Understanding General Training Costs: A Comprehensive Guide

Posted on Aug 31, 2024 in Economy

GENERAL TRAINING COSTS

1.1. Cost Concept

Cost is the measurement and valuation of consumption needed in the productive activity of the company.

The component elements of this definition are:

  • Measure: The number of items consumed in the productive activity.
  • Valuation: The assignment of monetary values to the physical quantities of resources consumed by the production process.
  • Necessary Consumption: Represents the utilization of resources in the production process (e.g., raw materials, labor, equipment, energy, building, cleaning) for the purpose of exercising the productive activity of the company itself.
  • Activity of the Enterprise: Covers not only manufacturing, but any process that generates added value, such as storage, distribution, and marketing.

1.1.a. Economic Concepts:

  • Cost: The resource consumption value required to produce products.
  • Expenditure: A concept of financial accounting. The various costs are included in Group 6 of the Chart of Accounts.
  • Payment: A cash outflow. Cost refers to the domestic sphere of the company, while spending and payment are related to the environment.
  • Investment: The part of expenditure not consumed entirely in the fiscal year and remains in the company to be used in future exercises. Examples include fixed assets (machinery, buildings, etc.).
  • Income: The value at market prices of the goods and/or services obtained in the production process and made available to customers. Income occurs at the moment of the product sale or service provision, regardless of whether collected or not. Revenues outside the economic mainstream, which is independent of the currency, are included in Group 6 of the General Accounting Plan.
  • Margin: The difference between income and a certain type of cost.
  • Results: The difference between income and total cost. The result is an end in itself. Its importance lies in its analysis, the true way to understand its training and know which factors have contributed to its achievement.

1.1.b. Technical Concepts:

The technical concepts we will analyze are the following:

  1. Factor
  2. Process
  3. Performance or Efficiency
  4. Effectiveness
  5. Cost Center
  6. Cost Object
  7. Economist
a) Factor

Each of the economic resources used in the economic transformation function. They can be classified as:

  • Fixed or capital (fixed)
  • Circulating or current (pertaining to the logging operations of the company)

Together, these tangible factors or materials are intangible or intangible factors formed by the knowledge management that are critical today.

b) Process

The set of operations, using a given technology under a structure, that transforms factors (inputs) into products (outputs).

When we speak of technology, we talk about machines and knowledge. The process does not necessarily have to use complex technology; it can be a big business with simple technology.

c) Performance or Efficiency

Performance is defined as the amount of product obtained in a determined processing time in an economic process.

Yield = Product (t) / Factor (t) = Efficiency

T is the temporary unit to which the two concepts concern.

That is, the goal is consuming few factors.

d) Effectiveness

Effectiveness means the degree of compliance with the objectives over a period of time.

It should be effective first, and additionally efficient. If we make a nice park (effective) and we used a lot of resources (inefficient), we have mismanagement. We must be effective (nice park) and efficient (lightweight).

Efficiency is a quantitative concept; effectiveness is a qualitative concept.

e) Cost Center

Defined as a group of means serving the same purpose. They are subsets of the major functions of the business (supply, transformation, business, and administration).

Cost centers can be confused or grouped into Sections, Departments, or Divisions.

f) Cost Object

A term coined by the Institute of Management Accounting (IMA) in North America.

It may be a product, a phase thereof, or a cost center involved in its development.

It is larger than the cost center and covers the same.

g) Economist

The parameter that relates the cost of resources employed with budgets, referring to the rationality in the consumption of resources.

In short: we must first be effective, then efficient, and then economistic (nice park, few resources consumed, and we have not deviated from the budget).

1.2. Cost Classifications

a) According to its behavior by varying the occupation of the productive capacity.

Productive Capacity: Maximum production capacity, determined by the fixed amount of resources (physical and human) with which a company accounts for its activity.

Activity: Use or occupation carried out in a given moment of productive capacity.

