Accounting for decision-making

Department Business Management

Faculty of Economics and Business Studies

COURSE GUIDE DOCUMENT

(check updates on online campus)

Prof. D. Ignacio García Gómez

Prof. D. David Guijarro Melguizo
david.guijarromelguizo@ceu.es

* The dissemination or total or partial reproduction of this material is not authorized without express permission from the authors and the Department.
If applicable, it will be submitted to the appropriate Courts under copyright regulations.
INTRODUCTION TO COST ACCOUNTING

TOPIC 2
THE COST ALLOCATION PROCESS: PRODUCTION
COST AND FUNCTIONAL ANALYTICAL ACCOUNT

2
 TOPIC 2
THE COST ALLOCATION PROCESS

THEORETICAL PROGRAM:
TOPIC 2. THE COST ALLOCATION PROCESS: PRODUCTION COST AND FUNCTIONAL
ANALYTICAL ACCOUNT

2.1. Identification and cost classification

2.2. Cost localization: Allocation key
2.3. Assigning costs: Cost drivers
2.4. Margins and Performance analysis: Production cost and the structure of the functional income
statement.

• EDUCATIONAL RESOURCES FOR THIS TOPIC (check online campus)

– Teaching guide for this course
– Additional documents for this topic

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 2.1 IDENTIFICATION AND COST CLASSIFICATION

THE COSTING PROCESS

PHASES OF COSTING

PRODUCTS
STARTING DATA

IDENTIFICATION CLASSIFICATION ALLOCATION ASSIGNMENT

If the data of the Financial Accounting were not periodized, they

would be periodized now.

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 2.1 IDENTIFICATION AND COST CLASSIFICATION: PHASES

1st PHASE: IDENTIFICATION

• FINANCIAL ACCOUNTING:

– G3: Opening stock 1st

Dist NON-
– G6: Purchases and expenses INCORPORABLE
2nd
CHARGES (account Dist
630/IMPAIRMENTS)
Depreciation
– G7: Revenue LOADS
(economic
INCORPORABLE
sense)
(rest)

EXTRA LOADS
• ANALYTICAL:

– Factors not provided by Fin. Acc.

BASE ELEMENTS (B.E.)
• THE COMPANY
(FACTORS CONSUMED)

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 2.1 IDENTIFICATION AND COST CLASSIFICATION: PHASES

2nd PHASE: CLASSIFICATION

COST OF PRODUCTS
Direct Costs
Base (REGARDING PRODUCTS)

Elements
Indirect Costs
(REGARDING PRODUCTS)

• The cost factors consumed in the period (base elements) are classified as
direct and indirect, with respect to the products.
• Note that a direct cost with respect to the products, is also with respect to
the center in which it is consumed

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 2.1 IDENTIFICATION AND COST CLASSIFICATION: PHASES

3rd PHASE: LOCATION (DIRECT COSTS AND PRIMARY DISTRIBUTION OF INDIRECT COSTS)

PRODUCTS

Line 1 (WOOD)
Indirect Labour
managers/supervisor Line 2 (METALS) Main Centers
s
DIRECT
Line 3 (ASSEMBLY)
COSTS Rivets

Insurance premiums?
INDIREC Energy consumption?
T COSTS Iindirect Labour as
Production Manager?

ADMINISTRATION
They’ll
need to be MAINTENANCE Auxiliary Centers
shared
CLEANING

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 2.2 COST LOCALIZATION: ALLOCATION KEY

COST CENTERS

CONCEPT
INDIRECT COST ACCUMULATION CENTRES
REAL DIVISIONS OF THE COMPANY
• COMPUTING CENTERS

GROUP HOMOGENEOUS COSTS

• UNIT OF WORK OR TRANSFER

CLASSIFICATION
MAIN: Work on product (purchases, sales, all production lines)
AUXILIARY: They work for other centers (maintenance, cleaning,
personnel, accounting, quality control, etc.). These are support centers.
MIXED: They are, simultaneously, auxiliary and main

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 2.2 COST LOCALIZATION: ALLOCATION KEY

COST CENTERS

• On a first consideration, it is usual to match the cost centers with the

functions performed in the company, which, in general, are:

FUNCTION/CENTER COST of.........

