Costing methods: absorption costing and direct costing. Calculation using the direct costing method What does the direct costing method mean?
Product cost calculation can be done using two methods:
- Calculation when taking into account all costs.
- Costing when taking into account only direct costs (Direct-Costing).
The method based on transferring all direct costs to sold products, regardless of the volume produced, is called “direct costing”.
Adherents of this method of calculation are confident that fixed costs have nothing to do with production volume or assortment, they should be kept in any case, their value always remains unchanged, so they should not affect the cost of a unit of finished products.
Direct costing method is applicable in internal situations when making production decisions:
- compare the profitability of several products,
- choose the most efficient and profitable production,
- make a decision to discontinue production of a specific product or to launch a new line.
When choosing this accounting method, the appearance of the reporting completely changes. Direct costing with its margin approach is suitable for short-term solutions.
The method is designed to compare costs that can be controlled. Calculating direct costs allows you to recreate an accurate picture of the relationships between profitability, output and controllable costs.
The main advantage of direct costing is the ability to determine the ratio of profit and the number of products produced, while it does not oblige you to take inventory into account.
Typical postings for the direct costing method
Typical postings taking into account general and general production costs, as well as costs from main and auxiliary production. Let's consider the procedure for determining the calculation results based on the cost of manufactured products, work rendered, services using the direct cost method in transactions:
| Account Dt | Kt account | Wiring description | Transaction amount | A document base |
| 90.02 | Transfer of production overhead costs to products sold during the reporting period | Amount of overhead costs | Accounting certificate-calculation | |
| 90.02 | Transfer of general business expenses to the cost of shipped products for the reporting period | Amount of general business expenses | Accounting certificate-calculation | |
| Determining the cost of production in auxiliary production | Product cost | Accounting certificate-calculation | ||
| 20 | Determining the cost of production at the main production facilities | Cost of manufactured products | Accounting certificate-calculation | |
| 90.02 | 20 | Determining the cost of services provided and work performed | Cost of services, work | Accounting certificate-calculation |
Direct costing is one of the cost accounting methods. When it appeared in theory and began to be introduced into practice (1936), it meant dividing costs into variable and fixed costs and keeping separate records of them. In the article we will talk about the direct costing method, consider what the features of direct costing are in the modern economy, what are its advantages and disadvantages compared to other calculation methods.
The essence of direct costing and its application
Originating during the Great Depression in the USA, direct costing (DC) received its development and recognition with the onset of the 50s of the last century. It was during this period that many companies increased production capacity, the scale of production of goods and worked to find ways to minimize costs. Lower production costs (c/c) increased their competitiveness and strengthened their position in the external and internal markets.
Questions about how to most accurately determine the cost of individual products, calculate the break-even point, how to find reserves for reducing prices - all this became the basis for the development of DC. The fundamental principle of DC and its distinctive feature is that the cost of manufactured products is planned, and then reflected in the accounts only in terms of variable costs - completely dependent on fluctuations in output volume.
Calculation using the DC method is applicable to resolving internal situations at an enterprise when it is necessary to make an operational production decision:
- choose the production that is most efficient and will bring greater profits;
- compare the profitability level of several products;
- justify the decision that the production of a certain type of product should be discontinued, a new line should be launched and the assortment should be changed;
Important! The DC method makes it possible to compare costs that can be controlled. Fixed costs are not included in the calculation of s/s. They are written off from the amount of profit received in the period of time in which the expenses were actually incurred.
Diagram of the relationship between indicators in DC
- Marginal income (MR).
- Profit (P).
MD is the difference between sales revenue and variable costs. It contains the sum of fixed costs and profit received. In the case of using DC, the report on financial results is built according to a scheme consisting of several steps:
Sales income (D)
Variable costs (Zper).
MD = D – Zper
Fixed costs (Zpost)
P = MD – Zpost
Types of accounting according to DC
Domestic practice identifies two variations of management accounting based on DC:
- Simple – separate accounting is organized for financial and management accounts. Direct variable costs are included in the s/s composition.
- Developed - integration of accounting using accounts 20-29 - usual for cost accounting. S/s also includes that part of indirect general economic costs that can be designated as variables (conditionally variable).
Important! The main problem of DC is that it is often difficult to separate variable costs from fixed ones, since in practice they are not easy to classify and unambiguously include in a certain group.
Elements of cost accounting for direct costing
Using direct costing in practice, it is necessary to calculate the real cost of manufactured products. It should include cost elements depending on:
- type of expenses;
- places of their formation;
- cost carriers (individual units);
- a specific period.
These components should be taken into account in both fixed and variable costs.
Typical accounting entries for direct costing
The DC system provides for the reflection of business operations with the following records:
| Debit | Credit | Description |
| 90.2 | 25 | general production costs are transferred to sold products |
| 90.2 | 26 | General business costs are included in the cost of shipped products |
| 40 | 23 | Definition of s/s in auxiliary production |
| 40 | 20 | S/s of the main production |
| 90.2 | 20 | C/s of work performed and specified services |
Advanced accounting - in the example.
Example 1. The company keeps records of agricultural products on the account. 40. Closes it monthly. If there are deviations from the normative and actual data, they are transferred to the financial result.
- The amount of general business expenses for the month is 60 thousand rubles.
- Electricity spent – 120 thousand rubles.