Occupancy is the relationship:

Capacity Employed / Maximum Capacity

By varying the degree of occupation, the behavior of costs will be different, with some costs remaining constant and others sensitive to this variation.

a.1 Fixed Costs

Those that remain constant when the occupancy rate or volume of activity changes. Both for that there is nothing like in the case of the occupancy rate equals the unit fixed costs remain constant.

a.2 Variable Costs

Those that are amending, in proportion or not, by varying the degree of occupation. Normally, the production of a good or service is accompanied by the consumption of resources per unit product. In this case, the cost of these resources will vary.

a.3 Semi-variable Costs

Costs that have a fixed and a variable component. Example: gas consumption has a fixed part, which relates to the rental of equipment, and another variable corresponding to the m3 consumed by the meter multiplied by the unit cost.

a.4 Semi-fixed Costs

Those that do not vary within a range of activity, but change as the level of activity is expanding. In reality, almost all fixed costs behave as semi-fixed, therefore ceasing to be fixed when capacity is expanded.

b) According to their way of allocating costs:

They fall into direct and indirect. This classification considers the possibility of allocating costs to so-called cost targets. The cost targets are activities, the cost centers, and the products or services.

Direct Costs

Those that can be linked directly with a cost target, without setting any method of distribution. The linking process of the direct cost to the product is called affectation.

Indirect Costs

Those that cannot be clearly linked with a cost target. To impute indirect costs to a cost target, it is necessary to follow an allocation procedure, in accordance with predetermined criteria.

c) According to the period referred to:

Budgeted or Standard Costs

Costs set for the future under future expectations, experience, or other factors.

Historical Costs

Those calculated from the consumption and real prices during the production process corresponding to a time past.

d) According to the production unit:

Cost

Obtained from the set of costs assumed by the company for a determined production volume.

Unit Costs

The cost of a unit of the cost calculation lens, the result of dividing total costs between the relevant activity level. If the goal is costing the product, we will discuss the unit cost of the product.

Marginal Cost

Determines the increase in costs suffered by the production unit.

e) Other classifications of costs:

According to the relationship factory costs:
  • Operating costs or manufacturing are those connected to the procurement functions and transformation.
  • Non-operating costs are linked to commercial and administrative functions.
According to their behavior in a decrease of activities:
  • Avoidable costs are those that are deleted if one takes the decision to eliminate a cost center, product, etc.
  • Unavoidable costs are not deleted even if the cost center or the product in question are eliminated.
According to the authority on the generation of cost:
  • Controllable costs are, with reference to the responsible management, those on whose existence and amount the manager can decide.
  • Uncontrollable costs are those that are beyond the scope of action of the manager and not his responsibility.
According to the disbursement of cost:
  • Out-of-pocket costs are those involving cash output (e.g., staff costs).
  • Opportunity costs do not involve any consumption, in principle, and arise from taking a particular decision by waiving another separate decision.
According to their importance for a particular decision:
  • Relevant Costs are those that vary with the decision taken.
  • Irrelevant costs are those that do not vary with the chosen alternative. Example: in a situation of sub-activity, upon receipt of an order, especially in a factory, the costs that would change if one accepts the order would be the raw material, energy, etc. (relevant costs). By contrast, the depreciation of the building would remain constant (negligible cost to take the decision).
According to the change caused by an increase or decrease in the activity:
  • Cost differentials are those increases or decreases in the total cost or at a certain cost element, driven by variation in the activities of the company. They can be divided into:
    • Incremental costs are cost increases caused by a particular decision (e.g., introduction of a new product line).
    • Cost depletion are the cost reductions caused by a particular decision (e.g., removal of an existing product line).
  • Sunk cost, if no changes are allowed.
According to the type of production:
  • Separable costs are those who identify with each product.
  • Common costs are generated in the multiple production (from a process out various products, being able to only produce one or more); that is, in the manufacture of products that are made at once, but could be done separately.
  • Joint costs are common costs when products cannot be obtained separately; that is, costs that are incurred in joint production.
According to the quality
  • Quality costs of prevention, grouping all preventive costs.
  • Quality costs of inspection, supervision, and audit.
  • Costs of internal quality: Contemplating the re-inspections, and investigations of the causes of defects.
  • Quality costs of an external nature: Coming given the assurance, from the sale of the product.

The total quality cost would be given by the sum of the partial quality costs mentioned.

In relation to the various stages of product life

The overall cost of the product’s life is the sum of the following partial costs:

  • Research, development, and tuning.
  • Industrialization (implementation of the facility).
  • Production operations.
  • Of use.
  • Maintenance: a) prevention, b) corrective or improvement.
  • Destructiveness: difficult to estimate, especially when attentive to the ecological balance.