Supply Purchasing, procurement
Production (1) Manufacturing, processing, production
Sales&Marketing Distribution, marketing, sales

Administration Genral Administration, HR, etc

Financing Financing
(1) Commercial companies do not perform this function

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 2.3 ASSIGNING COST: COST DRIVERS

PRIMARY DISTRIBUTION: INDIRECT LOAD RECLASSIFICATION TABLE

*CONCEPT
*PRACTICAL PROVISION
CONCEPT TOTAL P1 P2 ..... A1 A2 .....
OTHER SUPPLIES (1) and (2) Consumption of Indirect Materials:
Calculate: BOH + Purchases – EOH*
INDIRECT LABOUR (2) Calculate: Salaries, Social security, benefits, other costs for Indirect Labour
OTHER REST OF ACCOUNTS (COST Deperciation should be calculated by value in economic terms, not financial
ACCOUNTS IN G6 – 630 FRO SPANISH accounting (revisit topic 1)
GAAP)
INTEREST OF EQUITY (2)

TOTAL PRIMARY COSTS ∑ ∑ ∑ ∑ ∑ ∑

(1) All materials that one by one, are other than Direct Materials (Raws)
(2) The factors consumed in a given center, we allocated to that specific center.
Those factors that are common to several centers should be using DISTRIBUTION KEYS

*BOH stands for Beggining on hand and EOH for Endo of Hand. In this case the value of inventory at the beginning and at the
end of a period.

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 2.3 ASSIGNING COST: COST DRIVERS

DISTRIBUTION KEYS
• CONCEPT: Tool that will allow the distribution of indirect costs, common to several
carriers, among them.
• NATURE
– VARIABLES (hours/person, hours/machine, etc.)
– PARAMETERS (m², m³, etc.)
• REQUIREMENTS
– INDICATIVE (causality criterion)
• Gives a clear idea, as close as possible, about the consumption of the factor to
be distributed, for each carrier common to that factor
– OPERATIVE (economic criterion)

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 2.3 ASSIGNING COST: COST DRIVERS

EXAMPLE OF INDIRECT LOAD RECLASSIFICATION TABLE

CONCEPT TOTAL PROCUREMENT PRODUCTION SALES ADMIN QUALITY FINANCIAL
CONTROL
Supplies(1) 250.000 40.000 100.000 20.000 50.000 40.000

Indirect Labour 7.200.000 800.000 1.600.000 1.600.000 2.400.000 800.000

Advertising 500.000 500.000

Insurance premiums (2) 200.000 20.000 90.000 20.000 60.000 10.000

Auxiliary materials 50.000 50.000

Depreciation (machinery) 75.000 75.000

Depreciation (building) 625.000 62.500 281.250 62.500 187.500 31.250

(3)
Loans interests 75.000 75.000

PRIMARY COSTS 8.975.000 922.500 2.196.250 2.202.500 2.697.500 881.250 75.000

(1) Installed Power Kw/h

(2) Square metres (m2)
(3) Square metres (m2)

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 2.3 ASSIGNING COST: COST DRIVERS

3rd PHASE: SECONDARY DISTRIBUTION OF INDIRECT COSTS

PRODUCTS
Line 1 (WOOD)
Line 2 (METALS) Main Centers

Line 3 (ASSEMBLY)

1st Distrb 2nd Distrb

ADMINISTRATION
MAINTENANCE Auxiliary Centers
CLEANING

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 2.3 ASSIGNING COST: COST DRIVERS

4TH PHASE: ALLOCATION TO PRODUCTS

GEN. MANUF. COSTS

PRODUCTS
ALLOCATION
(Direct Cost) (DIRECT)
T1 (WOOD)
IMPUTATION (Work
(Inidirect Cost) Units)
(Direct Cost)
Main costs T2 (METALS)
(Inidirect Cost)
(Direct Cost)
T3 (ASSEMBLY)
(Inidirect Cost)

