OVERVIEW OF COST ACCOUNTING

Cost Accounting: Also known as analytical accounting, it allows us to

record, analyze, report and interpret the elements of the Production Cost.
It also requires the application of generally accepted accounting principles.
From this we can determine the unit costs and the totals, which Provides
information to administrative accounting for decision making. It also
provides information to financial accounting regarding inventories and
production for decision making.

GOALS

In the industrial company, its operation has a more complex impact on the
calculation of costs, since it acquires raw materials to subject them to
different transformation processes until obtaining goods intended for sale,
therefore it is clear that it does not know the resulting cost for each of its
products and it is not about arriving and setting the sales prices because
to do so it needs to have a mechanism that allows it to know these values
with certainty or else it is possible that it will encounter economic
problems.

From the above, the objectives of accounting emerge, which would be at

least the following:

a) Determine, in the most exact way possible, the cost attributable to

each of the products produced by an industrial company, with the
purpose of setting sales prices based on clear knowledge of the values
that must have been incurred during the process. productive.

b) The industry's need to properly value stocks of finished products and

those in the manufacturing process, both for presentation in the
balance sheet and also to cost sales in the income statement.
c) From the administration's point of view, another objective of great
importance is to exercise adequate control over all activities of the
production process.

d) Reduce manufacturing costs by introducing changes in the use of

material or human elements. Cost accounting will allow us to know
whether or not such changes have been positive from the point of view
of profitability.

APPLICATION OF COST ACCOUNTING IN INDUSTRIAL ACTIVITY.

Cost and Expense.

Cost refers to the set of expenses incurred to produce a good or service,

such as raw materials, inputs and labor. Furthermore, the cost is
recoverable and capitalizable.

The expense , on the other hand, is the set of expenses destined for the
distribution or sale of the product, and the administration. We also know
that the expense is recoverable according to the volume of production.

A big difference is detailed here: Cost is the expenditure incurred to

manufacture a product. The expense is the expenditure incurred to
distribute it and to manage the processes related to the management,
marketing and sale of the products, to operate the company or business.

Classification of costs.

The costs are classified into:

By its nature:
a) Order Orders: These are those in which the client requests a certain
production batch. Examples: Pastry shop, printing.
b) Process: Contrary to the previous one, here the production is
continuous. Examples: Cigars, dairy company, beverages.

By the functions of the company:

a) Production Costs: These are those generated in the process of

transforming raw materials into manufactured products, these are: MP,
MO, CIF. Examples: Thread to make a piece of clothing and workers'
salaries.

b) Administrative Costs: These are those that originate in the

administrative area, that is, those related to the direction and
management of the general operations of the company. Examples:
Salary items for administrators and Administration Telephone.

c) Sales Costs: These are those incurred in the area that is responsible
for bringing the finished products, from the company to the consumer.
Examples: Advertising, commissions.

d) Financial costs: These are those that originate from obtaining

external resources that the company needs for its development.
Examples: They include the cost of interest that the company must pay
on loans, as well as the cost of extending credit to customers.

By its calculation method:

a) Historical costs: Also known as real costs, they are those obtained
after the product has been manufactured. Therefore, this type of costs
 indicates what “it has cost” to produce a certain good or service. These
costs are used to prepare the external financial statements.

b) Predetermined costs: These types of costs are those that are

calculated before or during the production of a certain item or service in
an estimated manner or by applying the standard cost.

Estimated costs: It is that technique by which costs are calculated on

certain empirical bases, approximately calculating the cost of the
elements that comprise it, before producing the article or during its
transformation; Its purpose is to forecast the value and quantity of
production costs.

Standard Cost: It is the calculation made with generally scientific bases

on each of the elements of the cost of a certain product, in order to
determine what an item “should cost”

According to the level of production.

a) Fixed.- These are those that remain constant during the company's
accounting period.

b) Variables.- They are those that vary proportionally with the volume of
production.

c) Semi-fixed or semi-variable.- These are those costs that have fixed

and variable elements at the same time.

By identification with the Product:

a) Direct costs.- These are those that can be fully identified with the
product or with a particular process.
b) Indirect costs.- These are those that cannot be fully identified.

Example:

The metalworking industrial company Fortaleza Cía. Ltda., provides the

following data regarding the cost of producing 80 metal one-person desks.

It must be classified between direct and indirect costs and between fixed
and variable costs.

BEHAVIOR IDENTITY
ACCOUNTS FIXED VARIABLES DIRECT INDIRECTS
reinforced tube 182.9 182.9
iron plates 931 931
Gallons of Paint 33 33
Screws 2.5 2.5
Electrodes 8 8
Rivets 2 2
Regatons 10 10
Welder 210 210
Painter 150 150
Cutter 150 150
Bender 150 150
Production manager 300 300
Supervisor 220 220
Electric power 5 50 55
Fuel 40 40
Online depreciations 30 30
Fixed asset maintenance 20 20
Factory Lease 120 120
TOTAL COSTS 1355 1259.4 1773.9 840.5
UNIT COSTS 16.94 15.74 22.17 10.51

FUNCTIONS OF AN INDUSTRIAL COMPANY, A COMMERCIAL AND

SERVICES COMPANY.
Commercial Companies: These are those that acquire goods or
merchandise for subsequent sale. Examples: PYCCA, Comercializadora
Kywi SA

They are classified into:

 Wholesalers: They acquire goods in large quantities for distribution,

usually among retailers.

