

What objectives does this achieve?

  • Identify what creates value for customers, directing efforts accordingly.
  • Remove non-value-adding activities.
  • Identify causes of delays, overruns, and irregularities.
  • Keep track of waste indicators.
  • Reduce time and effort in activity implementation.
  • Eliminate unnecessary activities.
  • Select less costly activities.
  • Segment activities effectively.
  • Redeploy underutilized resources.

Imputation to Final Product or Service

Attributing main activity costs to products or services, distinguishing between:

Direct Costs of Products or Services

Direct Costs: Affect outputs immediately and are measurably valued for each unit produced.

Indirect Costs (Overhead)

Allocation: Imputed from main cost centers to products or services using work units (Cost Drivers). These measure the functional relationship between the costs of main production centers and the service/product obtained.

Overhead: Cost Centers -> Products or Services

Accrual and Book Value Considerations

Accrual

Determining the cost of the period. Calculate the overall cost of goods sold by adding period costs to the manufacturing cost of various products.

Incorporating Book Value Calculation

Consider potential differences between cost accounting and financial accounting:

  • Are there financial accounting costs that are not included in cost calculations (e.g., certain financial expenses)?
  • Are there calculated costs (e.g., imputed costs) that are not financial expenses?
  • Are there items treated as costs in both systems but valued differently?