ORIGIN AND HISTORICAL EVOLUTION OF COST ACCOUNTING

Cost accounting itself emerged with the development of industrial companies at the
end of the 19th century. Before this period there was global accounting based on the
accumulation of operations carried out by the merchant. Some authors claim that cost
accounting began in the Florentine fabric factories of the 12th century, while others place
its birth in the 14th century during the development of English and Italian trade.
Some of the researchers who have studied the origin of cost accounting establish that
its establishment arose in England, during the reign of HENRY VII (1485-1509) as a result
of restrictions imposed on cotton manufacturers, which forced them to organize. in
industrial communities so that sellers saw the need to know more accurately the cost of
products to be accountable to their clients.
Another factor that appears promoting the establishment of cost accounting during the
Middle Ages was the development of commerce and the consequence between different
merchants, which gave rise to some attempts to identify manufacturing costs and try to
calculate them; This constituted, however, an isolated fact in that the accounting used was
elementary and was designed to record external obligations and collections made, but did
not cover internal transactions of the production process.

GENERAL ELEMENTS OF COST ACCOUNTING.

As a branch of management accounting, cost accounting has its specific objectives

and characteristics:

One of the main objectives pursued by cost accounting: is to establish the

appropriate sales price based on recovering the fixed and variable investment of the
elements of the production cost, plus the expenses of distribution and administration , as
well as the costs. financing of the activity and a legitimate profit margin for being in
business.
It could be summarized then that the main objectives of cost accounting are:

 Evaluate the efficiency in terms of the use of material , financial and workforce
resources used in the activity.
 Serve as a basis for determining the prices of products or services.
 Facilitate the assessment of possible decisions to be made, which allow the selection
of that variant, which provides the greatest benefit with the minimum expenses.
 Classify expenses according to their nature and origin.
 Analyze expenses and their behavior, with respect to the standards established for
the production in question.
 Study the possibility of reducing expenses.
 Analyze the costs of each structural subdivision of the company, based on the
expense budgets prepared for it.
 Provide reports related to costs to determine results and value inventories (Balance
Sheet and Income Statements).
 They provide information to exercise administrative control of the company's
operations and activities (control reports)
 Provide information that serves as a basis for management for planning and decision
making (analysis and special studies)

CHARACTERISTICS OF COST ACCOUNTING.

Some of the main features of cost accounting are:

 Cost accounting is analytical, since it is planned on segments of a company, and not

on its total.
 It predicts the future, while recording the events that have occurred.
 The movements of the main accounts are in units.
 It only records internal operations.
  It reflects the union of a series of elements: raw materials , direct labor and factory
loads.
 Determines the cost of materials used by the different sectors, the cost of
merchandise sold and that of inventories.
 Its periods are monthly and not annual like those of general accounting.
 Its implicit idea is the minimization of costs.

IMPORTANCE OF COST ACCOUNTING.

An important function of cost accounting is to assign costs to products

manufactured and compare these costs with the income resulting from their sale. Its
purpose is the accumulation and calculation of the production cost for the analysis of the
reports it provides, which are of vital importance for internal use in companies, since they
are aimed at correct planning, control and decision making by part of the managers, as they
provide detailed information regarding expenses, inventories, sales costs, sales and profits,
corresponding to each of the various types of production.

ELEMENTS OF PRODUCTION COSTS

Production Costs: Production costs (also called operating costs) are the expenses
necessary to keep a project, processing line or piece of equipment, company or factory in
operation.

The Cost is made up of three fundamental elements:

 Raw materials : All those physical elements that are essential to consume during
the manufacturing process of a product, its accessories and its packaging. This is
with the condition that the consumption of the input must be proportional to the
number of units produced.
  Direct labor : Value of the work performed by the operators who contribute to the
production process. Physical and mental effort expended by personnel to produce a
product.

 Factory load : These are all the costs that a center needs to incur to achieve its
goals; costs that, except in exceptional cases, are indirectly allocated, therefore
requiring distribution bases.

The sum of raw materials and direct labor constitute the Prime Cost . The combination
of direct labor and factory load constitutes the Conversion Cost , so called because it is the
cost of converting raw materials into finished products.

Direct Labor: Labor directly involved in the manufacture of a finished product,

which can be associated with the product and which represents the main labor cost in the
manufacture of that product. For example, the work of machine operators in a
manufacturing company is considered direct labor.

Indirect labor: It is all labor involved in the manufacture of a product that is not
considered direct labor; indirect labor is included as part of the indirect manufacturing
costs. The job of a plant supervisor is an example of indirect labor.