Product data:
| Product | Quantity, pcs. | S/s normative | Price |
| A | 2000 | 100,00 | 300,00 |
| B | 2000 | 150,00 | 400,00 |
Actual costs for materials used:
- A – 70 thousand;
- B – 50 thousand
The accounting scheme according to the DC is as follows:
Dt 43 Kt 40 100 thousand (1000·100) capitalized ed. And according to the s/s normative;
Dt 43 Kt 40 150 thousand (1000·150) ed. B according to s/s norms. capitalized;
D 62 Kt 90 300 thousand (1000·300) reflection of revenue from sales of publication. A;
Dt 90 Kt 43 100 thousand normative s/s sold items. A written off;
D 62 Kt 90 400 thousand (1000·400) revenue from the sale of publications. B;
Dt 90 Kt 43 150 thousand s/s ed. B written off;
After the month has come to an end:
Dt 26 Kt 70 (02, 69) 60 thousand general business expenses are reflected;
Dt 90 Kt 26 60 thousand general household. monthly expenses written off;
Dt 25 Kt 76,120 thousand – actual total electricity costs;
Dt 20 Kt 25 51 432 (120 thousand · 0.4286) – electrical power. assigned to A;
Dt 20 Kt 25 68 568 (120 thousand · 0.4286) – electrical power. - to B;
Dt 20 Kt 10 70 thousand materials written off to A;
Dt 20 Kt 10 50 thousand write-off of materials at B;
Dt 40 Kt 20,121,432 (51,432+70 thousand) costs for A;
Dt 40 Kt 20,118,568 (68,568+50 thousand) costs for B;
Dt 90 Kt 40 21 432 (121 432-100 thousand) – write-off of overexpenditure according to A;
Dt 90 Kt 40 31 432 (150 thousand - 118 568) - savings on B are negated.
A separate sub-account is allocated for each product. In this example, the product is completely sold. Balances, if available, should be reflected in accounting according to the abbreviated standard s/s.
Features of direct costing – advantages and disadvantages
The advantages (+) and disadvantages of DC are given in the table:
| Direct costing | |
| + | – |
| The bulk of the costs can be sent to the tax base. This is done due to the fact that general business expenses are written off to the financial result at a time | Ambiguity of expenses of a constant nature. It's not always easy to isolate them |
| Accounting is somewhat simplified, since there is no need to distribute accounts. 26 on account 20 | There is no clear and unambiguous clarity about the manufactured cost of the product, its full cost |
| The level of “s/s management of the company” is always visible. This means that it is quite possible to make adjustments quickly | To determine the full s/s GP or work in progress, one cannot do without additional distribution of costs of a semi-fixed nature |
| S/s GP does not contain “extraneous” costs not related to s/s production | Discrepancy between the results of accounting and management accounting |
| The pricing policy is much more effective. The price allows you to get maximum profit | There is a distortion in the amount of annual profit due to the fact that work in progress balances are assessed taking into account only variable costs |
| Based on the calculation of the s/s unit, you can determine the break-even point | Overhead costs are out of the scope of cost control |
Standard costing and direct costing methods – which one to choose?
The standard costing method has been successfully used in accounting for many years. It is defined as a full cost method, since variable costs are included in the cost of a unit of goods.
When using standard costing:
- the bulk of the company's costs are included in the tax base as the products are sold;
- If a company has significant work-in-progress balances, its tax base will increase markedly as expenses are “tracked on the warehouse shelves.”
When using DC:
- The amount of income tax is significantly reduced due to the fact that variable costs are immediately included in the financial result without waiting for the sale of products;
- if there are large balances of GP in the warehouse, the tax base may also increase.
Example 2. Initial data:
- Annual production is 200 units.
- It will be sold quarterly in identical batches (50 units each).
- Price (market) per piece. – 2,500 rub.
- permanent – 100 thousand rubles.
- variables – 100 thousand rubles.
We will calculate the financial result and tax (on profit).
1) For the standard costing method, thousand rubles.
| Quarter | S/s units cont. | Implementation | Fin. result | Tax | |||
| Quantity | Price | S/s | Revenue | ||||
| І | 1,00 | 50 | 2,50 | 50,00 | 125,00 | 75,00 | 15,00 |
| ІІ | 50 | 50,00 | 125,00 | 75,00 | 15,00 | ||
| ІІІ | 50 | 50,00 | 125,00 | 75,00 | 15,00 | ||
| IV | 50 | 50,00 | 125,00 | 75,00 | 15,00 | ||
2) For the direct costing method, thousand rubles.
| Quarter | S/s units cont. | Implementation | Fin. result | Tax | |||
| Col. | Price | S/s | Revenue | ||||
| І | 0,500 | 50 | 2,50 | 125,00 | 125,00 | 0 | – |
| ІІ | 50 | 25,00 | 125,00 | 100,00 | 20,00 | ||
| ІІІ | 50 | 25,00 | 125,00 | 100,00 | 20,00 | ||
| IV | 50 | 25,00 | 125,00 | 100,00 | 20,00 | ||
Calculations show that with DC it is possible to delay payment. But the tax increases in subsequent quarters, and in general for the year its amount does not differ. Most often, companies use a mixed method - production variable costs are distributed, and non-production variables are immediately sent to the financial result.
Standard costing has the following undeniable advantages:
- With sufficiently high accuracy, it allows you to determine the full cost of individual products before their production begins. This is important for the company’s pricing process.
- Allows you to identify types of specific costs that influenced financial results. For example, after the end of the reporting period, it is possible, by comparing the actual prices for spare parts and materials with the planned ones, to establish that it is because of their growth that the costs of repair work have increased.
