They can be defined as the segregation of production costs between those that are fixed and those that vary in direct relation to the volume of production, that is to say, only variable costs are those that should form part of the cost.

Fixed costs should be considered as results of the period in which they are incurred.

FIXED COSTS.

They are those committed, programmed, or planned costs that are incurred to provide and maintain the production and sales capacity of the company.

DIRECT COSTING is also called VARIABLE OR MARGINAL COST.

Main goal:

Provide information about the relationship:

COST >>>>> VOLUME >>>>> PROFIT If you have a budget

CHARACTERISTICS OF DIRECT COSTING.

  1. All company costs, production, distribution, administration, and financing are divided into 2 groups. In Fixed and in variables.
  2. This primary classification regarding the variability of costs is taken to their respective accounts and does not limit the obtaining of statistical data.
  3. Only variable production costs are included in the cost of the unit produced.
  4. The direct cost of production is the one that is used to value the inventories of raw materials, in the process, of finished articles and to quantify the cost of sales.
  5. All fixed costs are taken directly to the results of the period in which they originate because they are a function of time.
  6. The direct costing technique can be applied to known cost systems (historical, predetermined, simple, or standard).
  7. In direct costing, the variable cost applied to the product is not a function of time.

STRUCTURE BETWEEN THE INTERDEPENDENCE OF THE COST VOLUME UTILITY RELATIONSHIP.

The structure of the cost volume utility relationship is the mathematical technique in the study of the behavior of costs that is based on the careful segregation of costs according to their variability.

The static assumptions on which the analysis of this interdependence rests are the following:

  1. All costs can be classified as direct costs or periodic costs. Variable costs change directly with volume.
  2. The costs of the period will not suffer changes during the coverage of the manufacturing capacity.
  3. Cost behavior will be linear and direct costs will change in direct proportion to changes in volume.
  4. The units of products and sales prices are homogeneous.
  5. There is no considerable difference between production and sales in the period being analyzed.
See also  What is inventory? Types, utility, accounting, and valuation

FIXED COSTS.

This cost in a given period and duration of the activity, this cost is called “relevant duration” does not change in total, but becomes progressively smaller on a per unit basis as the volume grows and will be progressively smaller. of a greater amount about the unit, if the aforementioned activities decrease.

That is, these costs are fixed about their amount in pesos and variable about the unit from which it can be deduced that fixed costs are a consequence of long-term management decisions.

In cost-utility relationships and the effect of patterns in the behavior of costs on decision-making, it is useful for precisely making administrative decisions.

The cost-volume-profit analysis determines the volume to be set as an objective, that is, the volume necessary to achieve the desired operating income, one of the most used forms in the cost-volume-profit analysis is the calculation of the break-even point of a company.

CALCULATION OF THE EQUILIBRIUM POINT.

The equilibrium point is found in that sales volume in which there is neither profit nor loss.

The analysis of the break-even point requires a study of the behavior of the company’s fixed and variable costs.

INFORMATION

COST-VOLUME-PROFIT

Repercussions in cost changes.

Repercussions on changes in income.

Repercussions in volume changes.

Repercussions in the product mix on profits.

As machines replace workers and factories increase their level of automation, many costs that were previously variable become fixed, such that:

UNDERSTANDING THE BEHAVIOR OF COSTS Decision making.

Price fixing.

Acceptance or rejection of sales orders.

Cost reduction analysis.

Promotion of product lines.

 

CONTRIBUTION MARGIN.

Contribution margin: represents sales in pesos minus all variable production costs that cover fixed costs and that produce a profit.

$10 Unit sale
-$4 Variable costs
$6 Contribution margin.

Variable costs are those that vary directly with the volume of production.

Fixed costs remain the same in total for a period and a level of production, in this context costs refer to costs that EXPIRE and therefore become EXPENSES in the period in question.

$36,000 fixed costs 6000 breakeven units
$6 contribution margin
6000 units * $10 = $60,000, which is what the cost is being recovered

BREAK-EVEN GRAPH.