COMMON,
DISTRIBUTE
(WORK UNIT)

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 2.3 ASSIGNING COST: COST DRIVERS
WORK UNIT OR TRANSFER UNIT

• Tool that allows the transfer of common indirect costs, either to another center (2nd distribution), or to
the finally to the products (allocation)
– REPRESENTATIVE VARIABLE OF COST CENTERS

• DISTRIBUTION KEY

– INDICATIVE

– OPERATIVENESS

– REPRESENTATIVE VARIABLE OF THE ACTIVITY OF THE COST CENTER

• PURPOSES
– ALLOCATION OF INDIRECT COSTS of a CENTRE

– ANALYSIS OF THE EFFICIENCY OF THE CENTER

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 2.3 ASSIGNING COST: COST DRIVERS
2nd DISTRIBUTION

• Operation through which, the costs that have corresponded to the auxiliary centers in the
1ST DISTRIBUTION, will be transferred to the main cost centers.
• TYPES:
– DIRECT
– INDIRECT
• ALGEBRAIC: Solution of a system of n equations with n unknowns where n =
number of auxiliary centers that subdistribute their costs
• UNILATERAL OR CASCADING
• ITERATIVE
• APPROXIMATE
• CONSEQUENCES: After the 2nd DISTRIBUTION, the auxiliary centers will be empty (at
zero costs), with all the Indirect costs concentrated in the main centers.

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 2.3 ASSIGNING COST: COST DRIVERS
EXAMPLE OF DIRECT 2nd DISTRIBUTION
CONCEPT TOTAL PROCUREMENT PRODUCTION SALES ADMIN QUALITY FINANCIAL
CONTROL
Supplies 250.000 40.000 100.000 20.000 50.000 40.000

Indirect Labour 7.200.000 800.000 1.600.000 1.600.000 2.400.000 800.000

Advertising 500.000 500.000

Insurance premiums 200.000 20.000 90.000 20.000 60.000 10.000

Auxiliary materials 50.000 50.000

Deprec. (machinery) 75.000 75.000

Deprec. (building) 625.000 62.500 281.250 62.500 187.500 31.250

Int. Loans 75.000 75.000

PRIMARY COSTS 8.975.000 922.500 2.196.250 2.202.500 2.697.500 881.250 75.000

Quality Control 881.250 - 881.250

Financial 75.000 -75.000

SECONDARY COSTS 8.975.000 922.500 3.077.500 2.202.500 2.772.500 0 0

WORK UNITS Kgs purchased Machine hours Units sold

Nº of units of work 150.000 2.500 200.000

Value of the work 6,15 €/kg 1.231€/machine 11€/pcsold

hours

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 2.3 ASSIGNING COST: COST DRIVERS
EXAMPLE OF INDIRECT 2nd DISTRIBUTION

Centres Primary Costs Work units number. Of

€ work units

Training 4.100 Training hours 115

IT 8.950 Services 204

provided
Sales 12.560

Production 7.345
Labeling and 6.000
Packaging

General 25.000
Services

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 2.3 ASSIGNING COST: COST DRIVERS
EXAMPLE OF INDIRECT 2nd DISTRIBUTION

• The Training Center served 15 hours for itself, 10 for IT, 40 for
Sales, the rest for Labeling and Packaging.

• The IT center was distributed as follows: 50 services for Training,

80 for Sales, 70 for Production and the rest was self-consumption.
Solution:
4,100 + 50s = 100h
8.950 + 10h = 200s
h= 65 €
S= 48 €
* Not including the services that they do for themselves as they will need to be distributed therefore

19

19
 2.3 ASSIGNING COST: COST DRIVERS
EXAMPLE OF INDIRECT 2nd DISTRIBUTION
(115 – 15) h = 4.100 € + 50 s (204 – 4) s = 8.950 € + 10 h h
= 65 €s = 48 €

Concept TOTAL Training IT Sales Production Labeling General S.

