Cost Systems: Analysis and Key Concepts
1. What is a Cost System?
A cost system is an information system based on a set of organized criteria and procedures for classifying, accumulating, and allocating costs to reference units (products, activity centers, responsibility centers, etc.). It is a crucial calculation for determining cost-benefit ratios.
2. Fundamental Elements of a Cost System
- Cost imputation to reference units (products, sections).
- Criteria for classifying and charging costs.
3. Types of Cost Systems Based on Time
Cost systems can be established a priori or a posteriori. Both include:
- Complete cost systems (absorption).
- Variable cost systems (direct costing).
- ABC cost systems (activity-based costing).
4. Differences Between Complete and Variable Cost Systems
Complete Cost System: Includes all costs, both direct and indirect, to obtain the unit cost of a product, incorporating indirect costs into the value of the stock. The absorption of indirect costs is a key decision.
Variable Cost System: Only includes variable or direct costs in the unit cost. Fixed costs are treated as period expenses. The stock does not include indirect costs.
5. Differences Between Conventional and ABC Cost Systems
ABC Cost System: Costs are not consumed but are generated by activities. These activities consume resources, which represent a cost. It is necessary to act on activities to control costs.
6. What is the Cost Allocation Absorption Rate?
The cost allocation absorption rate is the relationship between the general costs incurred and the total units produced, based on the activity.
7. Which System is Better When Production Exceeds Sales?
The direct costing system offers better results because only direct costs are attributed to each unit. Indirect costs are treated as period expenses.
8. How are Final Products Valued in Stock?
In a complete cost system, the unit cost of stock includes both direct and indirect costs. This increases the production cost of units in stock.
9. What are Sub-Activity Centers?
Sub-activity centers are cost centers where underutilization of available activity is recognized.
10. What are Discretionary Expense Centers?
Discretionary expense centers are those where costs are determined discretionally, and outputs cannot be measured quantitatively. Some measure must be established.
11. What are Primary and Secondary Activities in ABC?
Primary Activity: Any activity directly involved in product production. Example: In the textile industry, cutting and designing.
Secondary Activity: Activities that support primary activities. Example: Accounting and administration.
12. What is a Value-Adding Activity?
A value-adding activity increases the value of a product. A non-value-adding activity does not increase the value of a product. Example: Correctly finishing a shoe sole adds value; moving it within the store does not.
13. What is a Cost Driver?
A cost driver is a measure that allows controlling the cost charged to a product or activity objectively, similar to units of activity in traditional systems.
14. Examples of Cost Drivers
- Unit Level: Kg of material consumed.
- Lot Level: Number of purchase orders.
- Line Level: Design of specific product specifications.
- Company Level: Meetings with clients. These are more subjective.
15. Rules for Applying ABC Cost Systems
- Rule 1: ABC is recommended when indirect costs represent a high percentage of activity and/or resources, and there are significant growth rates. Also, when costs can be objectively charged to products or clients.
- Rule 2: ABC is recommended when there are many different products, clients, and/or processes.
16. Relationship Between ABC and TQM, ABM, and JIT
The implementation of ABC is compatible with techniques such as TQM, ABM, and JIT, as it provides a better analysis of production processes.
17. Fundamental Phases in Cost Allocation in ABC
- Phase 1: Determination of activity costs, including:
- Location in cost centers.
- Identification of activities.
- Allocation of costs to activities.
- Selection of cost drivers for each activity.
- Reclassification and grouping of activities.
- Calculation of unit costs for each cost driver.
- Phase 2: Determination of product/service costs:
- Allocation of indirect costs from activities to products.
- Allocation of direct costs (materials) to products.