Lesson 4.1 2021 The Cost Carriers Calculation Methods PDF

MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas LESSON 4: THE COST CARRIES: CALCULATION METHODS PART 1: CONCEPT AND CLASSES Departamento de Contabilidad y Gestión UNIVERSIDAD D...

MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas LESSON 4: THE COST CARRIES: CALCULATION METHODS PART 1: CONCEPT AND CLASSES Departamento de Contabilidad y Gestión UNIVERSIDAD DE MÁLAGA LESSON 4: THE COST CARRIES: CALCULATION METHODS Versión 2.0 Septiembre de 2021 © Mariano Soler Porta MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 2 LESSON 4: THE COST CARRIES: CALCULATION METHODS 1 COST CARRIERS: CONCEPT AND CLASSES 1.1. CONCEPT OF COST CARRIER The previous lessons, we have dealt with the two first basic concepts of the process of generating the cost in the company "Elements or factors of cost" and "Cost Centers”. This lesson we will refer to the third of these concepts, the Cost carrier or Cost Object. This concept responds to the idea of affectation of cost and it fulfils the cumulative function of the value of the total consumption of material and intangible goods generated during the production process and which, therefore, integrate the product or service, either from the centers (organic system), or from the factors (inorganic system). However, depending on the cost allocation approach to be used, and because the production does not incorporate all of the costs in all of them, we can find other kinds of carriers: ✓ In the Full-Costing: There is only one carrier: the production valued at total cost o full cost carrier, ✓ In the Direct-Costing: There are different carriers: The production Valued at variable cost or variable cost carrier The carrier of the fixed cost. ✓ In the FullCosting Evolved Also There are different carriers: The production Valued at intrinsic or production cost or Production cost carrier The cost carrier to reintegrate 1.2. CLASSES OF COST CARRIER In all cases we refer to production as an effect, and in all its manifestations: Finished production, comprises the products manufactured by the company and whose sale constitutes the main activity of the company. In a company that manufactures furniture, the different models of furniture. MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 3 LESSON 4: THE COST CARRIES: CALCULATION METHODS Semifinished production, it covers the products manufactured by the company, but which are still pending elaboration to achieve the desired products. Usually these are not intended for sale, but this may happen Circumstance. Examples of this category of inventories would be: wood planks and furniture skeletons. Production in progress, it includes those products that are in the training or transformation phase in a specific activity centre. There is no possibility of selling them. It could be noted: Wood being sawn, unfinished wood planks or furniture skeletons being varnished. Subproducts (coincides with the concepts of Residue and recovered material of the PGC), those obtained inevitably and at the same time as the products if they have intrinsic value and can be used by the company or sold. Sawdust obtained in the manufacture of furniture, if used by the company to make Wood agglomerate, would be a byproduct that recovers. Molasses in the manufacture of sugar (they constitute the raw material of the industrial alcohol), the residues of fish (they become oils and fertilizers) or the whey of milk in the manufacture of cheese, would be by-products to be sold. Waste: Those obtained inevitably and at the same time as the products or by-products, but they do not have value of realization and therefore they cannot be sold (even sometimes for the company it has a cost its elimination). The definition of carrier that we are considering is that of Final cost carrier, but the concept of carrier or Cost Object, as a cost accumulator in its broadest sense, it also refers to intermediate stages of aggregation of costs such as an activity, a department, etc. MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 4 LESSON 4: THE COST CARRIES: CALCULATION METHODS 2 THE COST OF THE COMPANY OR ITS OWN COST PRICE The cost of the company is defined as the integral set of all the costs that are generated in the company (it comes to coincide with the concept of full cost of full-cost method), and will depend on each economic unit, the dimension of the organization and the technology applied in the management process. This company cost will have different structure and composition, depends of the applying in the capture of the magnitudes of the internal scope an organic or inorganic system. in the case of the application of an Inorganic System, that neglects the existence of the centers in the company and considers that the formation of the cost of the carrier is carried out directly, with the classes of cost, we can define different levels of cost until arriving at the cost of company, as the following chart shows. Figure 4.1: Composition of the cost of the company in a system of inorganic costs. Source: Requena Rodríguez, J.M. y Vera Ríos, S. (2008) MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 5 LESSON 4: THE COST CARRIES: CALCULATION METHODS The process begins with the treatment of the direct labor over the direct materials. The valuation of both consumptions is called BASIC COST, direct cost or primary cost. In addition to the direct factors, the production involved other indirect factors (amortizations, telephone, electricity, repairs, etc.). We call them Indirect Production Cost. The sum of these Indirect costs with previous direct costs, determine the INDUSTRIAL COST. For the realization of the production process has been necessary a background and contemporary financing that generates costs, the Financial Costs Related with production. Adding it with the industrial cost we have the PRODUCTION COST. Once the production is obtained, it goes to the warehouse until it is sold. In this period the costs are denominated Sales costs or product placement on the market, which added to the operating cost determines the COMMERCIAL