Unit 2: Accounting and control of cost elements.

2.1 Direct raw material

Raw material
They are the materials that will be subjected to transformation or manufacturing operations for their physical change.
or chemical, before they can be sold as finished products.

It is divided into:
Direct Raw Material
They are all the materials subject to transformation, which can be fully identified or quantified.
with the finished products
Indirect Raw Material
They are all materials subject to transformation that cannot be identified or quantified.
fully with the finished products.

Areas that intervene with the raw material

The PURCHASING department intervenes from the moment an order for raw material is placed.
(they contact a supplier and request the necessary raw materials).
Similarly, the WAREHOUSE / INVENTORY department is involved, which is the department responsible for
receive the raw material and verify that it meets the quantity and quality that PURCHASING requested from the supplier
your order. Once this verification is done, WAREHOUSE / INVENTORY proceeds, as its name suggests, to
store this raw material to later supply it to the production area as it is requested.
PURCHASING carries out the task of 'external sourcing' (brings raw materials from outside to inside)
the factory), while the WAREHOUSE / INVENTORY carries out the task of 'internal provisioning'
provides the necessary raw materials within the same factory, that is, from the warehouse to the area of
production that requires it).
Likewise, the FINANCE department is in charge of preparing budgets for each department.
of the organization. In this way, PURCHASING must adhere to this budget when planning its
purchases; as well as WAREHOUSE / INVENTORY has its respective budget.

2.1.1 Why is material control important?

One of the most obvious reasons for the importance of control is that even the best plans can fail.
can divert.

Control is used for:

Create better quality. Process failures are detected and the process is corrected to eliminate errors.
Facing change. This is an inescapable part of the environment of any organization. The
markets change, global competition offers new products or services that capture the
public attention. New materials and technologies emerge.
Produce faster cycles: One thing is to recognize consumer demand for a
design, quality, or improved delivery times, and very different is to accelerate the cycles that involve
the development and delivery of those new products and services to customers.
Add value. The fast cycles are a way to gain competitive advantages.
Another way, applied by Japanese management expert Kenichi Ohmae, is to add value.
Trying to match all the movements of the competition can be very costly and
counterproductive.
 Facilitate delegation and teamwork. The contemporary trend towards management
participative also increases the need to delegate authority and to encourage employees
work together as a team.

2.1.2 Ways for material control

Form of information The diary and major assistants:

Purchase request. Accounts payable registration.
Purchase order. Purchase registration.
Warehouse assistant manager.
Of charges and credits: Daily log of materials used.
Debit note for warehouse returns. Shelf card.
Warehouse receipt.
A list of materials. Of relationship:
Returns to the warehouse. Partial inventory list.
Invoices to be paid. Inventory label.
Inventory list.
All of this includes the cost sheet.

2.2 Direct labor

Labor
It is the human effort involved in the process of transforming raw materials into finished products.

It is divided into:
Direct Labor
They are the salaries, benefits, and obligations that arise for all the workers of the factory, whose
Activity can be fully identified or quantified with the finished products.
Indirect Labor
They are the salaries, benefits, and obligations that arise for all workers and employees of the
factory, whose activity cannot be fully identified or quantified with the finished products
2.2.1 What are the ways to control the workforce?

Given the importance of labor as an essential element of production, as well as for

to be the most complex element for its proper management, which is mainly the responsibility of
Human Resources and Accounting department; maintains control through statistical forms, reports, etc.

Most relevant aspects in Labor Control

Hiring The selection of the company that needs personnel for the proper performance of its tasks,
You must request it from the official who has the authority to authorize the hiring of new personnel. Once
Once the written authorization is obtained, it is forwarded to the Personnel Department, mentioning the
characteristics that the person or persons requested must meet in order for the search to proceed
selection of the individual or individuals who will be hired. The means for recruitment are varied,
it could be: to search in the company's personnel record to see if someone has the profile, or that of
third parties outside the company. This request can be made through the newspaper, lawsuits to the exchanges of
work, training companies or any others that provide personnel search and selection services.
When the interested parties go to the company, they must interview with the head of Human Resources in order to conduct them
the necessary tests and choose the most suitable for the position and subsequently draft the individual contract
of work. This outlines the rights and obligations of both the worker and the employer, the work schedule of
work, salary, vacations, among others. After signing the contract, proceed to register it with the RFC and IMSS,
but when the contract is collective, each new member must be accepted by the union.

Record. Later, a file (Personnel Record) is opened where your application is archived.
Employment and the Contract itself; this file aims to contain all the documents of
worker in a single file.

Identification. The Human Resources Department does not finish its work, it must continue to monitor the performance of the staff.
during the time I worked at the company. It should be forming a history of the worker with data that
lead to a better understanding of the individual, as well as those that may provide guidelines about himself,
efficiency, punctuality, honorability, etc. This history must be part of the Personal Record.

Time and labor control. Time control is usually done with a time clock, where you ...
record the entry and exit of each worker through time cards. With these cards, it facilitates
to know which worker is inside the factory; furthermore, the payment procedure is established with the
The days and hours worked are used to calculate the individual earnings of the workers.
When workers are paid on an hourly basis and work with a Cost System
For Production Orders, it is necessary to identify what proportion of worked time corresponds to each
one of the orders. To make this possible, the so-called Time Distribution cards are used; in
The production departments, under the supervision of the manager, register the time stamps. The quotas for
time and amounts are recorded and calculated in the Cost Accounting department. Regarding the control of
labor, when the remuneration to workers is based on the production they carry out, work must be controlled
that are carried out to assess the performance of each individual and see if it is appropriate. The workers
They prepare reports of work executed, which are authorized by the Production Department.