 Retailers: They sell on a much smaller scale than wholesalers, usually

to the end consumer of the product.

 Commission Agents: They are responsible for selling products in

exchange for a commission.

Industrial Companies: They are characterized because, through the

acquisition of raw materials and their transformation, they obtain a final
product. Examples: INLECHE CIA. LTDA. , Piggis Sausages.
They are classified into:

 Extractives: Exploitation of natural resources.

 Manufacturing: They transform raw materials into finished products.

Service Company: They are characterized by the sale of services,

whether professional or any other type. Examples: SinterDent Dental
Clinic, Radio Bandida.

They are characterized by:

 They are intangible (they cannot be touched).

  They are heterogeneous (they are different depending on people's
demand).

 They expire, have a permanence over time and must be used when
they are in use.

PURPOSES OF COST ACCOUNTING:

We have four main purposes:

1. Determine the cost of inventories of manufactured products, both unit

and global, with a view to presenting the General Balance.

2. Determine the cost of products sold, in order to be able to calculate the

profit or loss in the respective period and to be able to prepare the
statement of income and expenses.

3. Provide management with a useful tool for systematic planning and

control of production costs.

4. Serve as a source of cost information for economic studies and special

decisions related mainly to long-term capital investments, such as
machinery replacement, plant expansion, manufacturing of new products,
setting sales prices, etc.

INDUSTRIAL COSTS
Industrial costs are all those costs necessary to produce a certain good.
There are variable costs, which are normally raw materials, labor, which is
the cost of labor necessary to produce the good, and fixed costs, which
are These are all those that occur that are not produced that the company
has to assume, such as the lease of the plant. and finally the indirect
manufacturing expenses, which are all those that are added as additional
costs of producing but that are neither fixed nor variable, such as indirect
labor, the salary of supervisors, electricity and depreciation.

PRODUCTION COSTS.

As we saw, production costs are those generated in the process of

transforming raw materials into manufactured products.

COST ELEMENTS.

The production cost has 3 elements:

Raw Material: It is the first element of the production cost and is the
primary element for the production of the product, they are divided into
direct raw materials (it can be quantified immediately and can also be
measurable in terms of quantity, weight and volume) and indirect raw
material (it cannot be clearly identified in the product and is therefore
subject to proration).

Labor: It is the workforce of workers for the transformation of Raw

Material into the manufactured product. We have: Direct labor (Labor force
of the workers who transform the MP into a manufactured product and are
known as workers who receive a salary) and Indirect labor (They are those
who do not carry out said transformation and these people receive
salaries).

Indirect Manufacturing Costs: Those that cannot be charged directly to

the value of the product but through proration.

To handle the raw material it is necessary to know the following:

 Stock establishment

The success or failure of the company will depend on this.

Limits of Existence:

Maximum Stocks: These are the maximum quantities that can be kept in
MP stock to avoid possible shortages for which we use:

Formula:

Consumo Máximo Mensual

Existencias Máximas= ∗Tiempo máximo de Reeemplazo
30 días

Minimum Stock: It is the minimum quantity in MP stock that must remain

in the warehouse so that production processes are not interrupted.

Consumo Mínimo Mensual

Existencias Mínimo= ∗Tiempo Mínimo de Reeemplazo
30 días

PRODUCTION COST STATEMENT

TO XX-XX-XXXX
EXPRESSED IN USD

II Raw material $XXXXX

+ Raw Material Purchases $XXXXX
MP XXXXX Purchases
+G. Transport MP XXXXX
= MP Gross Purchases XXXXX
- MP XXXXX discount
- Return of MP XXXXX
= Raw Material Availability $XXXXX
-IF Raw material $XXXXX
= Raw Material Used $XXXXX
+MOD $XXXXX
= Direct Cost $XXXXX
+ CIF
Supplies and Materials $XXXXX
Factory Insurance $XXXXX
Indirect Materials $XXXXX
Indirect labor $XXXXX
Other Indirect Costs $XXXXX
= PRODUCTION COSTS $XXXXX
+II Products in process $XXXXX
= Production Cost in Process $XXXXX
-IF Production in process $XXXXX
= Cost of Finished Goods $XXXXX
+II Finished product $XXXXX
= Cost of Available Merchandise $XXXXX
-IF Finished product $XXXXX
= COST OF PRODUCTION AND SALES $XXXXX

Structure of a Cost of Production and Sales statement

Cost Formulas
Manager Counter

Prime or Direct Cost= MPD+MOD

Conversion Cost= MOD+CIF
Production Cost= MOD+MPD+CIF
Unit Production Cost= Production Cost/Vol. Production
Distribution Cost= G. Administrative + G. Sales + G. Financial
Total Cost = Distribution Cost + Production Cost
Total Unit Cost = C. Distribution + C. Production/Vol. Production

Additional concepts:

Waste: Raw materials left over from the Production process. These
cannot be reused in production for the same purpose but it is possible to
use them for a different production process or purposes or to sell them to
third parties for a nominal value . Example: Powdered milk

Waste: Part of the raw materials that remain after the production process
and that has no additional use or income value. Example: Leftovers after
applying molds and templates in the fabric and folding packaging
industries.