The overall cost will be the cost from the cradle to the grave.

Strategic management costs

They are derived from all studies and actions aimed at the establishment of business strategy.

According to the positive environmental impact environment

These may include: green or environmental costs that result in environmental benefits, polluting or black costs that cause damage to the environment, and cost-neutral if they do not harm the environment.

2. Cost Components

Given that one of our main goals is the calculation of product cost, we define the elements comprising it:

  • Production costs are those costs that are generated during the transformation process to get the final product.
  • Distribution costs are the necessary costs to market and make the product available to end consumers, such as advertising costs, transportation of sales, etc.
  • General indirect costs are the remaining costs incurred by the company, such as financial and administrative costs.

A. Production Costs

  1. Direct costs
    1. Cost of direct material
    2. Cost of direct labor
  2. Manufacturing overhead costs
    1. Cost of indirect material
    2. Cost of indirect labor
    3. Other indirect costs

B. Distribution Costs

C. General Indirect Costs

2. A) “Production Costs”

Production costs are those costs that are generated during the transformation process to obtain the final product.

It consists of the following costs:

  • Direct costs: They can be assigned to the cost of production because they unequivocally identify the product.
  • Indirect costs of production: Those needed to obtain the product and are not included in any of the above. For example, the cost of electricity used in a chair factory.

The Direct costs of production can be classified into:

  • Cost of direct material: Raw materials that are consumed or incorporated physically into the finished product.
  • Cost of direct labor: Costs of salaries of personnel working directly in obtaining the product. An example might be the costs of carpenter labor that makes the chairs.

The Manufacturing overhead costs include:

  • Cost of indirect material: Cost of material that is part of the product in a direct way, although its use allows productive activity to develop. Example: Replacement cost of equipment used for robots that are devoted to painting cars.
  • Cost of indirect labor: Cost of staff not used directly in production, but in services that are necessary for the production process, such as monitoring, security, etc.
  • Other indirect costs: Indirect costs necessary for the production process, different from materials and labor. These include the depreciation of equipment, insurance costs, outside services and supplies (electricity), and the cost of providing services to departments and production centers. An example of the latter may be the case of the maintenance department.

2. B) and 2. C)

B. Distribution costs are the necessary costs to market and make available to the consumer the final product, such as advertising costs, transport sales, etc.

C. General indirect costs are the remaining costs in which the company incurs, such as financial and management.

3. The Utility of Cost Calculation

Get information on the transformation of raw materials (resources) into outputs. Financial Accounting only allows knowing the value of procurement of such resources and sales of products, but provides no information on the various added values that are generated through the transformation of raw materials to reach the finished product.

It is an essential support element for decision-making in the company. It allows for reporting all data deemed useful and relevant, such as transportation of products, inventory valuation, compliance with control targets, information about phases of production, etc., so that managers can make decisions.

4. The Cycle of Cost Accounting

The production process aims at transforming resources into products with the subsequent generation of costs from the time of acquisition of resources to the placement of products on the market.

The company, in addition to the production system, has a structure of supply of resources that feed the production system and a structure for the marketing and distribution of products obtained in the market. Therefore, in general, the company can differentiate three responsibility centers:

  • Acquisition Centers (procurement or purchasing)
  • Transformer
  • Marketing Center (distribution or sales)

The production process and its costs can be represented schematically as follows:

The assessment of the internal transformation of product factors in the production process through the face models and cost calculation methods.

One of the most important tasks before us is the cost allocation and revenues for the different products or services obtained in the production process.

The cost allocation takes three phases or stages:

  1. Classification
  2. Location
  3. Imputation

1st Phase. Classification:

Identification and analysis of the cost of factors to know what is consumed and how it has been consumed.

This phase will take into account the following aspects:

  • Implementation of as many kinds of costs as differentiated consumption has, always representing significant value.
  • Variability of costs should not be kinds of costs that include both fixed and variable costs, but separate them into a fixed cost and another variable.
  • Know your complaint form to the product cost and separate direct and indirect costs.

2nd Phase. Location:

Identification and analysis of the costs incurred in carrying out different activities made. Determine the location of the costs in places where people have consumed them.

