Cost Classification Systems

Posted on Oct 16, 2024 in Spanish

Cost Calculation Based on Time and Nature of Operation

Cost by Specific Planning Order Application (Unit, Request)

Historical Process Cost (Volume)

Estimated Work Order Cost

Predetermined Standard Process Cost

1. Based on the Timing of Cost Calculation:

1.1. Historical Costs: (Past, Absorbed, Consumed Costs). In historical systems, cost calculations are made with actual data, therefore, they are known after the operation is complete.

1.2. Predetermined Costs: (Future, Projected Costs). In predetermined systems, in addition to calculating historical costs, costs are determined beforehand to meet control needs and sales price setting. These predetermined systems can be simple estimates based on simple calculations, or they can be standards characterized by a scientific study of calculation.

2. Based on the Nature of the Operation:

2.1. Job Order Costing: The cost unit is the job, and costs are accumulated for each job. Production is on demand, based on the job.

2.2. Process Costing: The unit cost is the average cost of units produced in a period. Production is based on demand.

Job Order Cost Accounting System

1. Characteristics:

This system is used in companies that produce on demand. Therefore, it is possible to separate the productive process into individual jobs. When a request is received, a production order is issued detailing the requirements such as item type, quantity, customer name, design, and specifications.

The production order gives rise to the cost sheet, which records the consumption of direct materials, direct labor, and overhead. The productive process is arranged for a specific customer with a specific need, as shown in the flowchart:

  • Client → Company → Need → Production Order (Rejection/Quote/Supplier/Technical Specifications)
  • Request → Production Need → Warehouse → Process
  • Cost Sheet

2. Raw Material Registration and Control:

This refers to the printed forms and accounting entries related to the registration and control of raw materials, from the moment the supplier is contacted until the material leaves the warehouse and enters the production process.

The registration and control of raw materials, involving purchasing, warehousing, production, and cost centers, is essential for those who use this information, considering the following aspects:

  1. Raw materials constitute a high percentage of the total production cost.
  2. They represent a significant investment and financial outlay for the company.
  3. In addition to being a significant investment, they generate other expenses such as freight, insurance, and storage.
  4. Lack of adequate control can lead to losses.
3.1. Inventory Valuation:

Inventory consists of all tangible goods in the warehouse, intended for use in the production process.

Inventory arises from the need to ensure production flow, serving as a buffer against different production rhythms. Therefore, it is necessary to have information regarding stock versus consumption. To maintain this balance, we use the perpetual inventory method. Through inventory cards and procedures like FIFO, LIFO, and weighted average cost, we can track raw material movement in units and value.

3.1.1. FIFO (First In, First Out):

This procedure was originally designed to control perishable products. This method is based on the idea that the raw material sent to the production process corresponds to the oldest stock. Once this is exhausted, the next oldest stock is used, and so on. Each purchase received in the warehouse is assigned a number indicating its age and the units it comprises.

3.1.2. LIFO (Last In, First Out):

This methodology, originally designed to control non-perishable products, is the opposite of FIFO. Orders for the production process are executed based on the newest stock. Once this is exhausted, the next oldest stock is used, and so on. For control, each new lot entering the warehouse is assigned a number indicating its age and the units it comprises.

3.1.3. Weighted Average Cost:

This procedure is designed as an intermediate alternative between FIFO and LIFO. The raw material delivered to the production process is valued based on a moving average. The moving average is calculated by dividing the final inventory value (balance in $) by the number of units in the final inventory.

Finally, it is noteworthy that from a tax perspective, the FIFO and weighted average cost methods are authorized for inventory valuation.