What is Direct costs?

They can be defined as the segregation of production costs between those that are fixed and those that vary in direct relation to the volume of production, that is to say, only variable costs are those that should form part of the cost.

Fixed costs should be considered as results of the period in which they are incurred.

FIXED COSTS.

They are those committed, programmed, or planned costs that are incurred to provide and maintain the production and sales capacity of the company.

DIRECT COSTING is also called VARIABLE OR MARGINAL COST.

Main goal:

Provide information about the relationship:

COST >>>>> VOLUME >>>>> PROFIT If you have a budget

CHARACTERISTICS OF DIRECT COSTING.

1. All company costs, production, distribution, administration, and financing are divided into 2 groups. In Fixed and in variables.
2. This primary classification regarding the variability of costs is taken to their respective accounts and does not limit the obtaining of statistical data.
3. Only variable production costs are included in the cost of the unit produced.
4. The direct cost of production is the one that is used to value the inventories of raw materials, in the process, of finished articles and to quantify the cost of sales.
5. All fixed costs are taken directly to the results of the period in which they originate because they are a function of time.
6. The direct costing technique can be applied to known cost systems (historical, predetermined, simple, or standard).
7. In direct costing, the variable cost applied to the product is not a function of time.

STRUCTURE BETWEEN THE INTERDEPENDENCE OF THE COST VOLUME UTILITY RELATIONSHIP.

The structure of the cost volume utility relationship is the mathematical technique in the study of the behavior of costs that is based on the careful segregation of costs according to their variability.

The static assumptions on which the analysis of this interdependence rests are the following:

1. All costs can be classified as direct costs or periodic costs. Variable costs change directly with volume.
2. The costs of the period will not suffer changes during the coverage of the manufacturing capacity.
3. Cost behavior will be linear and direct costs will change in direct proportion to changes in volume.
4. The units of products and sales prices are homogeneous.
5. There is no considerable difference between production and sales in the period being analyzed.

FIXED COSTS.

This cost in a given period and duration of the activity, this cost is called “relevant duration” does not change in total, but becomes progressively smaller on a per unit basis as the volume grows and will be progressively smaller. of a greater amount about the unit, if the aforementioned activities decrease.

That is, these costs are fixed about their amount in pesos and variable about the unit from which it can be deduced that fixed costs are a consequence of long-term management decisions.

In cost-utility relationships and the effect of patterns in the behavior of costs on decision-making, it is useful for precisely making administrative decisions.

The cost-volume-profit analysis determines the volume to be set as an objective, that is, the volume necessary to achieve the desired operating income, one of the most used forms in the cost-volume-profit analysis is the calculation of the break-even point of a company.

CALCULATION OF THE EQUILIBRIUM POINT.

The equilibrium point is found in that sales volume in which there is neither profit nor loss.

The analysis of the break-even point requires a study of the behavior of the company’s fixed and variable costs.

As machines replace workers and factories increase their level of automation, many costs that were previously variable become fixed, such that:

CONTRIBUTION MARGIN.

Contribution margin: represents sales in pesos minus all variable production costs that cover fixed costs and that produce a profit.

Variable costs are those that vary directly with the volume of production.

Fixed costs remain the same in total for a period and a level of production, in this context costs refer to costs that EXPIRE and therefore become EXPENSES in the period in question.

BREAK-EVEN GRAPH.

It schematically depicts the cost-volume relationship and profit and shows the profit or loss that will occur on any sales volume within a relevant range. A break-even chart can better indicate the COST-VOLUME-PROFIT relationship to line managers, as it vividly shows the effect of volume on cost and profit.

A break-even graph expresses revenue, costs, and outlays on the vertical axis.

The horizontal axis indicates the volume, which can be represented by sales units, machine hours, direct labor, capacity percentage, or other useful indicators to express volume.

COSTS BY PROCESSES AND BY PRODUCTION ORDERS.

SYSTEM BY PRODUCTION ORDERS.

This system collects the costs for each physical order or batch.

Identifiable in its passage through the production centers of the plant.

This cost accounting system is applied in cases where production depends on orders or orders made by customers.

Under these conditions, there are 2 control documents.

• The order has a progressive number with the indications and specifications of the kind of work to be carried out.
• For each production order, a record will be opened in the so-called cost sheet that will summarize the 3 elements of the cost of production referring to the manufactured units of a given order.

PROCESS COST SYSTEM.

Through this system, all production costs are gathered during an accounting period and later those costs are distributed among the number of units manufactured during said period. It is applied in those companies with intermittent production, that is, constant, where production does not depend precisely on an order.

Example: the production of purified water, cigarettes, or the pharmaceutical industry.

The determination and registration of the costs are carried out until the moment in which the production has concluded for this reason they are called HISTORICAL COSTS.

THE SYSTEM BY PRODUCTION ORDERS

It is implemented in those industries where the production is unitary, that is, that the articles are produced by specific batches.

G/L ACCOUNTS OF THIS SYSTEM