Defective Production: These are products that do not meet the

company's quality standards. But they can be reprocessed or fixed to
overcome the defects detected and sold as
acceptable or good products. Fixing or reprocessing defective production
involves incurring additional production costs (direct material costs, direct
labor, and indirect costs).

Accounting Organization

Definition: Systematic rationalization of the accounting service of a social

organization, whose purpose is to ensure a uniform record of accounting
operations and events.

Purposes:

• Delimitation of responsibilities.
• Simplification of the operations registry.
• Establishment of rules and regulations
• Coordination of operations.
• Control of operations

Objectives: Establish procedures to record and control financial and

economic facts of the company to guarantee maximum productivity with
minimum human effort.

Items:

 Chart of Accounts.
 Supporting Documents.
 Accounted Documents.
 Auxiliary Books.
 Main Books.
 Intermediate Books.
 Reports.

Administrative organization

Definition: Set of legal rules that regulate powers, hierarchical

relationships, legal situations, the way the bodies act and their control.

Objective: It serves to group and structure all the company's resources,

people and teams, to achieve the desired objectives in the best possible
way. The objective of the organization is to group people so that they work
better together.

Administrative tasks:

• Accounting record of income and expenses

• Treasury control
• Billing and purchasing control.
• Fiscal and labor management
• Documentary archive.
• Basic communications

Resources:

 Human resource
 Economic resource
 Financial Resource
 Technological Resource
 Material Resource, etc.

Beginning:

 Specialization
 Functional Definition
 Equality of Authority and Responsibility
 Gradation
 Line and Staff Functions

ACQUISITION PROCESS

1. Identification and Evaluation of Supply Needs: The required

quantity to be acquired is determined.

2. Supplier selection:

 Company Profile
 Financial aspects
 Production capacity
 Supplier Evaluation

3. Preparation and approval of the purchase order: A purchase order

is structured with the selected quality and the sole supplier.

4. Warehouse receives raw materials and materials: The receipts of

raw materials and materials that arrive at the warehouse must be
recorded.

5. The supplier issues the respective invoice: The cancellation of the

invoice is prepared, which will have the purchase order attached.

6. Verification of the purchased product: Inspect the materials that

enter the factory.

NIC 2

Valuation of inventories: Inventories will be valued at the lower of: cost

or net realizable value.

Some concepts:
Stocks are assets:

(a) held to be sold in the normal course of business; 2NIC 2.

(b) in the production process for that sale; either
(c) in the form of materials or supplies, to be consumed in the production
process or in the provision of services.

Net realizable value

It is the estimated sale price of an asset in the normal course of
exploitation, less the estimated costs to complete its production and those
necessary to carry out the sale.

Fair value

It is the amount for which an asset can be exchanged or a liability

cancelled, between interested and duly informed parties, who carry out a
transaction under conditions of mutual independence.

Inventory cost

The cost of stocks will include all costs derived from their acquisition and
transformation, as well as other costs incurred to give them their current
condition and location.

Acquisition costs

The acquisition cost of the inventory will include the purchase price,
import duties and other taxes (which are not subsequently recoverable
from the tax authorities), transportation, storage and other costs directly
attributable to the acquisition of the goods, materials or services. Trade
discounts, rebates and other similar items will be deducted to determine
the acquisition cost.

Transformation costs

Inventory transformation costs will include those costs directly related to

the units produced, such as direct labor. They will also include a
systematically calculated part of the indirect, variable or fixed costs
incurred to transform raw materials into finished products. Fixed indirect
costs are all those that remain relatively constant, regardless of the
production volume, such as the depreciation and maintenance of factory
buildings and equipment, as well as the cost of plant management and
administration. Variable indirect costs are all those that vary directly, or
almost directly, with the volume of production obtained, such as materials
and indirect labor.

Cost Formulas:

El coste de las existencias, distintas de

las tratadas en el párrafo 23, se
asignará utilizando los métodos de
primera entrada primera salida (FIFO)
o coste medio ponderado. La entidad
utilizará la misma
fórmula de coste para todas las
existencias que tengan una naturaleza
y uso similares dentro de la misma.
Para las existencias con una naturaleza
o uso diferente, puede estar justificada
la utilización de
fórmulas de coste también diferentes.