Cost accounting

The cost accounting has the aim of providing the decision makers in the company or the organization, the necessary informations with decision making. The term of accountancy of management tends to replace cost accounting under the Anglo-Saxon influence ( management accounting ). Today, certain authors speak more readily about " accountancy of gestion" to qualify it.

History

The knowledge of the costs is, since the beginning of the industrial revolution, a basic requirement of any decision making. The concept of industrial book-keeping expressed this need very early and resulted in the installation by the accountants, but also by the engineers and the technicians, of systems of calculation ready to help them in their management. The historians thus count precursory systems of industrial book-keeping as of the end of the 17th century in the United Kingdom (in particular in the forging mills and foundries of the area of Sheffield). In France doctrines appear as from the years 1860 and one locates in 1885 the appearance of the first handbook.

Called initially industrial book-keeping then cost accounting of exploitation , the accountancy of management indicate today the whole of the elements of the countable system considered from the point of view of the interest that they present for internal management.

Between 1947 and 1999, the writers of the French chart of accounts wanted to standardize the cost accounting as well as financial accountancy (or General ledger). Since 1999, the accountancy of management is not standardized any more. Its methods and its organization must be adapted to the characteristics and the specific needs of each company or organization. Moreover, the objective of standardization is to facilitate the comparisons between firms. However, this objective does not relate to the accountancy of management which is of internal use and whose results are seldom revealed.

Objectives

The accountancy of management is initially an accountancy able to help the leaders. Only it is not a question to calculate the costs of the products manufactured by the company but especially to influence the behavior of the decision makers and to help them to achieve their goals. The goal of the analysis of the costs is not thus so much to know the costs of the products to make it possible to manage the economic resources of the organization.

Under consideration from this point of view, the roles of the accountancy of management belong to three main categories:

- To constitute a system of measurement which is most neutral and most objective possible. The determination of the costs remains a main aim of the analysis of the costs but, for the simplistic use that some could make some, it is necessary to keep in mind that the finality of a system of accountancy of management is to improve management and not to calculate costs with a great exactitude. Any information system, accountant or extra-accountant, " consomme" resources to function and its installation has interest only compared to the actions which it will make possible.

- Aider with decision making the analysis of the costs finds there its justification fundamental. The accountancy of management constitutes a data bank and an irreplaceable tool for data processing. In general it is neither possible, nor useful to know the entirety of the costs associated with a given decision. What is important it is to be able to associate with each decisional context the relevant costs those which will clarify its choice.

- To allow the Control of management . Only the accountancy of management is able to analyze the results, to reveal some the components, to provide of it a decomposition by product, branch or function. The analysis of the costs is with the service of management and must privilege estimated optics.

Organization

In France, since the standardization of the Chart of accounts of 1947, the cost accounting is autonomous compared to the General ledger. On the contrary, in the Anglo-Saxon countries where the recording and the behavior of the accounts were never standardized, the accountancy of management is generally integrated into the financial Comptabilité.

There exist several methods of calculating of the costs, listed hereafter.

Method of the complete costs

Already used at the 16th century, it is easy to implement and makes it possible to determine the CUMP (balanced average unit costs) necessary to the valorization of the Stock S. However the method employed of indirect burden-sharing can lead for purposes of subsidizing masking of the differences in profitability between products.

It consists in calculating the production costs of the products by distributing the loads by taking guard to exclude the ascribable expenses of distribution to the only market products. The direct burden-sharing does not present difficulties, because they can be charged directly to the products. The indirect Charges are distributed in centers according to keys of distribution. These keys, which are in fact of the reports/ratios, are fixed more or less arbitrarily by the management auditor. There does not exist, indeed, keys being able to be used in all the cases. A key frequently used to distribute the indirect loads of the workshops of production is the hour of direct labor (HMOD).

The fixing of these keys is the principal reproach made with the method. Indeed, it supposes that the indirect loads are distributed in a linear way according to the products what is not the case when the products are heterogeneous. This inaccuracy in the method results charging more indirect loads to a product and thus in weighing down its cost with the profit of an other produced, according to the principle of the communicating vases. According to the choice of the scale, the result can be sometimes very different and lead to erroneous decisions. This inaccuracy is all the more important as the proportion of the indirect loads is very large.