Involving DC in planning and accounting makes it possible to determine the relationship between the profitability of the company, its expenses, which are under control, and the volume of output. For standard costing, such opportunities are limited.
Features of direct costing for companies with simplified tax system
Account 26 for companies using the simplified tax system is closed, taking into account some features. The amount of costs is transferred from Kt of this account to Dt account. 90. Read also the article: → "". The amount of general business expenses is determined as the difference between the account turnover in debit and credit.
Costs in the organization should be distributed by type of activity. The distribution base is based on revenue by type of business. In its absence, the account may remain open. It must be closed manually. The sequence and regulations of such work are determined by the accountant, taking into account the features that are inherent in each specific enterprise.
Top 4 popular questions
Question No. 1. What is the main disadvantage of DC?
First of all, with DC you can make a mistake in determining the average production costs. As a result, the company takes unnecessary risks when pursuing its pricing policy.
Question No. 2. What is income called “marginal”?
This financial indicator is the difference between sales revenue and variable costs. It can also be calculated by adding profits and fixed expenses.
Question No. 3. What is absorption costing?
This is another method used in s/s calculation. When using it, all costs are distributed between the products sold and their balances in warehouses.
Question No. 4. What is the difference between absorption costing and DC?
The difference is that fixed expenses are distributed between reporting periods using different methods.
When using the DC method, c/c is formed on the basis of semi-variable costs. This must be written down in a separate paragraph of the accounting policy. The main advantage of DC as a management system is its high level of efficiency in making operational decisions.
The cost of products, works, services is one of the most important indicators necessary for business management. However, many are concerned with the question: can the cost really be “true”? Yes, if a direct costing system is used to calculate and generate financial results.
The essence of direct costing
The name “direct costing”, or “direct costing”, introduced in 1936 by the American D. Harris in his work, means “accounting for direct costs”. It does not fully reflect the essence of the system, because the main thing in it is the organization of separate accounting of variable and fixed costs and the use of its advantages in order to improve management efficiency. Therefore, the variable cost accounting system is often called Variable Costing.
The main characteristic of direct costing is the division of costs into fixed and variable depending on changes in production volume. In this case, only variable costs are included in the cost of products, and fixed costs are immediately included in the financial result.
The main feature of direct costing is that the cost of industrial products is taken into account and planned only in terms of variable costs. Fixed expenses are collected in a separate account and debited directly to a financial results account, such as Profit and Loss, at specified intervals.
Fixed expenses are not included in the calculation of the cost of products, but as expenses of a given period are written off from the profit received during the period in which they were incurred. The balances of finished products in warehouses at the beginning and end of the year and work in progress are also assessed using variable costs.
In the direct costing system, the scheme for constructing income reports is multi-stage. They contain at least two financial indicators: marginal income and profit (see table).
An important feature of direct costing is that thanks to it it is possible to study the relationships and interdependencies between production volume, costs and profits (see graph).
Management accounting system
Domestic experts have two views on the subject of direct costing. From the point of view of some, this is a cost accounting method. Others tend to consider it a calculation method. It seems that both points of view somewhat “impoverish” its content.
In our opinion, direct costing is a management accounting system. Therefore, in addition to accounting and calculation itself, that is, procedures for obtaining cost data, this system also includes the use of this data for decision-making, planning and control.
The goals and objectives of industrial accounting are different from the goals and objectives of financial accounting. Nevertheless, interaction between them is possible. In today's practice, there are several options for organizing management (production) accounting using the direct costing system.
The first option is the organization of separate accounting in the accounts of financial and management (production) accounting (autonomy option).
However, the autonomy of accounting in the first option is somewhat conditional, since the connection between management and financial accounting still exists and is ensured through the use of reflected accounts (screen accounts).
The alternative third option can be considered fully autonomous, in which the management accounting system is “absolutely parallel” to the financial accounting system. In this case, each of the systems is self-sufficient, no information exchange occurs between them. So the systems do not complement each other, but, in fact, duplicate. Despite all the external absurdity of this option, in practice it is very often its use that turns out to be the most convenient.
The company can choose the option that best suits its needs. In any case, based on an analysis of the relationship between production volume, cost, profit and marginal income, it is possible to obtain the management information necessary for company managers.
For example, calculate the minimum selling price, which, given the existing level of business organization and volume of activity, will ensure break-even. Or calculate the amount of fixed costs that the company can “afford” given the existing level of profitability and volume of activity.
Another important area of application of the results of such analysis is planning and monitoring performance in conditions of seasonal fluctuations.
About the pros and cons
Establishing connections and proportions between costs and production volumes is of great importance. Using methods of correlation and regression analysis, mathematical statistics, and graphical methods, it is possible to solve strategic problems of enterprise management. For example, to determine the forms of dependence of costs on production volume or capacity utilization, to construct costing equations, to obtain information about the profitability or unprofitability of production depending on its volume, to calculate the critical point of production volume.
Direct costing allows management to focus on changes in marginal income both for the enterprise as a whole and for various products. For example, it is possible to identify products with greater profitability in order to switch mainly to their production, since the difference between the selling price and the amount of variable costs is not obscured by writing off fixed costs to the cost of specific products.
The system provides the ability to quickly reorient production in response to changing market conditions.
The financial results statement prepared under the direct costing system shows changes in profit due to changes in variable costs, selling prices and the structure of products.
However, the organization of management and production accounting using the direct costing system is also associated with a number of problems that arise from its features.
