The following concepts are only one of the several ways used to calculate values in Cost Accounting.
Production cost is attributed to products in two stages:
1st Stage: Attribution of Direct Costs
By means of extra-accounting controls, one can get to know values spent on materials, labor and general manufacturing, which directly impact cost of products.
2nd Stage: Apportionment of Indirect Costs
Materials, labor and general manufacturing expenses, whose incidence in products cannot be identified easily, are apportioned through estimated or arbitrary criteria.
To coherently apportion indirect manufacturing costs to the cost of each product, it is easier to adopt the System of Departmental cost.
Administrative, commercial and production activities of a company can be structurally divided into the following sections: General Administration, Medical Policlinic, Warehouse, Maintenance and Conservation, Quality Control, Recruitment and Personnel Training, Studies and Projects, Cutting, Machining, Assembly, Finishing, etc. Each of these sections is considered as a department for Departmental Cost.
Thus, there are two types of departments in a company:
Productive Departments
They are composed by personnel and machines, which manufacture of products. In these departments, direct and indirect costs are generated in relation to products.
Direct costs are attributed to products with no major complications. Even though indirect costs require estimated or arbitrary criteria, they are apportioned directly to each product, since products pass through these departments.
Service Departments
It is composed of personnel and machines (but generally personnel), who provide services to the whole company, including production departments. Thus, costs generated in these departments are considered direct costs in relation to these departments, but indirect in relation to products, because products do not pass through them.
For the purpose of calculating the indirect manufacturing costs, Cost Accounting considers each department as a Cost Center.
See Also
See also Methods of Apportionment.
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