The use of this method gains in relevance when the production process is stable, the personnel is not very general-purpose, the products are standard.

Direct the costing (method of the variable cost)

The method makes it possible to calculate estimated profitabilities, in particular according to the forecasts of sale.

It consists in charging to each product the corresponding variable loads. The main difficulty of this method comes from the indirect variable loads. The heaviness of the analysis pushes to consider variable only the variable and direct loads. The use of the method gains in relevance if the decomposition in variable cost and fixed cost is reliable and that the share of the variable costs is important.

After having carried out this distribution of the variable costs by products, it is possible to carry out analyzes of profitability. The determination of the margin on variable cost by product (turnover minus the corresponding variable loads) can represent a measurement of it. This margin on variable cost reflects the participation of each product in the cover of the fixed charges, thus avoiding the effects of subsidizing observed at the time of the installation of the method of the complete costs. It is thus possible to calculate a Break-even point representing the sold quantity (or the turnover) for which the fixed charges are entirely covered by the margin on variable cost (MCV). The awaited result is null with this threshold because the margin on variable cost is equal to the fixed cost. A chart can be realized emphasizing the moment when the product becomes profitable according to the sold quantity. It is a representation of the economies of scale. The cost price " direct costing" corresponds to the selling price in lower part of which the company should never go down even in period from weak activity. This method is also useful to evaluate the contribution of each product or groups products with the assumption of responsibility of the indirect expenses (which are often called " expenses of structure").

The method of direct the costing advanced (specific costs) is an alternative of direct the costing attaching to each product of the specific fixed charges… and the CAE

The method ABC (Activity-based costing)

The method ABC consists in calculating the cost price of the products by saying that in fact the activities consume the resources and not the centers of activities. This method adopts a transverse of company and either hierarchical vision like the two preceding ones. It is based on an operational flow chart, i.e. that which really corresponds to the processes of the company. Usually, the activity is a component of a process. The companies thus analyze their internal processes through the activities which compose them.

This method usually used was born when a need for more precise information appeared with the modern industrial development: model " fordien" with the current models. More complex and transverse, the indirect proportion direct costs/costs in the cost of a product was reversed. If, at the beginning of the 20th century the direct costs represented more than 70% of the total costs of a product, today, in fact the indirect costs represent the major part of the cost.

The principle of the method is the following: objects of costs (produced, customers…) activities consume which, themselves, consume resources. In practice, the various stages for the installation of a step ABC consists with:

To model the processes of the company to apprehend the circuits of them. These activities can be, for example: treatment of an order, the management of the references, or reception of the goods.

For each activity, an inductor (the driver) will be retained and followed (for example, the number of orders, quantities of reference). This inductor will be the unit which will make it possible to distribute the total costs of the activity. Certain inductors will not be used to avoid too heavy models. One will prefer a typical inductor of the activity. For each studied activity, the model will thus specify the consumed inductors.

Ainsi the calculation of the cost price by carrying out a table of burden-sharing by product can it be carried out. It should be noted that the inductors have as a main aim to distribute the indirect loads and that the direct loads are generally distributed in an ordinary way.

The method ABC has the advantage of assigning in a more precise way the costs to the products without carrying out a distribution of the indirect costs using an often arbitrary measuring unit (for example, the hours machines). A better knowledge of the processes makes it possible to release the forces and weaknesses of one organization to the installation of this method. The use of this method gains in relevance when the production processs are " in ligne" with a qualified personnel and general-purpose, that the processes are flexible, and that the technique used is that of the series production different of size with use of the method of the Juste-with-time.

Method of the Calculation of the Costs by the Characteristics (MCCC)

In the prolongation of the method ABC, American J.A. Brimson proposes in the Nineties the " Feature Costing" , published in a French article in 1998 under the name of " Calculation of the Costs by Caractéristiques". This method analyzes the bond between the characteristics of the products and the costs with each activity. The principle improves the ABC economically by proposing a more relevant distribution of the costs but, after having stated the principle, Brimson especially was interested in its use in term of management.

