Cost Allocation Formulas Explained
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ScribdTranslationsCost Allocation Formulas Explained
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ScribdTranslationsCOST ALLOCATION FORMULAS
An entity must use the same cost allocation formula for all.
the inventories with nature and similar use for it.
Regarding inventories of different nature and use, the application of
Different cost allocation formulas can be justified.
The unit cost of inventories must be assigned using one of the
following formulas: identified costs, average costs, and first entries
first outings (PEPS).
For example, the inventories used in an operating segment may have
a different use of the same type of inventory that is used in another segment
operational of the entity. However, a difference in the geographical location
of the inventories or in the corresponding tax rules, by itself, does not
it is sufficient to justify the use of different cost allocation formulas.
IDENTIFIED COSTS
The cost of inventory items that are normally not
interchangeable with each other and of articles or services produced and
assigned for specific projects must be allocated using the
specific identification of its individual costs. The identification
specific means assigning the costs to individual items of the
inventory. This is the appropriate treatment for items that
They are segregated for a specific project, without considering whether those
goods were purchased or produced by the entity. However, the
specific identification of costs is inappropriate when in the
the inventory has large numbers of items that are normally
interchangeable with each other, since, in these circumstances, the procedure
to select items that will remain in the inventories can
to be used to achieve predetermined effects on profit or loss.
AVERAGE COSTS
According to the average cost formula, the cost of each item
it should be determined by the average cost of similar items
at the beginning of a period adding the cost of similar items
purchased or produced during this. The average can be calculated
periodically or as new items enter the inventory,
whether acquired or produced.
It is based on the average cost of the inventory during the period.
Determine the cost of the initial inventory by multiplying the quantity of
units to the start for his cost
Determine the cost of all purchases by multiplying the quantity of
units purchased for their price
Obtain the total cost of the goods available for sale
by adding the previous results (CT)
Obtain the total number of units available for sale (NT)
Obtain the average cost of goods by dividing CT by NT
Calculate the cost of goods sold by multiplying the cost
average of the goods by the final inventory
FIRST IN FIRST OUT (FIFO)
4.1The "FIFO" formula is based on the assumption that the first
items entering the warehouse or production are the first to leave;
so the inventories at the end of each fiscal year are recognized at
the latest acquisition or production prices, while in
Sales costs are those that correspond to inventory.
initial and the first purchases or production costs of the period. The
the physical handling of the items does not necessarily have to match
the way its cost is allocated and to achieve correct allocation
under the FIFO formula, layers of must be established and controlled
inventory according to the dates of acquisition or production of it.
This method presents the final inventory at its most current cost. When
inventory costs increase (price increase) this method gives
as a result a higher profit and therefore a tax on the
wholesale.
The first costs that entered the inventory are the first costs.
that go to the cost of goods sold.
Determine the cost of the initial inventory by multiplying the quantity of
units to start for you cost
Determine the cost of all purchases by multiplying the quantity of
units purchased for their price
Obtain the total cost of goods available for sale
through the sum of the previous results (CT)
Calculation of the final inventory cost: as the sum of the costs by the
quantities that make up the final inventory (Ci)
Obtain the cost of goods sold, calculate the difference between
el costo total (CT) y el del inventario final (Ci)
One of the advantages of using the product Kardex to manage your inventory
that you will have your company's movements updated and if you maintain it
In this way, you will always be able to count on the total cost of the movements that
you carry out in your warehouse.
Unlike the weighted average method where the products that are going
As you buy, they accumulate to theinventoryand an average cost is obtained between
the stocks that are held and those that are acquired, in the FIFO you will know the
separate cost of the movements of your warehouse both in entries and
in exits.
Another advantage you havewhen using the FIFO methodDoes it have validity?
accountable since the inventories at the end of the fiscal year will be recognized as
latest acquisition or production prices, while in the results
The cost of goods sold corresponds to the initial inventory, this is found
approved by the NIF (Financial Reporting Standards) in its bulletin C-4.
The physical handling of the products does not have to match the way in which
that its cost is assigned to achieve this under the FIFO method must be
establish and control the inventory phases according to the date of
acquisition.
An alternativeto carry this method in your inventories is by means of
a system or software that has the ability to emitthe reports that you
the company needs, like the kardex.
COST ACCUMULATION SYSTEM
Companies seek profit by supplying their customers with goods and services.
necessary.
To find this utility, it is continuously necessary to make decisions that
be based on updated and appropriate information generated by the
financial accounting
Cost accumulation systems in manufacturing processes are
classified into two, which are:
1) Cost Accumulation System by Work Orders.
2) Process Cost Accumulation System.
COST ACCUMULATION SYSTEM BY ORDERS
WORK
The procedures for recording operations by Work Orders
They must be adapted to the operational characteristics of the company.
PROCEDURE
The system registration procedure to accumulate costs for
Work Orders are the set of methods employed in the
control of the respective operations, generally applicable to
industries that manufacture their products through assembly by
lots or unique products, not in series.
This control procedure is mainly used in
industries that perform special jobs or that manufacture
products on request and also in those in which it is
possible to separate the costs of materials and labor,
employees in a manufacturing order.
CHARACTERISTICS
It allows to gather, separately, each of the elements.
of the cost for each work order, completed or in
process.
It allows the possibility of parceling and subdividing production.
Each order constitutes a document in which it is recorded
each element of the cost, to determine the unit cost.
ADVANTAGES
It must be known in detail the production cost of each
article.
It is known the value of the production in process, without need
to estimate it, nor to carry out physical inventories.
At the moment the production cost is known and the
the value of Work in Process inventory will be more
easy to make future estimates.
DISADVANTAGES
Its operating cost is high due to the great work that
it is required to obtain the data in detail,
the same that must be applied to each 'work order'.
By virtue of this meticulous work, greater
time to obtain production costs, reason for the
What data is provided to the management?
they may turn out to be untimely.
COST ACCUMULATION SYSTEM BY PROCESSES
The procedures for recording operations by Processes are applied.
when the production characteristics are continuous and stable.
The system registration procedure to accumulate costs for
Process is the set of methods used in the control of the
respective operations, generally applicable to industries that
they manufacture their products in series, identical and in bulk.
This control procedure is used in industries that produce
standardized articles in their design characteristics, measurements, and batches.
CHARACTERISTICS
The use of a production cost report to collect,
summarize and compute total and unit costs.
Production is accumulated and reported by department.
The work in process at the end of a period is expressed
again in terms of complete units.
The total cost charged to a department is divided among the
total equivalent production for the department in order to
determine an average cost for a specific period.
The cost of lost and damaged units is calculated and
add to the cost of the finished units
satisfactorily.
ADVANTAGES
Less costly administrative procedure.
Determine the cost unit per department,
considering it as a finished product.
Global cost analysis procedures.
DISADVANTAGES
Management of average unit costs.
Management of Equivalent Production.