Indirect Manufacturing Costs: Indirect cost is any general expense not included in
the direct cost, but that intervenes so that the work or concept is executed correctly, and that
must be distributed proportionately in the unit price.

Inventory Valuation Methods

Inventory valuation methods are the set of procedures used in order to evaluate and
control the flow and cost of merchandise.
 Inventory valuation is the process of selecting and applying a specific basis to value
inventories in monetary terms. Below are 4 inventory valuation methods that are commonly
used in companies:

 Specific Identification: Each item sold and each unit remaining in inventory is
individually identified
 First in first out (FIFO) (in English FIFO ): the first items to enter inventory are
the first to be sold (cost of sales) or consumed (cost of production). The final
inventory is made up of the last items that became part of the inventories.
 Last In First Out (UEPS) ( LIFO ): The UEPS method of calculating the cost of
inventory is the opposite of the FIFO method. The last items that became part of the
inventory are the first to be sold or consumed. In this method, a material should not
be purchased at a different price until the most recent batch of items has been sold
out, and so on. If a new item is received in the warehouse, the cost of that item
automatically becomes the one used in the new shipments.
 Average Cost: This is the method most used by companies, it requires calculating
the average unit cost of the items in the initial inventory plus the purchases made in
the accounting period. Based on this average unit cost, both the cost of sales
(production) and the final inventory of the period are determined.

EXAMPLES FOR THE APPLICATION OF THE METHODS

The following example is intended to explain the application of each of the methods
for setting the cost of goods in inventory.

Quantity Unit cost Total value Beginning inventory

10 Units $10,000 $100,000 10 Units.

Purchases 30 Units. $ 15.000 $ 450.000

Total quantity 40 Units. $ 550.000

Sales period 35 Units. Final inventory

5 Units

Weighted average

Total value = $550,000

Total quantity: 40 Unit
Average value: total value divided total amount = 550/40 = $13,750

The average cost value per item is $13,750

The value of the final inventory = 5 Units. * $13.750 = $68.750
The final inventory is valued at the average cost of merchandise in stock.

FIFO or FIFO method

Final inventory value per = 5 Units. * $10.000 = $50.000
The final inventory is valued at the cost of the first merchandise in stock.

UEPS or LIFO method

Final inventory value per = 5 Units. * $15,000 = $75,000 The final inventory is valued at
the cost of the last merchandise purchased.

FIRST IN, FIRST OUT - PEPS

Commonly known as FIFO (First In, First Out) , this inventory valuation method is based
on the logical interpretation of the movement of units in the inventory system, therefore the
cost of the last purchases is the cost of inventories, in the same order in which they entered
the warehouse. As we can see below:
In this case, the output of units on February 16 is for 450 units, from the first batch of
inputs 250 units are taken at a cost of $620 and from the second batch the remaining 200
units are taken at a cost of $628.

The advantage of applying this technique is that inventories are valued at the most recent
costs, given that the oldest costs are those that shape the first sales or production costs
(output costs).

LAST IN, FIRST OUT - UEPS

Commonly known as LIFO (Last In, First Out) , this valuation method is based on the
fact that the last items that became part of the inventory are the first to be sold, of course
based on the unit cost, that is, the flow physical is irrelevant, the important thing here is that
the unit cost of the last inputs is the one applied to the first outputs. As we can see below:
In this case, the output of units on February 16 is 450 units, from the last batch of inputs the
first 250 outputs are taken at a unit cost of $633, and from the second batch of inputs the
remaining 200 units are taken at a cost of $628.

CONSTANT AVERAGE OR WEIGHTED AVERAGE COST

This is a reasonable approximation valuation method where the balance in monetary units
of inventories is divided by the number of units in existence. This procedure, which causes
an average cost to be generated, must be recalculated for each entry into the warehouse. As
we can see below:

In this case, at the time of departure from the warehouse of 450 units, the average cost
must be calculated, dividing the balance ($470,250) by the number of stocks prior to the
departure of the merchandise (750), that is, 470250/750 = 627. This cost will be the one
that will be applied to all 450 output units.

BIBLIOGRAPHIC REFERENCES

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 Giménez 96 Giménez, C. Management & Costs. Macchi Editions. 2001. p.42
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decision making. Havana. Felix Varela Editorial. p. 2, 3, 10, 11, 28, 33, 34, 239,
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 Collective of Authors, 2008. Cost Manual for Agricultural Productions