Note: official French-speaking name is " Method of the stable costs (MCS) ".

Method CALADRIS

Since ten years, the Belgian E. Chop develops method CALADRIS in the prolongation of the method ABC. Published in 2006, this method proposes a practical solution for the analysis of the bonds between the costs and the characteristics of the products while approaching as well as possible the economic reality of the process of the company.

This method is based, with each activity of the process of the company and for each type of load, on a system of weighting of the difficulty generated by the characteristics of the products. It results an evaluation from it multicriterion specifies used in control of management (calculation of the cost price of a product carried out), from an estimated point of view (preparation of the estimates, offers and tariffs) or in strategic management (value of the characteristics of the products analyzes).

Method CALADRIS thus brings a high degree of accuracy including for the companies with industrial products or services overmeasure or very diversified.

Method UVA (unit of added-value)

Historical, objectives and characteristics of method UVA.

This method improves the method of the complete costs and is used as alternative to the method ABC. It is also based on a meticulous analysis of the activities (named here ranges), but especially on that of the stations (elementary operation of work made up of a whole of average materials and human). This method diffused and widened amongst other things by J. Fievez, R. Zaya and J.P. Kieffer was born from work of Georges Perrin carried out with beginning of the year 50 on the concept of the unification of the measurement of the production which leads to the model of renamed method GP UVA in 1995.

Method UVA is posed like main objective to calculate the result (benefit or loss) of each commercial transaction. The transaction is regarded as the elementary transverse process in the company gathering all the work made by all the functions since the recording of the order, while passing by the production of the products, to their delivery and the cashing of the invoice. The transaction, being the elementary transverse process, it can be seen as the called basic “brick” UVA which makes it possible to carry out the analysis of profitability. This method makes it possible to carry out a very great number of simulations without additional analysis as from the moment when we have equivalent UVA.

The UVA is a measuring unit, which makes it possible to develop the operational ranges (activities), specific to each company, it is the specific standard meter with which all consumption of resources of all stations UVA will be compared. The fundamental advantage of the use of this unit is that it is independent of the monetary variations and makes it possible to manage in a simple way of the complex companies (having many products and much customers), to make as if the company were mono-product. The price of this precision is the need for stability in time of the relationship between the stations and the ranges (activities) of the company, i.e. without technological deep change (the analysis should normally be reactualized every 5 years). This analysis of the stations must be very pointed. Moreover the article (the product) used to calculate the UVA must be representative. This method can be also used in the organizations which do not have the sufficient size to have a management auditor. These organizations can as well be small companies as atypical operational units of great groups.

Stages of use of method UVA.

To draw up a table for a basic article (representative of the activity) by crossing the resources consumed by stations of the article and those by ranges of the company. It will be necessary to use a homogeneous unit of work by stations. By this operation the company carries out the analysis of the activity.

To draw up a second table crossing the consumption of all the stations and all the amounts of loads. All the difficulty is to reduce to nothing the nonascribable expenses. To correspond to the stations, the loads are charged by the use of unit of employment (the unit term of work being reserved at the stations). The total by station of the table is called rate of station UVA. By this operation it is a question of identifying the resources consumed by the various stations and not of distributing the loads of the company between the stations.

To calculate the basic rate of the article (value of a UVA) which is the sum of the rates of station UVA only of the article multiplied by the units of work per station. This operation makes it possible to evaluate the effort of production of the article.

To calculate the indices UVA by station which are the division of the rates of stations by the basic rate of the article. This operation makes it possible to evaluate the share of a station on the transaction value.

To calculate the equivalent UVA which is the sum of indices UVA multiplied by the units of work of a product of the range.

Having equivalent UVA, it is possible to carry out very many analyzes with the Break-even point, or the instrument panels at the elementary or total level by preserving objectivity necessary.

See too

Random links: