Main function of Cost Accounting

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Main function of Cost Accounting
Misurazione e Controllo della Performance Industriale
Main function of Cost Accounting
Supply to Management, at all appropriate levels,
• individual product cost data
• with consistent and uniform calculation
needed for the day-to-day running and control of the business
and for the formulation of Strategic and Operating Plan, Reviews and Forecasts
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Misurazione e Controllo della Performance Industriale
Cost Accounting has to supply the basic data required for:
 Measuring the costs and/or profitability of specific process, products, group of
products, markets…
 Optimization of the use of resources and maximization of the results
 Investment appraisal of proposed new projects, and the calculation of
subsequent actual returns
 Continuous control of the Actual operating results through the Budgetary
Control System which measures the variances from Standard Costs
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Misurazione e Controllo della Performance Industriale
The Cost analysis of a tyre size is made up of the separate
semi-manufactured products and the subsequent production
stages, divided into :
• Materials
• Labour
• Expenses
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Misurazione e Controllo della Performance Industriale
SPECIFICATION
COST CENTER
MATERIALS
LABOUR &
EXPENSES
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Misurazione e Controllo della Performance Industriale
Costs Components are sub divided in
“Variable” & “Fixed”
according to whether their value is subject to particular
variability or not, in relation to
the volumes of production (sales).
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Misurazione e Controllo della Performance Industriale
The Variable Cost items are charged analitically and
in a differentiated way to the single sizes.
...Example:
 Direct Materials
 Variable Labour
 Variable Expenses
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Misurazione e Controllo della Performance Industriale
The Fixed Cost items are allocated in an
analytical or generic way to the single sizes according to which
are brought about by, and related to the type and quantity of
tyres produced.
...Example:
Depreciation
 Salaries
 Indirect Fixed Labour
 Direct Fixed Expenses
 Indirect or General Fixed Expenses
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Misurazione e Controllo della Performance Industriale
Variable Costs Item #1
Materials
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Misurazione e Controllo della Performance Industriale
The Materials are sub-divided in :
DIRECT MATERIALS
Strictly corresponding to those foreseen by the product specification
PRODUCTION CONSUMABLES
Materials which wear out during the production cycle. These are used
only in the production departments.
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Misurazione e Controllo della Performance Industriale
MAINTENANCE MATERIALS
These are specially used and wear out during normal maintenance in
both the production service departments. They are used only by the
Maintenance personnel. The “Maintenance Material” item includes also
any possible services carried out by outside firms.
INDIRECT MATERIALS
All Other Materials used in any Department (production, services,
workshop, offices, ...)
Electricity, Gas, Oil and other Fuels, used in production are included in
the energy cost calculation
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Misurazione e Controllo della Performance Industriale
The amount of Materials in the Cost calculation is given by :
Purchasing - Raw Material Prices
R & D Dept. - Product Specification
Industrial / Quality Dept. - Scrap (in %)
Industrial / Technical Dept. - Allowances (in %)
Sales Dept. - Market Demand
Industrial Dept. - Capacity
Industrial Dept. - Plant Calendar
UNITARY NEED
OF RAW MATERIAL
FINISHED PRODUCT
BASE VOLUME
X
RAW MATERIAL COST
The charge concerning losses, scrap, allowances...is appropriately
considered as a distinct analysis item, thus offering a greater possibility of
analysis and control
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Misurazione e Controllo della Performance Industriale
Variable Costs Item #2
Labour
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Misurazione e Controllo della Performance Industriale
Basically the “LABOUR” is sub divided in:
Direct
Labour
Indirect
Labour
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Misurazione e Controllo della Performance Industriale
Distinction between direct and indirect labour
Direct Labour: This is employed in the production departments for carrying out the
production cycle phases of semi-manufactured products and finished products
Indirect Labour: All Labour except direct labour
The Direct labour is measured by process stage and is charged analitically by
separate item.
The Indirect Labour is included as an expense item in the departments to which it
belongs, following the same charging principle.