First of all, difficulties arise when dividing costs into fixed and variable, since there are not so many purely fixed or purely variable costs. Basically, costs are semi-variable, and in different conditions the same costs can behave differently.
The most common case is labor costs. Today, an employee uses a salary, time-based remuneration scheme. Accordingly, labor costs can be classified as constant. Next month, the motivation system changes - remuneration is tied, for example, to the number of services provided. Costs turn from fixed to variable.
Opponents of direct costing believe that fixed costs are also involved in the production of a given product and, therefore, should be included in its cost. Direct costing does not provide answers to the questions: how much does the manufactured product cost, what is its total cost? Therefore, additional distribution of semi-fixed costs is required when it is necessary to know the full cost of finished products or work in progress.
Obviously, there are no ideal systems or methods. Each system and each method has its own advantages and disadvantages. The main task is to understand these features in order to neutralize their negative aspects and make the most of their advantages.
The future of direct costing
Several years ago, the CBA company, together with the Association of Controllers of Russia, conducted a survey of more than one hundred Russian companies. These were representatives of large, medium and small businesses. The main question asked during the study: “Do you use a direct costing system?”
As it turned out, from 40 to 90% of Russian companies use direct costing in their management practice. The brilliant statistics are somewhat overshadowed by the fact that this application is either purely formal or very limited in nature.
One of the key problems is that the “owners” of the management accounting system – financial economists – are not always interested in the wishes of their non-financial colleagues, and the latter are not always ready to clearly voice their needs. The main reason for such managerial apathy, in all likelihood, is that managers are not yet accustomed to looking at their activities and the activities of the units entrusted to them through the prism of efficiency, when the results obtained must be compared with the costs of achieving them.
Currently, unfortunately, not all potential opportunities of direct costing are used. Of course, if the company’s activities have not yet encountered a situation in which it would be necessary to apply data on limited costs, then it would be absurd to blame the company’s managers for ignoring direct costing. It is possible that when such a situation arises, its capabilities will be fully revealed.
For example, a company is embarking on a restructuring path. It is also planned to evaluate the activities of auxiliary units. It is possible that its result may be a decision to liquidate some divisions and transfer the corresponding functions to outsourcing.
Of course, in such a situation, both the own costs of the auxiliary units and the cost of the internal services they provide will certainly be taken into account. And to calculate these indicators, you cannot do without the principles of direct costing.
SCHEME OF REPORTING INCOME AND EXPENSES
|
№
|
Name |
Meaning |
|
|
Revenues from sales | |||
|
Variables | |||
|
Marginal |
M = V – PZ | ||
|
Permanent | |||
|
Profit (P) | |||
Direct costing
Where used: In enterprises where there is no high level of fixed costs and where the result of work can be easily determined and quantified. Widely distributed in all economically developed countries. In Germany and Austria, the method is called "partial cost accounting" or "coverage accounting", in the UK it is called "marginal cost accounting", in France - "margin accounting" or "margin accounting". Russian accounting standards do not allow full use of the system "Direct costing" for the preparation of external reporting and calculation of taxes, this method is currently finding increasing use in internal accounting for analysis and justification of management decisions in the field of break-even production, pricing, etc. Key Concepts Marginal income - the difference between revenue and variable costs. Includes operating profit and fixed costs. Marginal costing - distribution of only variable direct costs to a cost object.
Essence:
The main feature of direct costing is that the cost of industrial products is taken into account and planned only in terms of variable costs. Fixed expenses are collected in a separate account and debited directly to a financial results account, such as Profit and Loss, at specified intervals. The method is based on the calculation of the reduced cost of production and the determination of marginal income.
An important feature of direct costing is that thanks to it you can study the relationships and interdependencies between production volume, costs and profits (see chart No. 1)
(graph No. 1)
The modern direct costing system offers two accounting options:
simple direct costing, in which only direct variable costs are taken into account as part of the cost price
developed direct costing, in which the cost includes both direct variable and indirect variable general expenses.
Cost accounting is carried out in the context of variable costs, fixed costs are taken into account for the enterprise as a whole and are included in the reduction of operating profit. In the process of applying this method, marginal income and net profit are determined. Interrelation of indicators in the marginal approach:
Revenue from sales of products (B)
Variable costs (PV)
Marginal income (MD = B - PeZ)
Fixed costs (PoZ)
Profit (P = M - PoZ)
The change in the value of marginal income characterizes the influence of sales prices and variable costs on the cost of a unit of production. The amount of profit depends on the amount of fixed costs. The relationship between indicators allows you to influence the amount of profit by adjusting prices and production volume. Direct costing allows you to determine the critical production volume at which revenue will cover all production costs without making a profit. The critical production volume (number of products) can be determined by the formula: O = PoZ / (C - PeZ),
Where O is the critical output volume, PoZ is the fixed costs for the enterprise as a whole, C is the selling price of 1st product, PeZ is variable costs for 1st product.
Example:
The price of the product is 3200 rubles, variable costs are 1200 rubles, fixed costs for the reporting period are 2,000,000 rubles.
Critical volume: [ 2,000,000 / (3200 - 1200) ] = 1,000 pieces, i.e. when producing and selling 1000 pieces of products at a price of 3200 rubles. for 1 tsu, the revenue will cover all production costs, but the profit will be zero.