We find that:

  • Direct costs will be no problem because they can be identified unequivocally with the products. The allocation of direct costs is known as the “earmarking”.
  • Conversely, indirect costs should be distributed between different cost responsibility centers (acquisition-supply centers or shopping-centers and processing-marketing centers).

The problem that arises before the Indirect costs is to determine a means of charging the rational distribution product.

The allocation of indirect costs is normally in two phases and always has an element of subjectivity:

  • Primary Distribution: In which costs are distributed among the liability centers, costs to be incorporated into the production cost.
  • Supporting cast: In redistributing the costs, of assigning the auxiliary to the main centers.

Phase 3. Imputation:

Identification and analysis of the costs of products and the value of unsold stocks. In this stage, we will determine which products are consumed the costs.

5. General Model

5.1 Principles of Costing

Costs that will be incorporated into the cost of products should be added according to their relationship with each of the stages of the normal operating cycle of the company (procurement-production-distribution).

Therefore, costs must be formed in successive stages: purchase cost, cost of production, and cost of sales.

5.2 Structure of the General Model

We can structure the different cost calculations that are made, as follows:

  1. Collection and measurement of the initial stock.
  2. Collection and measurement of indirect costs of responsibility centers.
  3. Assignment of indirect costs between different institutions.
  4. Determining the cost of purchases.
  5. Determining the cost of production.
  6. Determination of the final cost or sales.
  7. Determination of analytical results.
5.2.1. Collection and measurement of the initial stock:

It is necessary to know the value of stocks with initiating the period, to grasp the store this information on stocks and, subsequently, the value and measure.

If multiple entries have an inventory of the same product, but at different prices, there is the problem of deciding what price stocks are leaving the inventory for consumption in the production process or to be sold. You can use the methods of assessing stock withdrawals:

  • Weighted Average Price
  • FIFO
  • LIFO

Weighted Average Price: This method values the stock leaving the average price of all stocks that remain in stock.

FIFO (First In, First Out, First Entry, First Out): As the name suggests, this method is to consider that the goods leaving the store in the first place are just that came first. This need not be so physically; it is only an accounting device.

LIFO (Last In, First Out; last-in, first-out): The value of the unit is based on the last to enter the store.

5.2.2. Collection and measurement of indirect costs of responsibility centers:

It consists of the location of indirect costs for a certain period among all responsibility centers (main and auxiliary).

Its calculation is performed by Costs Statistics and as a result is the total cost of each primary center.

5.2.3. Assignment of indirect costs between different responsibility centers:

The process of settlement of the costs previously allocated to ancillary facilities, according to the activity that each of them has performed in centers that are interrelated, both main and auxiliary.

This is done through supporting cast. Recall that the allocation of overhead costs is typically in two phases:

  • Primary Distribution: In which costs are distributed among the cost responsibility centers, costs incorporated in the cost of production.
  • Supporting cast: In redistributing the costs, of assigning the auxiliary to the main centers.
5.2.4. Determining the cost of purchase:

The cost of purchased materials consists of two components:

  • Invoice value (the purchase, minus returns minus the rappels)
  • Overhead costs collected in the center of shopping responsibility.

Once calculated the total cost of the materials, that value shall be transferred to the inventory records (warehouses).

5.2.5. Determining the cost of production:

Its process is influenced by three components:

  1. Allocation of direct costs: We assign the cost of the product the two most common direct costs: direct labor and raw materials consumed.
  2. Allocation of indirect costs collected in the production centers: To charge the cost of individual products, allocation criteria should be established based on the provision made by each center for each product, using work units as distribution keys.
  3. Incorporating the value of the products that were ongoing manufacturing and semi-finished products: Usually incorporate the cost of production to be without end at the beginning of the year and must return to that process to become finished products.

At the end of the period or upon completion of a manufacturing process step and new products are obtained, whether in progress (which are in one section of production), semi-finished (not completely finished and out of the production section), or completed, we will take the respective costs of production corresponding stores.

Determining the cost of production is key to the accounting process of costs.

5.2.6. Determination of the final cost or sales:

The final cost will be the cost of goods sold. An estimate is adding to the cost of production, which is output to these the shelf products, the cost of their distribution in the market.

5.2.7. Determination of analytical results:

Can obtain different results by product, by comparing sales revenue and the final cost of the product, market, result of the operation as a whole, and so on.