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Misurazione e Controllo della Performance Industriale
Indirect Labour
• in Production departments
• In maintenace
• In power supply plants (boiler house…)
• In quality
• In cleaning
• In offices and services
• In warehouse
• …
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Misurazione e Controllo della Performance Industriale
The amount of Labour in the Cost calculation is given by :
R & D Dept. - Process Specification
Industrial / Controlling Dept. - Minutes from
Cost Analysis (**)
Industrial Dept. - Finished Product Volume
TOTAL NEED OF MINUTES
(N° OF PEOPLE)
Personnel Dep.t - Base Salary
Working hours per person
Extraordinary Hours
Average Absenteisme....
X
COST PER MINUTE
LABOUR COST
(**) MINUTES FROM COST ANALYSIS
INDUSTRIAL DEPT. - Technical Minutes
INDUSTRIAL DEPT. - Productivity
Controlling / Ind. Dept. - Size change time
Machine Downtime
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Misurazione e Controllo della Performance Industriale
Variable Costs Item #3
Expenses
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Misurazione e Controllo della Performance Industriale
Expenses
Costs which, in addition to materials transformed into
final products and to direct labour, are incurred by
the centres and offices of the entire organization.
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Misurazione e Controllo della Performance Industriale
The first sub-division of the Expenses concerns their variability with the
volume and type of production.
From such a viewpoint expenses are subdivided into :
VARIABLE EXPENSES
FIXED EXPENSES
Every element of cost, and therefore also of expenses, are attributed in the
analysis of Product Cost in a different way, depending on wheather it
represents a component whose cost varies with type of article and quantity
produced.
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Misurazione e Controllo della Performance Industriale
Variable Expenses
A cost heading is variable whenever it varies with variation in
product type and volume.
The variable cost of a unit produced tends therefore to remain
constant with variation in the quantities produced.
The main items of variable cost are the materials and direct labour.
With regards to the expenses, in practice, whilst some expenses vary in line
with the volume (e.g. Consumption of steam, electricity, ...), others vary only
for limited intervals of variation in volume (maintenance, production
consumables,...)
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Misurazione e Controllo della Performance Industriale
Fixed Expenses
Not in proportion to the production volumes of a period (for
example one year)
Depreciation of machinary
Cleaning
Canteen
Security
Rents
Telephone, Stationary
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Misurazione e Controllo della Performance Industriale
Cost Centre
Accounting
Profit & Loss
Service
Centres
Administration
R&D
Production
Centres
Functional
Centres
Commercial
Distribution
Materials
Direct
Labour
•Indirect Labour
•Variable Expense
•Fixed Labour
•Salaries
•Fixed Expenses
COST OF SALES
Product Cost
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Misurazione e Controllo della Performance Industriale
PRODUCT
SPECIFICATION
RAW MATERIAL
UNITARY PRICE
PRODUCT
COST
PROCESS
SPECIFICATION
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COST CENTER
RATE
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Misurazione e Controllo della Performance Industriale
Raw Material
Depreciation
+
Fixed Labour
Variable Labour
+
+
Variable Expenses
Fixed Expenses
=
=
Variable COST
of PRODUCTION
+
Fixed COST
of PRODUCTION
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Total Cost
= of Production
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Misurazione e Controllo della Performance Industriale
PRODUCT COSTING MUST BE
HOMOGENEUS
COMPARABLE
COHERENT
BENCHMARKING
IMPROVE THE BUSINESS
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Misurazione e Controllo della Performance Industriale
Standard Cost
Represents the Forecast Average Cost for the Following year
- REALISTICALLY ACHIEVABLE for the Production of the foreseen BASIC VOLUME, under
NORMAL CONDITIONS of availability and use of the factors,
taking into account the PROGRAMMES AND PLANS OF
ACTION on which the estimate is based
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Misurazione e Controllo della Performance Industriale
The variances analysis can helping us in understanding:
•
What’s happened in the factory (industrial result)
•
Critical Area and Risks
•
Weakness & Opportunities
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Misurazione e Controllo della Performance Industriale
VOLUME
MIX
INDUSTRIAL
VARIANCES
PRICE
EFFICIENCY
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