Understanding Cost Systems: Key Concepts and Classifications
Unit 15: Basic Concepts in Cost Systems
Financial information is essential for making management decisions. The components are:
Income and Costs
- Income: External in nature and easily identifiable for each product. These are not the primary objective of Management Accounting, but rather Finance.
- Costs: According to AECA, this is the measurement and valuation of consumption undertaken or planned by the rational application of factors to obtain a product or service.
Distinction Between Expenditure and Cost
Consumption must be quantified for goods and services necessary to develop the activity. A cost is an expense that has been consumed, whereas purchases are merely spending.
Cost Elements and Structure
Company Cost Price: The total costs allocated to a product when it is ready for sale.
Product Costs
Production costs are listed as assets in the balance sheet (stocks) and move to the Profit and Loss Account when the product is sold:
- Direct Materials + Indirect Costs + Direct Labor (MOD) = Cost of Production
- Cost of Production +/- Change in inventories in progress = Cost of finished products
- Cost of finished products +/- Change in stocks of finished products = Cost of Products Sold
Formula: Sales - Cost of Goods Sold = Gross Margin - Period Costs = Result.
Period Costs
These are not production costs. They are recorded in the Profit and Loss Account of the period in which they arise (e.g., distribution, marketing, administration).
Detailed Cost Breakdown
Product Cost Calculation:
- Direct Materials (MPD) + Direct Labor (MOD) = Direct or Primary Cost
- Direct Cost + Indirect Manufacturing Costs (CGF/CIP) = Cost of Production Factors
- Cost of Production Factors +/- Variation in work in progress = Cost of Production Completed
- Cost of Production Completed +/- Variation in finished stock = Cost of Production Sold
Operating Cost Calculation:
Cost of Production Sold + (Postage + Financial Expenses - Financial Income) = Operating Cost + Distribution and Commercial Sales Costs = Cost + Administration Cost = Enterprise Cost.
Management Accounting Insights
- Not charged to the product: Costs not included in the valuation of stocks.
- Disaggregated costs: Allows for the detection of phase errors or inefficiencies.
- Management Accounting: Provides information on market costs and improving the production process.
- Conversion Costs: Direct Labor (MOD) + Indirect Manufacturing Costs (GIF).
- Unit Manufacturing Costs: Total production cost / number of units.
- Distribution Company: Cost of Sales = (Initial Inventory + Purchases - Final Inventory).