Cost Accounting Systems: A Comprehensive Guide
Cost Accounting Systems
Definition
Costing systems are accounting models used to determine the unit cost of production. These systems are essential for valuing inventories and utilities.
Objective
- Allocate costs to departments for planning and control.
- Allocate costs to units of the product to determine the cost of the product.
Features
- Multiple systems exist, with varying degrees of subjectivity.
- Purpose depends on the analysis (short-term or long-term decisions).
Prerequisites
- Understanding of the enterprise’s organizational structure.
- Knowledge of the production process and technology.
- Understanding of the resources involved.
- Knowledge of the production, incorporation, and transformation methods.
- Understanding of the outputs: products, services, impact, and distribution.
Cost Systems
These are accounting standards and procedures for calculating costs. They are characterized by the unit costing (the unit for which costs will be accumulated) and the mode of production (batch production or mass production).
Classes of Cost Systems
- Production Order Costing
- Process Costing
- Standard Costing
- Activity-Based Costing
Cost Basis
- Historic Base: Works based on actual or historical costs (costs already incurred).
- Default Base: Based on estimated costs prior to the occurrence of actual costs (e.g., Standard Costs).
Production Order Costing
Overview
This system is used for costing products produced in special or specific orders. Material, labor, and manufacturing overhead costs are assigned to specific production orders or batches of products.
Key Features
- Unit Costing: Usually a group or batch of identical products (e.g., furniture, printing) and sometimes individual products (e.g., a ship).
- Manufacturing: Each item is undertaken by a production order.
- Cost Accumulation: Costs are accumulated for each order separately.
- Unit Costs: Total cost of the order divided by the number of units produced.
- Suitable When: Products are identifiable at all times with a specific production order, different orders begin and end at any time within the accounting period, and equipment is used for manufacturing various orders.
Characteristics
- Used by companies whose products are readily identifiable by individual units or batches.
- Each lot has varying degrees of care and technology applied.
Examples
- Aircraft production
- Services in a garage
- Special online portfolio
- Special products according to customer needs
Advantages
- Detailed production cost for each item.
- No need for complete inventory count to determine the value of production.
- Gross profit of each item is known.
- Detailed cost of production.
Disadvantages
- High operating cost.
- Requires meticulous work.
- Information obtained can be outdated.
- Total cost is obtained at the end of the period, causing difficulties with partial deliveries.
Administrative and Accounting Control of Materials
Administrative Treatment
Control, Registration, and Use of Materials
Materials entering the business require a combination of work and a set of forms and records as tools of control at each stage of use.
Purpose of Control Materials
- Ensure timely and adequate supply of materials for production.
- Control the distribution of purchased equipment.
- Prevent waste and leakage of materials.
- Facilitate regular financial statements.
Procedures for Administrative Control of Materials
- Shopping: Initiated by purchase orders or requisitions.
- Receiving and Storage: Documented by deposit slips, return notes, and inventory control records (Kardex).
- Distribution: Documented by material issue slips and return notes.
- Valuation and Accounting: Controlled by the valued Kardex.
Process Materials Management and Formats
Procurement
The division responsible for managing all crops of the company, considering the necessary provisions. The store submits its demand for materials to fulfill the application of inputs on the specified dates and times.
Storage
A crucial phase in the operative movement of materials, from the time they are received in the store, their organized location for immediate delivery, and based on the presented requirements. Store management is critical, especially with high volumes.
Distribution
Materials are delivered upon request from different fields or sections. Supporting documents include withdrawal notes and re-entry notes.
Chart of Accounts
The Revised General Plan of Accounting doesn’t require companies to use all accounts. Each company should adapt the chart of accounts to its needs. The Analytical Accounting Plan conforms to the rotation of each company, creating accounts and sub-accounts as needed while maintaining their nature.