Analysis. If the system used by the company is by production orders, it is necessary to have a report.
from the work carried out by the workers, identified by orders, to determine the corresponding charge for
each one. This se achieve for half of a Report of Work Executed.
If the costing system used is that of Processes, Departments, Phases, etc., it will be enough to mention in the
time cards the job performed by each worker and the department in which they are occupied, for
that the Accounting Department accurately identifies which of those phases, stages, etc., of the
production must charge the labor cost of each operator.

Valuation. It is conditioned by the payment system that has been adopted within the company, as well as that of
Cost Accounting that is used. The most common systems for compensating Labor take
as a base:
Unit of time.
Produced unit.
Of incentives.

Payment
After the labor has been valued, it should be concentrated for payment, which is usually made
per week when it comes to Transformation Industries. For the calculation of the payment, they must be taken into account.
calculate the salary, overtime, and legal deductions. Once the information is available, the payment is scheduled.
It can be by check or bank transfer to a payroll account.

Accounting
For the amount of the payment request, the Accounting Department records a journal entry of:
 Labor to be applied x
Banks x

After, it will make the distribution of the amount paid, which results in a journal entry of:
Work in Progress x
(Subaccount that corresponds according to the adopted cost system)
Labor to be Applied x

The Work in Progress account serves as a bridge account. The previous entry will be formulated with
based on a Labor Analysis Record, which classifies and accumulates the amount paid to the
workers, by Production Orders.
It is advised that within the Accounting Department there be a record of accumulation of
salaries, which can be taken through a table or individual cards. The record serves as a precedent
for the annual calculation of the tax on labor products and the distribution of profits to workers.
This record must be affected monthly by the earnings of each worker.

Efficiency Measurement
In manufacturing industries, it becomes necessary to control the overall efficiency of each department.
of production and of each individual in particular.
For the measurement of efficiency, it is necessary to formulate graphs, relationships, and statistics that show the
performance and utilization of each of the phases of work of the company.
The interpretation of these documents allows for determining at which points there are failures and what they consist of.
these, which makes it easier to take the appropriate measures to correct them. The reports of work done and the
lists of lines are a source of information to structure graphs, relationships, and reference statistics with
the goal of measuring produced units by making a monthly comparison.

2.3 Indirect Manufacturing Costs

They intervene in the transformation of the products but do not fully identify or quantify with the
elaboration of specific production batches.

2.3.1 Accumulation of manufacturing costs

An adequate accumulation of costs provides management with a basis for forecasting the consequences.
economic aspects of their decisions and allows them to make improvements in their production levels...
questions like: What products should be produced?, Should a department be expanded or reduced?, What
Should the selling price be fixed? Should the product line be diversified? And many others that in a
certain moment helps them improve their productive level.

Manufacturing costs. They consist of all the outlays necessary to carry out the
production; due to their nature, they cannot be directly applied to the cost of a product, such as:
indirect materials, indirect labor, and indirect expenses (energy, fuels, insurance, rent, etc.).
Manufacturing costs group the necessary expenditures to achieve that transformation, such as: space,
equipment, tools, driving force, etc.
Similarly, manufacturing costs are divided into direct and indirect.
Other indirect manufacturing expenses group all other expenditures that are derived from the
production cannot be applied accurately to a produced unit. Example: Depreciations,
Amortizations, Fuel, etc.
They are recorded and accumulated in cost accounting through an account that can be called: expenses.
production, manufacturing expenses, indirect production costs, etc.
2.3.2 Regulatory coefficients

The standard rate is determined per hour or per volume in units, using the same system for the calculation.
of the regulatory coefficient, taking into account the technical studies on the productive capacity of the company
And considering the Sales Budget set for the period, once this is obtained, the Costs are determined.
Indirect Production, considering the statistics proposed by Accounting on the subject, adjusting
the known figures and the future figures depending on the sales volume and therefore, the production volume
necessary to cover it.

When it comes to standard costs, the calculation of predetermined indirect production costs in
The function of an estimated capacity is of utmost importance as it serves as a reference for measuring capacity.
effective developed, as a certain volume of indirect production costs must be absorbed by hours
direct work hours employed, which means that if the actual hours or units are less than the
Budgeted, the company has operated at a pace lower than its capacity.

2.3.3 Rectifying coefficients

Margin or percentage of error we had between what we actually spent and what we estimated to spend.
The variations recorded in Work in Process must always be recorded as debited in red or black.
Recorded variations in the variation accounts are recorded as debited or credited but always in black.
estimated costs always the minimum and maximum to correct is the finished production.

The accounts for Work in Process, Finished Goods, and Cost of Goods Sold are
they must correct from Estimated Costs to Historical Costs through the Adjusted Unit Cost
Three variance accounts will be used (Labor, Raw Materials, and Indirect Expenses)
The adjustments of the Ending Inventory accounts of Work in Process must always be loaded to
Finished Production and Cost of Goods Sold, regardless of the corresponding color,
The Work in Process accounts are settled at estimated value.

2.3.4 Proration Application

The prorating is the share that each manufactured item must absorb for this element.
Its accounting cycle begins with the payment or accrual of the items that make it up and that are allocated to each
specific account. Then, they are assigned in accordance with some proportion to the production and
services (primary apportionment). Subsequently, these accumulated costs in the service departments are
redistributed among the first (secondary proration).
Finally, with the indirect costs concentrated exclusively in the production departments
They are allocated to the products through tertiary or final apportionment.

Primary pro rata.

The distribution of costs of the productive departments is based on an appropriate basis, there is no criterion.
universal for choosing a base, but it is chosen according to the characteristics of each factory and the
experience and judgment of the accountant.

Direct material: it is used when the direct material in a product is easily identifiable.

Prime cost is understood as the sum of direct materials plus direct labor and is applied
where the material and direct labor can be easily identified.