COST. All the previous processes are developed by means of an adequate economic direction of the company (management, organization of the company, planning of the business management), which also originates a cost, called Management and administration Costs (General insurance, costs of maintenance of the administration, direction, organization, planning, accounting, etc.). By adding them to the commercial cost, we finally get the COMPANY COST. In the case of the Organic System, the composition of the company cost will be the following: MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 6 LESSON 4: THE COST CARRIES: CALCULATION METHODS Figure 4.2: Composition of the cost of the company in a system of organic costs. Source: Requena Rodríguez, J.M. y Vera Ríos, S. (2008) The elaboration of the product takes place from the cost of the direct materials. At first, the tasks carried out in the Procurement or Purchase Section will be carried out, which increase the cost of it. The sum of both costs is called the ASSIGNMENT COST OF DIRECT MATERIALS, which will be the amount by which the purchasing section transfers the direct materials to the transformation section to carry out its consumption and processing. These materials will then undergo a series of processes in the Transformation section that will generate the Maintenance costs of the transformation section. Added to the cost of the transfer of the materials will result in the cost of production or THE INTRINSIC COST of production. Once the production is finished, it goes to the sales section where its storage, conservation, distribution, etc. will take place, in short, all the actions aimed at placing it on the market, which would cause a new increase in the cost, determining what is known as COMMERCIAL COST. MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 7 LESSON 4: THE COST CARRIES: CALCULATION METHODS Finally, in order for everything to be possible, the appropriate management and administration has been carried out, which generates the costs of the Administration section, which together with the commercial cost determines the COMPANY COST. The cost of maintaining the commercial and administrative sections is the so-called "Cost to be return". Both esqueare translated into the company in A form of composition of the cost to be taken for each product, to know the composition of the same. 3 METHODS OF CALCULATION: FUNDAMENTAL PRINCIPLES The incorporation of the cost to the cost carriers, either from the Classes in an Inorganic system, either from the Centers, in an Organic system, is carried out through those of "Calculation Methods", which are defined as the "Set of operations aimed at carrying out the computation of the costs to be imputed to the product ". The way of acting will be conditioned by the structure that owns the cost (inorganic or organic), the technological and economic characteristics of the production (if production is simple, composite, etc.) and by the behavior of the factors that intervene in the process. 3.1. FUNDAMENTAL PRINCIPLES To ensure the correction of the Methods of calculation, professor Schneider believes that meet two principles: ✓ Principle of proportionality ✓ Principle of differentiation. According to the Principle of proportionality, known a magnitude of cost and elements to which it should be affected, that cost should be allocated proportionately to the consumption of factors that these elements include (for MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 8 LESSON 4: THE COST CARRIES: CALCULATION METHODS example, if a product incorporates double quantity of raw material that another must correspond double cost). With regard to the Principle of differentiation, the incorporation of the cost to the carriers must be done in a way, that analyzing its value we can know the different strata that compose it, and so, we get information about the process of obtaining this product. 3.2. CLASSES OF PRODUCTION To carry out the application of the different methods of calculation it will be necessary to know the type of production, defined as a cause1, that the company develops. Can be distinguished fundamentally between two Classes of production (considered as a cause): Simple and composed. Is understood as Simple production, the one under which you get a single product type (Cement, wheat, Etc). The Composite production will be the one by which two or more kinds of products are obtained (a land with wheat and barley). In turn, this can be of three classes: Alternative, cumulative and parallel. a. Alternative: That in which increases in the obtaining of one of the products implies decreases in the production of the others, because they are excluding (in a same land dedicated to wheat and barley, if more wheat is cultivated, it is less barley, or in a cattle farm, the increase in the production of milk produces a decrease in the meat). b. Cumulative: The one in which the obtaining of a type of product and its increase imply the obtaining of another or others, because they are obtained simultaneously. It also receives the name of Joint production. (milk and wool production, refinery ofl oil that gives place to different derivatives...). There is a particular case of joint production called Coupled production, when the proportion in which the different types of 1It is necessary to interpret the term production in a double sense, as a cause and as an effect, according to which we relate it with the productive process itself or with the product resulting from that process. MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 9 LESSON 4: THE COST CARRIES: CALCULATION METHODS products are obtained is constant (it is very common in the chemical Industry). c. Parallel: the one where you get two or more types of products but independently, without interference, it is, therefore, of the conjunction of several simple productions. Different methods of calculation are applicable for different types of production, which we will analyse in the following sections. Figure 4.3: Main calculation methods MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 10