Introduction
Section 1. Cost accounting using the Direct Costing system
1.1 The essence of the Direct Costing system
1.2 Method and organization of cost accounting in accordance with the Direct Costing system
1.3 Advantages and disadvantages of the Direct Costing system
Section 2. Practical task on the “Direct Costing” system
2.1 Account scheme when accounting for costs using the Direct Costing system
2.2 Practical task
Conclusion
List of used literature
Introduction
The Direct Costing system is one of many costing and cost accounting systems used in the management accounting system.
The history of the development of the Direct Costing system shows that the most important objective condition for its application is the formation and development of market relations, when the independence and responsibility of enterprises increases, competition and risk appear in the business environment surrounding the enterprise, enterprise managers independently make many decisions, taking into account demand, competition and other factors, while accounting requirements are changing, primarily in the direction of increasing its efficiency and analyticality.
Similar issues have been occurring in the last fifteen years in the Russian economy, so the question of the need to master Western experience and adapt the practices accumulated in the field of management accounting, including the use of the Direct Costing system, is not in doubt. Moreover, we can already talk about some experience accumulated by Russian enterprises in the use of this system.
The relevance of this work is due, on the one hand, to the great interest in the topic “Cost accounting using the Direct Costing system” in modern science, and on the other hand, to its insufficient development. Consideration of issues related to this topic is of both theoretical and practical significance.
Section 1. Cost accounting using the Direct Costing system
1.1 The essence of the Direct Costing system
It is difficult now to say which scientist was at the origins of the theoretical justification and application of this system. Still T.E. Klipstein, in his book “The Doctrine of Alternatives in Accounting” (Leipzig, 1781), used the example of metallurgical production to show how direct costs should be attributed to its individual phases, and overhead costs should be attributed directly to the results for the period.
J. Courcelles-Senel in his work “Theory and Practice of Entrepreneurship in Agriculture, Crafts and Trade” (Stuttgart, 1869) proposed dividing costs into “special” and “general”.
For the first time, the prominent German scientist O. Schmpalenbach spoke in favor of accounting for boundary costs in 1899. At the beginning of the 20th century, G. Hess made a clear distinction between fixed and variable costs.
So, we see examples of the theoretical application of the ideas of differentiating expenses into fixed and variable, but the sign of this classification is not clearly formulated - the ratio of these expenses and production volume, their different behavior depending on changes in volume.
This feature is clearly formulated by J. Clark. In 1923, he substantiated the need to divide gross production costs into constant and variable.
The idea of classifying expenses into fixed and variable depending on the volume of production would have remained the property of theory if objective economic conditions had not developed in economic practice that made it possible to realize the advantages of this classification: market commodity-money relations developed and, as a result, the role of accounting increased, in particular, the theory of calculation in the management system of economic processes and phenomena.
The essence of a concept should be reflected in its name. The name "direct costing", introduced in 1936 by the American D. Harrison in his work, means taking into account direct costs. It does not fully reflect the essence of the system; The main thing in the direct costing system is the organization of marginal accounting of variable and fixed costs and the use of its advantages in order to improve management efficiency.
Currently, direct costing involves taking into account the cost not only of direct variable costs, but also of variable indirect costs. Therefore, there is some convention of the name here.
Having defined the essence of direct costing as a management accounting system based on dividing costs into fixed and variable depending on changes in production volumes, we will formulate its main features.
The main feature of direct costing is that the cost of industrial products is taken into account and planned only in terms of variable costs. Fixed expenses are collected in a separate account and, at a specified frequency, are written off directly to the debit of the financial results account, for example, “Profit and Loss”.
Fixed expenses are not included in the calculation of the cost of products, but as expenses of a given period are written off from the profit received during the period in which they were incurred. Work in progress is also assessed using variable costs.
With the direct costing system, the scheme for constructing income reports is multi-stage (Table 2.1). They contain at least 2 financial indicators: contribution margin and profit.
Table 2.1 “Scheme of the income statement for the direct costing system.
The income statement does not have to be two-step. If variable costs are divided into production and non-production, then this income statement will be three-stage. In this case, at the first stage, the production marginal income is determined as the difference between the volume of products sold and variable production costs. At the second stage, the marginal income for the entire company is determined as the difference between production marginal and non-production variable costs. At the third stage - the company's profit by subtracting the amount of fixed expenses from the total marginal income.
An important feature of direct costing is that thanks to it it is possible to study the relationships and interdependencies between production volume, costs and profits. This is clearly depicted in the graph (Fig. 2.1).
variables
Critical cost point
Production loss
Revenue from
For implementation
Full of self-
price
profitability
Product volume, thousand pieces.
Rice. 1.1 The relationship between production volume, cost and profit.
The three main lines show the dependence of variable costs, fixed costs and revenue on production volume. This chart and its numerous modifications are used in analysis and management decision-making.
Thus, the fundamental difference between the “direct costing” system and the calculation of the full cost is in relation to constant general production costs. When calculating the full cost, fixed overhead costs are included in the calculations; when calculating using variable costs, they are excluded from the calculations. General business expenses are also excluded from calculation. They are periodic and are fully included in the cost of goods sold in the total amount without division into types of products. At the end of the reporting period, such expenses are written off directly to reduce revenue from sales of products.
However, in accordance with International Accounting Standards, the direct costing method is not used for preparing external reporting and calculating taxes. It is used in internal accounting to conduct technical and economic analysis and to make operational management decisions.
1.2 Method and organization of cost accounting in accordance with the Direct Costing system
Cost accounting consists of the following elements: accounting by cost element, accounting by cost center and accounting by cost object (calculating the cost of a unit of product). All these elements are present in any specific organization of cost accounting in management (production) accounting, including when accounting for full or partial costs.
