Collection and distribution of costs - Management accounting

Collection and allocation of costs

In the process of pricing, costs are taken into account for production workshops, and not for specific orders. This means, first, that costs can be collected over a longer period of time, and secondly, at least one distribution at the end of the week, a month, etc., is required to calculate the cost of the output over the period. The cost data used in the process accounting system can be classified into material, labor and overhead costs.

Material costs in the process-based method can be accounted for and calculated in two ways. Invoices for materials or requirements for their leave in production can be used in the same way as in the order method. In another method, a consumption report is prepared showing the cost of the materials used. To do this, either the products are analyzed at the final stage or at the stage of the semi-finished product, or the final stocks that remain unused are estimated.

In the first of these methods, there is only one main difference from the ordering method. It consists in the fact that in the process of a process, the cost of a process or product is determined more than a single order. Material inventories for a certain period or individual applications for materials are also used here, only specific data refer not to the order, but to the shop for a certain period of time. At the same time, one should pay special attention to the fact that there should not be a period of time between the holidays and the use of materials or any other recorded but not actually incurred costs. The rather fast identification of products inherent in the ordering system is not suitable for materials intended for mass production.

The second way of accounting for material costs is an inverse procedure. In an enterprise where there is a continuous process of a steady stream of raw materials, it is not always expedient to take into account materials when entering them into the process. Examples of such enterprises can serve: chemical industry, ferrous metallurgy, steelmaking, production of mirrors, cotton, etc. Here we can use the relationships that establish the content of the material in the finished product or semi-finished products. In the chemical industry, for example, many sub-industries are material-intensive. The data on the consumption of materials is obtained on the basis of the amount of the finished product using the percentage of raw materials that such quantity of the product should contain. This approach is based on the fact that in the production of chemistry products, different elements can be combined with each other only in a fixed proportion. The quantity of each type of consumed raw materials in a mixed lot is determined by multiplying from the appropriate proportions, including possible losses.

Another way is to use the equation between the balances of work in progress at the beginning of the month and the raw materials released on production, on the one hand, and the balances of work in progress at the end of the month, on the other. However, in practice, such a balance equation does not exist, as a rule, the first part is greater than the second by the amount of losses. The data for the above equation are also obtained depending on the accepted system of accounting for inventories. There are two main systems: periodic and continuous inventory accounting. In accordance with the periodic system, there is no detailed accounting of inventories during the reporting period, and at the end of the year an inventory should be conducted to establish the level of reserves at the end of the reporting period. With the continuous accounting system, continuous stock accounting is maintained by maintaining detailed records.

Accounting for labor costs with a process system is much simpler than with a custom order. The correlation of labor with products takes place on the basis of the unit (shop). The accounting records for labor costs for both systems are similar, except that when a process is non-process, there is no requirement to assign labor costs to specific orders, and the costs are correlated with the process or cost center. Indirect wages, although a form of overhead, are often taken into account as a direct wage. The only requirement is that it must be reflected separately. In practice, cases of entering all the labor costs for a process by a single amount are not uncommon. Although this, of course, is convenient, the question of the legality of such an approach seems very problematic.

Taking into account the peculiarities of accounting labor costs in a process, the classification of costs is widely used in this system, implying their division into basic and added (conversion). The main costs of the terminology adopted abroad consist of the costs of direct salaries and basic materials. Added (conversion) costs include processing costs and general production (overhead) costs.

Overhead in a process system represent the same costs that need to be distributed to calculation objects as with a custom order system. These are indirect wages, payments for electricity and water, repair costs, etc. Since in this case, as an object, we are dealing with divisions, the proper division of the enterprise is more important than the identification of specific orders. In most cases, the allocation of overhead is a fairly accurate procedure, because cost centers or shops can use distribution bases such as square meters or a machine clock. Some complexity of distribution inherent in the order system, of course, occurs in enterprises that produce many types of products. Even in such cases, with a simple method, cost identification is easier.

The transferred costs are the costs transferred from the previous process to the subsequent one. As a rule, this is the cost of semi-finished products. The subsequent process receives partially finished units that must be subject to additional processing, which includes direct labor, overheads and, in some cases, additional materials.

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