One of the main tasks of any accounting at the enterprise is the calculation of the cost of one unit of production. It is she who influences the adoption of key management decisions. The success of the company’s activities directly depends on its formation, since expenses affect the size of the selling price, and cost data are fundamental in managing current business processes and making managerial decisions. This article focuses on the types of costs, their accounting systems and methods of distribution to cost.
Important Definitions and Terms
Cost sharing - allocation of expenses incurred to specific objects.
Cost objects - an accounting unit that generates expenses that affect the cost of production, investment, services, work.
Cost Center - Organizational Unit. It can be a workshop, a site - a unit that accumulates and systematizes information about costs and general expenses.
Calculation principles
To calculate the cost of production using the method of calculation. In this case, several methods are used: including only variable costs (direct costing), taking into account all costs, or using established regulatory costs.
For ease of calculation and more accurate decision-making in management accounting, the classification of production costs by two types of objects is used. This process is carried out in stages. At the beginning there follows a grouping of costs at the place of occurrence, then they are distributed to a costing unit or specific products. Let us consider in more detail the initial stage.
Types of Responsibility Centers
As already noted, the cost center (responsibility center) is a structural unit of the company. Each such center incurs certain costs and contributes to the manufacture of the final product or service.
The costs of each cost center are monitored and measured by the responsible person. But the contribution to the final product is sometimes difficult to determine. For example, it is impossible to determine the income from the accounting activities of the enterprise. Thus, not all divisions of a company that measure profit and expenses can participate in the distribution of income. Based on the possibility of profit formation and distribution, the cost centers of production and other enterprises are divided into centers of costs, income (profit) and investments (investments). Let us dwell on each of them.
Expense centers
In these centers, cost accounting at the places of origin is usually the main one. Revenue control is not carried out here. Such a center may be a production workshop, a robotic workstation, a team or a site. Its main goal is to reduce costs as much as possible.
Profit centers
Here, not only cost accounting is kept. The head of the center by comparing the costs incurred and the income received determines the profit. The main objective of this cost center is to achieve the greatest possible profit.
Investment centers
In these centers, control is exercised not only of the income received, the expenses incurred, the total profit, but also the distribution of this profit, for example, investment in the assets of the company. Such centers are usually quite large - these are branches, non-resident divisions of the company, subsidiaries.
Classification of Responsibility Centers
According to the principle of participation in the business of the company and the production functions performed, the classification of cost centers implies the allocation of the types of centers listed below.
The procurement center plans the volumes of materials and other inventories purchased, keeps records of them, controls storage and expenditures for production purposes.
The responsibility center for production keeps records, monitors and plans the costs of manufacturing products. The task of this cost center is also to structure the assortment of the company, control the volume of production, cost and quality of the final product.
The sales center (responsibility for the implementation) maintains records and plans the costs of implementation. Here, such performance indicators as the volume of products sold, their structure, profitability of finished products in the context of various product groups, and revenue are monitored. These structural units may also be called revenue centers.
Control centers are not directly involved in the production process, but are an integral part of the financial and economic activities and important structural units of the company. These include planning departments, accounting units, management accounting service. It takes into account and monitors the costs of its own functioning and evaluates the effectiveness of the work.
Activities
The main function of responsible centers is the organization of cost accounting at places of origin. This is realized by comparing the actual expenses incurred with the planned indicators calculated in the estimate, which serves as a kind of economic plan for each place where costs arise. It is expediently compiled taking into account only those costs that are controlled by this center.
The actual use of the so-called flexible (or variable) estimates, when the planned costs can be compared and modified in accordance with the actual volume of output and production. In this case, when recalculated at the place of occurrence, costs are grouped into constant or unchanged, variable and partially variable.
Variable costs when adjusting costs are adjusted for the actual value of production. Partially variable costs are adjusted by the actual change in the volume of production, taking into account the dependence of these costs on its size. Fixed costs when adjusting the cost estimates are not adjusted.
Activity report
The results and analysis of the ratio of incurred and planned costs are reflected by the responsible persons of the centers in the reports on the execution of the approved estimates. Such a report is generated in the form of a table where the types of costs for which the center is responsible are indicated, control indicators are entered, and tolerances are calculated.
Effective business conditions
The effectiveness of the cost accounting system at the places of their occurrence in order to manage the costs and profits of the organization can be achieved if several conditions are met:
- Realistic, production-based choice of responsible centers.
- Formation of estimates for a specific cost center, which is designed to stimulate their maximum reduction.
- The correct and adequate selection of the list of costs that are actually controlled by a particular center.
- Competent selection of responsible persons who will be entrusted with the authority to control costs.
- The close relationship of reports and activities in general at various cost centers.
- Joint coexistence of accounting at cost centers with a common production accounting system.
Cost Center Accounting
As already noted, the center is a type of cost center, which can be any organizational unit capable of controlling its own costs. This paragraph also provides for the organization of rationing and planning of expenses incurred and the definition of the person responsible for keeping records and reporting.
The determination of cost centers is carried out by management depending on the goals and general structure of the economic entity. It should be remembered that at the same time as the number of centers increases, the degree of cost control increases, but the costs of maintaining cost centers also increase.
After determining the cost centers for each of them, an estimate is made only of those costs that are located within the responsibility of this unit.
Direct manufacturing costs should be accounted for on the basis of primary accounting data. Indirect costs are divided into estimates belonging to this center and distributed from others.
For the most successful determination of cost centers, conducting accounting activities in them, compiling reports, it is recommended to use guidelines issued by industry.
Profit Center Accounting
Profit centers are those divisions of the company that are responsible and can influence not only costs, but also participate in the formation and distribution of income. This, for example, workshop, sales department, organization as a whole.
The main reporting document of such centers is a profit report, which is generated depending on the used profit indicator: net, from sales, before tax or gross.
Instead of profit reports, revenue centers can provide margin income reports. In this case, constant spending is divided into indirect and direct, taking into account the specifics of the manufacturing process. Then the marginal income is determined by the difference in sales revenue and the amount of variable costs. To specify the accounting indicators, residual income is also determined, which is formed from the difference between marginal income and fixed costs.
Investment Center Accounting
Investment centers are the largest structural units - subsidiaries and branches. Their reporting is the generally accepted financial statements, including a statement of results. Moreover, when comparing the performance of individual investment centers, the parent organization is focused not only on profit indicators, but also on the specifics of production, volume of assets, and overall activity. Therefore, when evaluating the activities of investment centers, indicators of profitability and added value are used.
Problems of cost accounting, their distribution, competent allocation of places of their occurrence, the impact of total costs on the cost of the finished product are one of the most important areas of business management. Depending on the specifics of the organization’s activities, various methods of cost accounting can be applied. The choice of method is usually in the area of responsibility of the parent organization or the head of the company.