Let's consider the organization of cost accounting in accordance with the Direct Costing system according to the elements listed above.
The task of the first element of cost accounting is the systematic accounting of costs by type for a given period. It reflects the vertical cost structure of the enterprise.
The most important types of costs to be accounted for are: wage costs; material costs; energy costs; repair costs; taxes, fees, insurance; depreciation costs; interest, risks; other costs. This list may vary depending on national accounting characteristics and the degree of detail.
From the point of view of using the Direct Costing system, there are no fundamental features compared to the full cost accounting system. It is only necessary to emphasize that the division of costs into fixed and variable, necessary for organizing direct costing, cannot be done in accounting by type of cost, since often the same type of cost in different cost centers behaves differently in relation to changes production volume.
For example, the wages of support workers in one cost center may be variable, in another semi-variable, and in a third they remain virtually unchanged with changes in capacity utilization or production volume.
Thus, the distinction between costs into fixed and variable, as well as their separate accounting by type, can only be organized in terms of where costs arise.
Cost center accounting gives an idea of the horizontal cost structure of an enterprise.
In fact, when organizing accounting in the context of cost centers using the “Direct Costing” system, the very concept of indirect costs disappears, overhead costs become direct in relation to a given cost center. Thus, with the Direct Costing system, costs at cost centers are divided into fixed and variable. This element of the cost accounting system provides information for calculating the cost of cost carriers - the next element of the production accounting system - only for variable costs.
One of the problems of accounting for costs at the places of their occurrence in terms of separate accounting of variable and fixed costs is the presence of “jumping” (stepped) costs, which are constant over a certain interval of volume changes, and then increase sharply at a certain value of the production volume indicator .
In practice, organizing cost accounting in the context of cost locations using the Direct Costing system, this problem is solved by distinguishing three groups of costs: absolutely variable costs, changing in proportion to changes in production volumes; regarding variable (or relatively constant) costs - to reflect “leap-like”, stepwise costs; absolutely constant costs that do not change with changes in production volumes or capacity utilization. When making decisions in a specific management situation, the second group of costs is added either to the first or to the third, depending on the goal being pursued.
Accounting by cost carriers in production accounting means the allocation of costs to their carriers. Cost carriers are products, works and services of an enterprise intended for sale on the market.
When calculating the cost of products using the Direct Costing system, fixed costs are not distributed among carriers. With this calculation option, it is assumed that only variable costs (direct costs and part of overhead costs) depend on capacity utilization or production volume, and therefore only they can be attributed to cost carriers.
Thus, the cost of the cost object does not include fixed costs. This calculation option, without special additional calculations, provides the information needed in market conditions about trends in cost behavior in conditions of changes in load or volume.
1.3 Advantages and disadvantages of the Direct Costing system
Direct costing is a management accounting system based on dividing costs into fixed and variable depending on changes in production volume. Let us highlight its inherent features, positive and negative aspects.
The main feature of direct costing, based on the classification of costs into fixed and variable, is that the cost of production is taken into account and planned only in terms of variable costs. Fixed expenses are collected in a separate account and written off directly to the debit of the financial results account at specified intervals.
Fixed expenses are not included in the calculation of the cost of products, but as expenses of a given period are written off from the profit received during the period in which they were incurred.
The balances of finished products in warehouses at the beginning and end of the year and work in progress are also assessed using variable costs.
The direct costing system focuses the attention of the organization's management on changes in marginal income for the organization as a whole and for various products. It allows you to take into account products with high profitability in order to switch mainly to their production, since the difference between the selling price and the amount of variable costs is not obscured as a result of writing off constant indirect costs to the cost of specific products.
By reducing cost items, its rationing, accounting, control is simplified and, in addition, accounting and control of semi-fixed, overhead costs is improved, since their amount for a given specific period is shown in the income statement as a separate line, which clearly demonstrates their impact on the amount of profit organizations.
The main advantage of the direct costing system is that, based on the information obtained in it, you can make various operational decisions on managing the organization. First of all, this concerns the ability to implement an effective pricing policy.
Accounting under the direct costing system also involves the possibility of implementing a dumping policy, calculating and selecting various combinations of the price of a product and its sales volumes.
Having accounting data on the limited cost and marginal income for products, it is possible to solve such management problems as optimizing the range of products, the feasibility of accepting an additional order at prices lower than usual, producing components within the enterprise or, conversely, purchasing them externally, determining the optimal size of a batch or series products, selection and replacement of equipment and others.
Another important advantage of the system is that limiting the cost of production to only variable costs makes it possible to simplify rationing, planning, accounting and control of a sharply reduced number of cost items: the cost becomes more “visible”, and individual costs are better controlled. Since the more objects under control, the more attention is scattered between them, the weaker the control becomes.
The organization of management accounting using the direct costing system is associated with a number of problems that arise from the features inherent in this system:
Difficulties arise when dividing expenses into fixed and variable, since there are not so many purely fixed or purely variable costs;
Opponents of direct costing believe that fixed costs are also involved in the production of a given product and, therefore, should be included in its cost. Direct costing does not answer the question of how much the manufactured product costs or what its full cost is. Therefore, additional distribution of semi-fixed costs is required when it is necessary to know the full cost of finished products or work in progress;
Keeping cost records based on a reduced range of items does not meet the requirements of our accounting, one of the main tasks of which until recently was the preparation of accurate calculations;
Necessary in the prices set for the organization’s products
ensure that all costs of the organization are covered.