5.3 Development of the General Model Absorption of Costs:

  1. Diagram of the production process.
  2. Calculating the cost statistics.
  3. Calculating the cost of purchases.
  4. Inventories.
  5. Calculating the cost of production.
  6. Final cost estimate or sales.
  7. Calculation of margins and results.
5.3.1 Diagram of the production process:

Represents the structure of the production process. It is a summary of the manufacturing process under study. Lets break down the manufacturing process in phases and define the various costs. It should be included in the diagram: the consumption of materials and construction units of cost centers in order to facilitate the maximum costing.

Cost centers or sections are characterized by a responsible, objectives, few human and material resources, and allocated costs, also called cost locations and that they produce costs.

5.3.2 Calculating the Cost Statistics:

In calculating cost statistics, we obtain information on consumption in different centers.

Once you have classified the costs of periodic and in direct/indirect and fixed/variable, and costs are allocated to centers, following the model being implemented (Cost Full, variable cost of activity-based costing).

Because there are main and auxiliary facilities, we know that is done in two phases:

  • Primary Distribution: Costs consumed in all schools (schools plus major ancillary facilities).
  • Supporting cast: Redistribution of costs, allocating Auxiliary center costs to the costs of the main centers.

Remember:

Main Centers are those directly involved in making the product or service. For example, in the case of an industrial company, it would be manufacturing centers such as painting, machining, packaging, etc.

Auxiliary centers are those that complement and support main centers (maintenance, purchasing, auxiliary production section, reception, etc.).

Another consideration to keep in mind is that the costs of main centers will detail for each product. In contrast, the costs of auxiliary facilities are reversed in major centers.

For the venues included in the functions of administration, marketing, and address, there are several options:

  • Do not charge their costs to products, but consider them period costs. (fixed)
  • Considered ancillary facilities to be repaid their costs to major manufacturing centers.
  • Considered as major centers, although the product fails physically by these centers, the intention is that the total cost of each product unit provides information on the cost of marketing management functions and direction.
5.3.3 Calculating the cost of purchases.

The purchasing cost calculation allows us to value purchases correctly, also including the value of the goods purchased, to its share of the costs of the function of provisioning.

Therefore, the purchasing cost is composed of:

  1. Direct costs (Pc), value sales commissions, fees, etc.
  2. Indirect costs appearing in supply centers, which amount is calculated using the allocation box.
5.3.4 Inventories:

Accounting tools that are represented in the number and amount of materials or products and allow for ongoing assessment of the same, to collect all the movements, making possible the calculation at all times of the theoretical stock.

There are two types of inventory: materials and products. The Inventories of materials will have as inputs to purchases and as solutions to the consumptions incurred in the production process. In product inventories, the entries are the quantities and outputs produced products sold or used as material for manufacturing other products.

5.3.5 Calculating the cost of production:

To calculate the total cost of a product unit, align the cost of raw materials and other direct costs to the costs of production of the sections.

The production costs of product sections are obtained by:

Cost of processing a unit of product in a given section = Number of units needed to process one unit of product in that section for the cost of a unit of work in that section.

The table for calculating the cost of production reflects the valuation of the costs corresponding to each of the products the company manufactures.

5.3.6 Calculation of the final cost or sales:

The cost of sales is the production cost of goods sold plus the costs for placing on the market (sales commissions, promotion, etc.).

The costs that have taken place for product placement in the market are reflected in the responsibility centers of distribution.

5.3.7 Calculation of margins and result:

The result is calculated once we found the final cost, compared with the corresponding revenue:

Example: if to produce a product unit subjects were required premiums to the value of 424 um, 20 kg in the machining section, 200 kg in the painting section and the package (work units), and the cost of each unit work sections of machining, painting and packaging is 30.2 um, 4.7 um and 126.2 um, respectively, we have:

Direct costs:

  • Cost of raw materials 424

Indirect costs:

  • Cost of machine = 20 kg x 30.2 um = 604
  • Cost of paint = 200 Kg. x 4.7 um = 940
  • Cost of packaging = (1 unit) = 126.2

Cost per unit of product 2094.2 um

Thus, as you know the total cost of the product and the cost of each stage of its development, one could optimize each of the stages of the production process. To calculate the cost of production, use a table that includes the assessment of the costs of each product the company manufactures.