Indirect Manufacturing Costs (CIF) as a mechanism to improve Profitability
Due to the complexity and uncertainty that characterizes the current context in which the general companies operate, they have found the need to incorporate new accounting techniques as a fundamental part of their administrative processes that ensure in the short term to know the indirect cost resulting from the production of a certain product. This practice implies the use of an adequate cost system that allows detecting the level of incidence that these costs generate in the real value of the good produced.
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It should be considered that cost accounting is a process that classifies, accumulates, controls and assigns costs to determine the expenditures of activities, processes and products, facilitating decision making, planning and administrative control.
In this context, traditional production cost systems consider that their only mission is to correctly determine the price of the product or service, ignoring that currently what cost users demand is information to see what can be done to reduce them, i.e., timely accounting information is required to determine which activities add value and which do not, in order to achieve greater profitability.
From this perspective, cost accounting has undergone, and will undergo in the future, a modernization of the techniques that will be used in the treatment and use of information that seeks to recognize all these accounting data, specifically indirect manufacturing costs or manufacturing overhead that are not normally included.
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In this regard, according to Cárdenas (2016), cost accounting "is an important part of the administrative or managerial information commonly called internal information, whose objective is to present all kinds of analytical reports regarding the conformation of the unit cost of producing a good or product" (p.6). In other words, it allows, through its results, to make rational decisions, based on the information obtained, in order to design strategies that lead companies to establish efficiency and competition frameworks, in relation to their production costs.
It should be considered that in today's changing economic environment, competitive pressures, industrial growth and technological advances have demanded a restructuring of the administration of indirect production costs, which has caused companies to adapt the way they manage their operations and implement new administrative and accounting practices aimed at achieving the highest possible profitability in their production processes.
References Consulted
- Cárdenas, R. (2016). Costs 1. (3rd ed.). Editorial: Mexican Institute of Public Accountants. Mexico.
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Indirect manufacturing costs seem to be a very useful mechanism to improve profitability and optimize a company's production processes.
Greetings @fucho27 and thank you for your contribution in this publication.
Greetings @carlos84 thanks for your input, and increasingly CIFs are becoming more relevant when determining how much it costs us to produce a good or provide a service, assuming the wide area that those CIFs can cover.
Greetings @chucho27, indirect costs are relevant for companies because although they are not taken directly to calculate the price of the good produced it has an impact on it and from my point of view should be taken into account to determine the cost of the product.
Greetings friend @carlir of course they do, they have an impact and in great magnitude, and although many companies did not take it into account, it is very relevant if they do not want it to become an expense instead of a cost.
Greetings @chucho27, it is very important to keep track of CIF as it will have a direct impact on profitability at the end of the accounting process, these costs over time, when the processes are almost entirely automated, accounting will have to reinvent itself to determine their value without leaving details of these costs.
Thank you very much for sharing your publication.
Greetings friend @dgalan, thanks for your input, and it is a viable point to reinvent accounting to fully cover production costs.
The purpose of existence of any company, regardless its size or nature, is to be profitable.
But to be profitable they need to sell their goods or services to their market target: the general public. In order to do so they need to get the preference of their clients and also be disciplined by handling their cost structures accordingly.
That's why management needs to pay special attention on its own accounting cost department while making use of IT (new Computing and Communications technologies) to keep track of information and data in real time in order to take the right decisions as they're needed.
And as the world gets more globalized and competitive, larger companies relies on smaller ones to get provided with goods and services needed to find a positive balance between profits and expenses. Those smaller companies represent an indirect production cost for the main manufacturing process, but most of the timeq they tend to provide the best possible quality at the lower cost compared to their own competition.
In the end is always the client/buyer who decides which product or service to acquire, and any company involved in that market segment should consider what's the best internal process in order to keep them satisfied.
Greetings @bostonblake quoting your info.
This is an important point because when selling products they incur in CIF, which many times are not classified, such as transportation, depreciation on the vehicles they use, maintenance of the same, and end up becoming an expense.
Indeed Jesus, thanks