and
Packaging
Primary costs 63.955 4.100 8.950 12.560 7.345 6.000 25.000

Distrib. Training (6.500) 650 2.600 3.250

(10h) (40h) (50h)
Distrib. 2.400 (9.600) 3.840 3.360
IT (50s) (80s) (70s)
Total 2nd Distrib. 2.400 650 6.440 3.360 3.250 ----

TOTAL COSTS 63.955 0 0 19.000 10.705 9.250 25.000

WORK UNITS Service Hours

provided
Nº of units of work

Value of the work

unit
20

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 2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

DIRECT COSTS: THE COST OF MATERIALS AND DIRECT LABOUR

COST OF MATERIALS (2):

• Purchasing or Procurement Function:
» Selection of suppliers.

» Negotiation of prices and contracts.

» Issuance and monitoring of orders.

• Warehouse Function:
» Reception and verification of orders.

» Storage of materials.

» Delivery of materials to the factory.

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

COST OF ENTRY AND DEPARTURE

COST Cost of Procurement

Cost of ACQUISITION COST
OF
RAW MATS. Purchase costs
EXIT purchases
Purchase price
OF
WAREHOUS Stocking/
E Warehouse
costs Gross purchases
- Returns
- Rappels
- Discounts
= NET PURCHASES

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

COST OF ENTRY AND DEPARTURE

• Purchase expenses: Tariffs , Transport, Insurance.

• Purchase costs:
– Two options:
– Working with real data Delay getting information
– Working with Budget Data Calculating Deviations

• Purchase Price Valuation (PPV):

– Purchases – Returns - Rappels - Discounts
• Purchases costs or Cost of warehouse entry:
Purchase price
+ Purchase expenses
+ Purchase Costs
= Purchase costs of raw mats. OR COST OF WAREHOUSE ENTRY

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 2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

Notes on Procurement cost

• EXTERNAL: (Purchase costs)

– Transport
– Insurance
– Taxes, etc.
(Normally, usually being accounted by Financial Accounting and included in
the account "purchases of...")

• INTERNAL: (Indirect costs of the purchasing center)

– Staff costs
– Depreciations
– Power consumption, etc.
(calculated by Cost Accounting itself)

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

COST OF ENTRY AND DEPARTURE

• Holding Costs/Warehouse Costs

– Costs related to the existence of the warehouse
– Costs that depend on the nature and quantity of the items stored

Input valuation:
Inventory valuation under IAS 2:
Defines the purchase price as the one as per the invoice plus all additional
expenses that occur until the goods are in storage (freights, custom taxes,
insurance, etc.).

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

COST OF ENTRY AND DEPARTURE

Stock/Inventory valuation:
Gross purchases
- Returns
- Rappels
- Discounts over early payment
= Net purchases
+ Procurement Costs
= COST OF ENTRY INTO WAREHOUSE OR
COST OF PURCHASES

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PRACTICAL PROVISION FOR THE CALCULATION
OF CONSUMPTION

(1) (2) (1) X(2)

CONCEPTS
Nº OF UDS COST/UD. TOTAL

Opening stock 100 10 1.000

• Gross purchases 120 12 1.440

-Returns (10) 12 (120)

-Rappels 110 (ratio) 1.36 (150)

= Net purchases 110 (ratio) 10.64 1.170

+ Procurement Indirect
110 (ratio) 0.36 40
costs
= Warehouse entry cost 110 11 1.210

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

Output valuation:
Treatment of holding costs
1. Based on the entries.
2. Based on the outputs.
3. Based on all units stored during the period.

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 2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

Treatment of holding / storage costs according to inputs:

IAS 2 bans:
• Any adjustment when transferring the valuation data to the financial accounting.
• In case there is some closing stocks remaining:
• Lower consumption of raw materials.
• Higher margins and results.
• Overvalued inventories.
• Transfer of warehouse costs from this period to the next via final stocks of
raw materials.

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 THE COST OF MATERIALS

Treatment of holding / storage costs according to

outputs:
• In case final stocks remain:
• Higher consumption of raw materials.
• Lower margins and results.
• Inventories not overvalued.
• The warehouse costs for this period are fully assumed by the income
statement for that period.
As a general rule:

WAREHOUSE OUTPUT COST (CONSUMPTION) = INPUT COST + STORAGE COSTS

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 2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

EXAMPLE 2:
Based on the following data:

Raw materials inventory: September 2024.