A significant distortion of the total profit for the current period, since work in progress balances are assessed in terms of only variable production costs;
Inconsistency (due to the same reason) of the size of the actual cost of manufactured products with the indicator of “reduced” cost calculated according to variable cost items, which sharply reduces the reliability of accounting;
A discrepancy between the results of financial accounting (and financial reports) and the results of management accounting, as a result of which the trust of regulatory authorities - financial, tax department and others - in the management of the company is reduced, and this leads to negative consequences;
The unsolved problem of distribution of fixed (indirect) costs, which are also involved in the production process, and therefore must be included in the cost;
Difficulty in determining the nomenclature of calculation elements or dividing costs into variable and fixed.
With the direct costing system, the full costs of manufacturing products are not determined. Therefore, this system does not meet one of the main goals of domestic accounting - the preparation of accurate calculations. However, it should be borne in mind that there is no costing system that would allow one to determine the cost per unit of production with one hundred percent accuracy. Any indirect attribution of costs to a product, no matter how well it is justified, distorts the actual cost and reduces the accuracy of calculation. From this point of view, the most accurate calculation is for variable (direct) costs, which is obtained when calculating using the direct costing system. In this case, the cost estimate includes costs directly related to the manufacture of this product. Therefore, the criterion for the accuracy of calculating the cost of a product should be considered not the completeness of inclusion of costs in the cost, but the method of attribution to a particular product.
Section 2. Practical task on the “Direct Costing” system
2.1 Account scheme when accounting for costs using the Direct Costing system
Let's consider the procedure for reflecting transactions on accounting accounts under the “direct costing” system.
Direct production costs from the credit of accounts 10, 70, 69 are collected by the debit of account 20 “Main production” or 23 “Auxiliary production”. The variable part of general production expenses from account 25 of the same name is also written off to account 20 (23). Costs, using any distribution base, will subsequently be allocated to the corresponding cost carriers, i.e. will participate in the calculation.
In this option, the constant part of general production costs, together with commercial and general business expenses, considered as periodic, are not included in the cost of costing objects (cost carriers), but are written off as a decrease in revenue from sales of products.
Thus, the use of the direct costing system in practice involves differentiated accounting of overhead costs. They should be divided into constant and variable parts.
Two sub-accounts are created for account 25:
25-1 “Overhead variable costs” and 25-2 “Overhead fixed costs”. The turnover of account 25-1 at the end of the reporting period, distributed among cost carriers, is written off to account 20 “Main production”. The score 25-2 closes with a score of 90 "Sales"
The order of entries in accounts when accounting for costs using the direct costing system is illustrated in Fig. 1. It is necessary to pay attention to the fact that the balances of work in progress and finished products, i.e. Inventories are valued in this case at partial (variable) cost.
Rice. 1. Accounting scheme for calculating partial costs using the “direct costing” method
2.2 Practical task
Example.
The enterprise produces two types of products - A and B. Direct costs for the production of product A amount to 100 thousand rubles, including direct wages - 50 thousand rubles. Direct costs for the production of product B are 200 thousand rubles, of which wages are 100 thousand rubles.
During the reporting period, the debit turnover on account 25 “General production expenses” amounted to 90 thousand rubles, on account 26 “General business expenses” - 120 thousand rubles. To simplify the calculation, we assume that overhead costs consist only of the variable part.
Let us also assume that half of all costs incurred during the reporting period materialized in finished products, and the second part remained in the form of work in progress, and during the reporting period 10 units of finished product A and 15 units of product B were produced.
And one more assumption: all manufactured products are sold. Sales revenue amounted to 400 thousand rubles.
Cost accounting using the “direct costing” method is illustrated in Fig. 2.
Rice. 2. Cost accounting scheme using the “direct costing” method, thousand rubles.
Two sub-accounts have been opened for account 20 - for calculating the cost of each type of product - 20-A and 20-B. Direct costs are attributed directly to cost carriers: 100 thousand rubles. - for product A and 200 thousand rubles. - for products B.
The costs collected on account 25 are distributed between products A and B in proportion to direct wages, i.e. in a ratio of one to two. Thus, out of the total amount of overhead costs of 90 thousand rubles. 30 thousand rubles. attributed to product A, 60 thousand rubles. - for products B.
General business expenses as periodic in the amount of 120 thousand rubles. directly written off to cost of goods sold.
It can be seen that 130 thousand rubles were spent on the production of product A in the reporting period. Half of them are 65 thousand rubles. - cost of finished products. According to the condition, 10 units of product A were produced during the reporting period. Consequently, the cost of one unit is 6.5 thousand rubles. Products A worth 65 thousand rubles will remain in work-in-progress.
Similar calculations for product B allow us to estimate the finished product (15 units) at 130 thousand rubles. Therefore, the cost per unit of product B is 130: 15 = 8.7 thousand rubles. Work in progress for products B is estimated at 130 thousand rubles.
The cost of all finished products is 195 thousand rubles. (65 + 130). This is a variable cost. On account 46, the first financial indicator is formed - marginal income; in this case it is equal to 205 thousand rubles. (400 - 195).
After writing off general business expenses, the second indicator is displayed on account 46 - profit, i.e. the difference between contribution margin and fixed costs. In the example given, operating profit is equal to: 205-120 = 85 thousand rubles.
Since there are no finished products in the warehouse, inventories will only be represented by work in progress. Its total size is: 65 + 130 = 195 thousand rubles.