It schematically depicts the cost-volume relationship and profit and shows the profit or loss that will occur on any sales volume within a relevant range. A break-even chart can better indicate the COST-VOLUME-PROFIT relationship to line managers, as it vividly shows the effect of volume on cost and profit.

A break-even graph expresses revenue, costs, and outlays on the vertical axis.

The horizontal axis indicates the volume, which can be represented by sales units, machine hours, direct labor, capacity percentage, or other useful indicators to express volume.

Break-Even-Analysis-1

 

Break-even graph

COSTS BY PROCESSES AND BY PRODUCTION ORDERS.

REGARDING THE ELEMENTS INCURRED REGARDING THE TIME OF OBTAINING THE COSTS AND THEIR DEGREE OF CONTROL IN ATTENTION TO THE FUNCTION THEY CORRESPOND. REGARDING THE NOTIFICATION AND THE CONTINUITY OF PRODUCTION.
ABSORBING COSTS A) HISTORICAL, ACTUAL, OR INCURRED.

B) PARTIALLY DEFAULTED

A) PRODUCTION 1.- PRODUCTION ORDERS.

2.- PROCESS

DIRECT OR MARGINAL COSTS C) ESTIMATED OR BUDGETED COSTS

STANDARD COSTS

a) PARTIAL

b) COMPREHENSIVE

c) MIXED

B) DISTRIBUTION.

OF ADMINISTRATION.

OF FINANCING.

SYSTEM BY PRODUCTION ORDERS.

This system collects the costs for each physical order or batch.

Identifiable in its passage through the production centers of the plant.

This cost accounting system is applied in cases where production depends on orders or orders made by customers.

Under these conditions, there are 2 control documents.

  • The order has a progressive number with the indications and specifications of the kind of work to be carried out.
  • For each production order, a record will be opened in the so-called cost sheet that will summarize the 3 elements of the cost of production referring to the manufactured units of a given order.

PROCESS COST SYSTEM.

Through this system, all production costs are gathered during an accounting period and later those costs are distributed among the number of units manufactured during said period. It is applied in those companies with intermittent production, that is, constant, where production does not depend precisely on an order.

Example: the production of purified water, cigarettes, or the pharmaceutical industry.

The determination and registration of the costs are carried out until the moment in which the production has concluded for this reason they are called HISTORICAL COSTS.

THE SYSTEM BY PRODUCTION ORDERS

It is implemented in those industries where the production is unitary, that is, that the articles are produced by specific batches.

G/L ACCOUNTS OF THIS SYSTEM

RAW MATERIALS WAREHOUSE
They are charged: For the beginning inventory at the cost price They are paid: For the cost of direct raw materials used in production.
For purchases at cost price. For the cost of indirect raw materials.

 

PRODUCTION IN PROCESS
They are charged: By the cost of the direct raw material consumed. They are credited: For the cost of production of orders completed in the period
For the direct salaries employed.
Default CIs.
BALANCE DUE: FOR THE COST OF PROCESS ORDERS IN MANUFACTURING

 

WAREHOUSE OF FINISHED ITEMS
They are charged: For the cost of the orders finished in the period. They are credited: For the cost of finished orders sold in the period.

 

LABOUR
They are charged: For the amount of labor paid in production. They are paid: For the application of direct and indirect labor in production.

 

SALES COST
They are charged: For the cost of finished orders sold in the period. They are paid: Debit balance that is transferred at the end of the year to profit and loss.

 

CI APPLIED
They are charged: Due to the credit balance, it is transferred to low or over-absorbed indirect charges. Are paid: Application of default CIs to production

 

IQ LOW OR OVER ABSORBED
They are charged: For the transfer of real indirect charges. They are paid: Transfer of the CI applied

 

IC INCURRED
They are loaded: By the accumulation of all the real CI of the period. They are paid: Transfer to low CI or over-absorbed.
IF IT IS A DEBTOR, IT REPRESENTS A LOW ABSORPTION OF THE CI IF IT IS A CREDITOR, IT REPRESENTS AN OVERABSORPTION OF CI