We explain what predetermined costs are and what they are for. Also, differences with historical costs and other types of costs.
What are default costs?
In accounting, predetermined costs are known as those that are calculated before the product is finished so that they can be compared with the real costs, which are those that are calculated once the production cycle has ended. They are commonly divided into:
- Estimated costs. Which are those theoretical expectations of what is expected to be invested in production, considering each specific case;
- Standard costs. Which are the average costs that a type of production process usually produces, at normal levels of efficiency, that is, a theoretical projection of what can be expected.
It is worth remembering that All the different factors that intervene in the production cycle are called costs and they make it possible, such as raw materials, direct labor, etc. These costs can be classified according to their nature into various categories, of which real and predetermined are just two.
Costs of all types are the object of study of analytical accounting or cost accounting, and in this the predetermined costs play a fundamental role, as premises to judge the production process, that is, as expectations.
See also: Management accounting
What are predetermined costs for?
Predetermined costs are, as we said before, an expectation. In that sense, serve to offset real costs and know how close the production cycle is to plan. This makes it possible to make decisions and make adjustments, if necessary.
Default costs and historical costs
Historical costs are more related to actual costs than to predetermined ones, to the extent that are a reflection of the company's productive trajectory or organization.
Like real costs, they are data obtained after the production process has finished. But they differ in that they are compared with several years of similar processes, to obtain a history of their costs.
On the other hand, predetermined costs are calculated before starting the production cycle, and therefore are a kind of speculation or planning, instead of a historical look at the production process to which they refer.
Other types of costs
There are many ways to classify the costs of a company or organization. Next, we will see a couple of the most important ones:
- According to your identification within the company we can talk about:
- direct costs. They are those identifiable and quantifiable with respect to a specific area of the production process, or with respect to the finished products.
- Indirect costs Those that, on the contrary, are not identifiable or quantifiable with respect to a specific area of the production process or its finished products.
- Depending on the function incurred that is, to which part of the production circuit it generates them, we can talk about:
- Production costs. Which have to do with raw materials, labor or direct factory charges-expenses.
- Distribution costs. Those that have to do with the process of transporting raw materials and other inputs to the factory, and then the manufactured products to their marketing area.
- Administration costs. Those that come from the administration of the company, that is, its management and maintenance.
- Financial costs. Which originate from obtaining resources (generally capital) outside the company and necessary for its success.
- According to their behavior throughout the production chain we can talk about:
- Fixed costs. Those that are constant within the production circuit, regardless of the volume of operations carried out in a period of time.
- Variable costs. Those that fluctuate in some way depending on the volume of operations carried out, such as commissions, for example.
- Mixed costs. Which bring together both fixed and variable elements.
Continue with: Financial accounting
References
- “Cost accounting” on Wikipedia.
- “Predetermined cost systems” in MarcoTeérico.com.
- “Predetermined costs” in the University Learning Network of the National Autonomous University of Mexico (UNAM).
- “What is Predetermined Cost?” at Lets Learn Finance.
- “Predetermined Cost” in Mirriam-Webster Dictionary.