CONCEPT QUANTITY UNITARY TOTAL

OPENING STOCK 5 tons 10 €/tn 50 €

GROSS PURCHASES 20 tons 12€/tn 240 €

RAPPELS 20 €
PROCUREMENT COSTS 80 €

WAREHOUSE COSTS 100 €

CLOSING STOCK 10 tons ? ?
CONSUMPTION ? ? ?

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 2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

Calculate the consumption and valuation of final stocks of raw materials at

September 30, taking into account that the criterion of exit from warehouse is
FIFO, under the following 2 hypotheses:
1º.- The company passes on the warehouse costs on the inputs.
2º.- The company passes on the warehouse costs on the outputs.

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

Hypothesis 1: The company passes on the warehouse costs on the inputs.

CONCEPT QUANTITY UNITARY TOTAL

OPENING STOCK 5 TN 10€/TN 50 €

GROSS PURCHASES 20 TN 12€/TN 240 €
- RAPPEL (20€)
- RETURNS -0
= NETS PURCHASES 20 TN 11 €/TN 220€
+ PROCUREMENT COSTS 80€
+ WAREHOUSE COSTS 100€
=ENTRY COST 20 TN 20 €/TN 400€

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 2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

Hypothesis 1: The company passes on the warehouse costs on the inputs.

RAW MATS. WAREHOUSE

Op. Stock 5 tn *10 €/tn

Purchases 20 tn * 20 E/tn
CONSUMPTION 15 TN

Closing stock 10 tn

Consumption (FIFO): (5tn * 10 €/tn) + (10tn * 20 €/tn) = 250€

Final stocks: (10 tn * 20 €/tn) = 200 €

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

Hypothesis 2: The company passes on the warehouse costs on the outputs.

CONCEPT QUANTITY UNITARY TOTAL

CLOSING STOCK 5 TN 10€/TN 50 €
GROSS PURCHASES 20 TN 12€/TN 240 €

- RAPPEL (20€)
- RETURNS -0
= NET PURCHASES 20 TN 11 €/TN 220€
+ PROCUREMENT COSTS 80€

=ENTRY COST 20 TN 15 €/TN 300€

40
2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement
COST OF ENTRY AND DEPARTURE

Hypothesis 2: The company passes on the warehouse costs on the outputs.

RAW MATS. WAREHOUSE

Opening stock 5 tn *10 €/tn

Purchases 20 tn * 15 €/tn CONSUMPTION 15 TN

Closing stock 10 tn

Consumption (FIFO): (5tn * 10 €/tn) + (10tn * 15€/tn) + 100 € = 300 €

Final stocks: (10 tn * 15€/tn) = 150 €

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 2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

CALCULATION OF THE PRODUCTION COST (PC)

PRODUCT COST = DIRECT COST + INDIRECT COSTS =

=Raw Materials (consumption) + LABOUR COST + MFG OVERHEADS
PURCAHSE COST + Opening Stock – Closing Stock
Net Puchases + Procurement Costs
Gross purchases – Return – early payment discounts

The cost of production is calculated for both finished products and semi-finished products and/or those in
progress

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2.4. Margins and Performance analysis: Production cost and the
structure of the functional income statement

FUNCTIONAL P&L ACCOUNT

P1..........TOTAL Pn
Net sales...........................x...............x.........x
- Cost fo sales........... (x)............ (x)......(x)
= Gross Margin................x...............x..........x
- Distribut. I C.......... (x)............ (x)........ (x)
= Com Margin...................x...............x..........x
- Admin. I C..............................................((x)
= OPERATING RESULT...........................x
± Financial Result.......................................(x)
= ORDINARY RESULT.............................x
± Non recurring / ectra. result............... (x)
= Net analytical result.................................x
± Incorporation Diff................................... (x)
= Profit before Taxes (as per Fin Acc)...x

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