Production Process Accounting: Cost Analysis & Formalization

Formalizing Production Process Accounting

Production Process Analysis

Production is any activity that causes the transformation of resources as a result of a process. We differentiate between external transactions that identify changes to resources originating in the external world, and internal transactions, which are phenomena causing the transformation of resources as a result of the process. This is the company's economic activity without external exchanges. That is, the company carries out financial operations and transactions externally, while production operations are performed internally.

A production process is defined as any alteration, using a particular technique, of inputs (or means of production factors) into outputs (products).

Elements of a Production Process:

• Inputs: Economic resources consumed by the enterprise for industrial, commercial, or service economic activity.
• Process: Operations performed using a given technology and involving an operational plan.
• Outputs: The results of a production process, which can be products or services.

Fundamental Cost Analysis

1. Cost Rating Criteria

This step analyzes inputs according to economic criteria and groups them for easy observation. Considerations include:

• Their relative importance for company control.
• Situations where a single price doubles the cost by including direct and indirect consumption, or fixed and variable components.
• The distinction between product costs and period costs.

2. Cost Location & Distribution

This analyzes the structure of the production process to find sites where costs are consumed. Cost accounting sites refer to a scheme that allows the accumulation of cost factors required to perform an activity or function over which control is required.

Cost distribution can be made:

• According to functions.
• According to actual divisions of the company.
• According to responsibility centers.

3. Cost Imputation Methods

Cost imputation involves assigning costs to each cost carrier, which can be objects, products, or services. In the case of direct costs, attribution presents no difficulty. However, for indirect costs, allocation systems must be employed.