Rice. 3. Example of accounting records when calculating the total cost, thousand rubles.
The difference from the previous scheme is that all expenses, including fixed ones, are included in the calculation.
Thus, in addition to general production costs, general business expenses will also be distributed between products A and B. The distribution base is direct wages, the distribution proportion, as before, is 1:2. Then 40 thousand rubles will be allocated to product A. general business expenses for product B - 80 thousand rubles.
The debit turnover on account 20-A, taking into account direct and general production expenses, will be 170 thousand rubles; of which half is the cost of finished products, and half remains in work in progress. Consequently, 10 units of finished product A are valued at 85 thousand rubles, i.e. unit cost - 8.5 thousand rubles. For product B we have: the production of 15 units cost the enterprise 170 thousand rubles, i.e. unit cost is: 170: 15 = 11.3 thousand rubles.
The cost of all finished products is 255 thousand rubles. (85 + 170). Therefore, the operating profit will be: 400 - 255 = 145 thousand rubles.
Let's estimate work in progress inventories. For product A their cost is 85 thousand rubles, for product B - 170 thousand rubles. Hence, the cost of inventory amounted to 255 thousand rubles.
The results of the calculations performed are summarized in table. 2.
Table 2. Estimation of cost, profit and reserves when taking into account variables (direct costing method) and total costs, thousand rubles.
A comparison of the results obtained allows us to conclude: the cost per unit of production, calculated using the “direct costing” method, is lower than the full cost (for product A - by 2 thousand rubles, for product B - by 2.6 thousand rubles). As a result, when calculating the partial cost by 60 thousand rubles. the inventory valuation is also lower than with the full cost accounting method (255 - 195). Therefore, the cost of goods sold turns out to be higher, and therefore, the profit is less when using the variable cost accounting method for the same 60 thousand rubles. (145 - 85).
The chosen calculation method affects not only the cost of production, but also the form of the profit and loss statement.
An income statement prepared using the marginal approach focuses on separating costs into fixed and variable costs. In this case, the indicator of marginal income is certainly formed. Taking into account the digital example, the report looks like this (Table 3).
Table 3. Profit and loss statement (direct costing method)
In the report compiled based on the results of calculating the full cost, the marginal income indicator is not calculated (Table 4).
Table 4. Profit and loss statement (method of calculating the full cost of production)
As already noted, International Accounting Standards do not allow the use of the “direct costing” system for the preparation of external reporting and tax calculations. What then is the practical significance of this system?
First of all, its use allows you to quickly study the relationship between production volume, costs and income, and therefore, predict the behavior of costs or certain types of expenses with changes in business activity.
In modern conditions, managers must know what it costs to produce certain types of products, regardless of what the rent for the premises is or what the salaries of the director and his assistants are. Therefore, one of the principles of management accounting is the following: the most accurate calculation is not the one in which, after numerous and labor-intensive calculations, all the costs of the enterprise are included, but the one in which the costs that directly ensure the production of a given product are included (performing work, providing services). This problem can be solved only by using the “direct costing” system.
The direct costing system allows for an effective pricing policy. In some situations, when production capacity is underutilized, attracting additional orders may be justified even if payment for them does not fully cover the costs of their implementation. The price for such orders can be reduced to a certain limit, called the “lower price limit”. Beyond this border, the execution of such orders is impractical. The “direct costing” system allows you to calculate the value of the boundary.
Finally, this system makes it possible to significantly simplify rationing, planning, accounting and control of a sharply reduced number of costs, as a result, the cost becomes more visible, and individual cost items become better controllable.
Conclusion
In the direct costing system, all costs are divided into variable and fixed. Fixed costs are taken into account separately, they are not distributed between individual types of products and are not included in the cost of production, but are reimbursed with a total amount from revenue.
The main provisions of the direct costing system are the most accurate cost price, not the one in which all costs are included after numerous distributions, but the one in which the costs actually related to the production of a given type of product are included. In the direct costing system, the amount of marginal income is calculated as the difference between revenue from sales of products and the cost of these products, calculated using variable costs.
The point of critical production volume is determined. At this point, sales revenue is equal to the full cost of production.
The main advantages of direct costing are:
· The ability to calculate the cost of a marginal unit of production and, based on this, determine the break-even point;
· It is an economical method of accounting for an enterprise, because the task of distributing overhead costs is not worth it at all.
But there are also disadvantages:
· Does not allow determining the average cost of production, which makes it possible for the enterprise to pursue an unreasonably risky pricing policy;
· Removes overhead costs from cost control.
There are no ideal systems or ideal methods. Each system and each method has its own advantages and disadvantages. The main task is to understand the features of systems and methods in order to neutralize their negative aspects, make maximum use of the positive ones, and realize the advantages inherent in them.
List of used literature:
1. Vakhrushina M.A. "Accounting and management accounting." M.: "Omega-X", 2005;
2. Veshchunova N.L., Fomina L.F. “Accounting at enterprises of various forms of ownership.” M.: "Magis", 2005;
3. Kamordzhanova N.A., Kartashova I.V. "Financial Accounting". M.: “Peter.” 2005;
4. Platonova N. Formation of cost in cost accounting systems // Financial newspaper. - 2005. - 41. - P. 18.
5. Nikolaeva S.A. “Principles of formation and calculation of product costs.” M.: “Analitika-Press”, 2002;
6. Kerimov V.E., Komarova N.N., Epifanov A.A. Organization of management accounting using the "direct costing" system // Audit and financial analysis, Moscow, 2006
