METHODS OF CALCULATING THE COST OF PRODUCTION IN
FOOD INDUSTRY IN KAZAKHSTAN
Abdreimova A.N.
Gumilyov Eurasian National University, Astana,
The Republic of Kazakhstan
E-mail: aziza021@gmail.com
In terms of technical progress, the company management of food industry in
Kazakhstan needs useful data to control production costs enrollment in preestablished standards, which enable it to take decisions at the appropriate time and to
assure the achievement of the objectives predetermined in budget.
Effective management of economic activity requires the effectuation of modern
methods which should not provide with data related only to past periods. The
methods used must provide operative data and foresight the use of production and
time resources that determine the production costs. Through the system and methods
used, the management accounting should contribute to increased production
efficiency, and rather than simply finding former facts it should highlight the future
development trend of the phenomena.
In order to provide data concerning the efficiency of production costs on the
one hand, and to forecast the development of management accounting on the other
hand, it is necessary to promote different methods of costing based on pre-established
expenses. In this direction there are well-known the standard cost method, as well as
combinations of various methods used by some advanced countries such as the direct
costing method, the cost centers method, absorption costing, target costing, kaizen
costing etc.
Food industry requires finding innovative methods as regards the accounting
management and cost calculation. In the market economy management accounting
methods and cost calculation should provide more detailed information to the
management reflecting all manufacturing and organization operations of the
production, technical productive and organizational and managerial structure of the
company.
Costing methods that have been developed and used in recent decades,
corresponded to a certain production technologies. In the last years there have been
important changes in the Kazakhstan economy under pressure of global competition,
which led to dramatic changes in doing business in many enterprises. These changes
have created a new environment for cost calculation in a significant number of
organizations. Once changed environment, traditional methods can’t be applied.
Currently, the market has evolved due to the competition becoming more
intense and is characterized by a demanding application in terms of quality and
product customization. In addition to price competition by new forms of competition,
such as diversification in the technical, delivery, after-sales services, recycling of
used product. Enterprise performance is multidimensional, resulting from a
combination of processes: minimum price, maximum quality, strict delivery
deadlines. Thus, the market price is determined according to the attributes that the
customer gives the product or service. So the company profitability depends on its
ability to respond to market expectations.
In the current economic conditions, industrial production is characterized by
occurrence and expansion of new manufacturing design and product technologies.
Manufacturing technologies had evolved from partial mechanization, to complex
mechanization and automation then.
The new design and manufacturing technologies significantly influence both
the level as well as structure of expenditures, regarded by the entire chain:
conception-design-production-service-use- decommissioning [1].
Management accounting will have to prove its efficiency, especially on
production costs, but also on forecast aspect. Therefore, different methods of costs
calculation based on predetermined expenses should be considered. The best known
method is the standard cost method. The standard-cost method is efficiently, which
has an operational, functional and forecasting character, thereby ensuring a modern
management.
Today, food industry applies traditional methods of cost calculation based on
actual production costs. But this traditional system has certain disadvantages and
limits. Nonetheless this fact, all limits of management accounting system and cost
calculation practice can be eliminated by standard cost method.
Standard costing is an important subtopic of cost accounting. Standard costs
are usually associated with a manufacturing company's costs of direct material, direct
labor, and manufacturing overhead.
Rather than assigning the actual costs of direct material, direct labor, and
manufacturing overhead to a product, many manufacturers assign the expected or
standard cost. This means that a manufacturer's inventories and cost of goods sold
will begin with amounts reflecting the standard costs, not the actual costs, of a
product. Manufacturers, of course, still have to pay the actual costs. As a result there
are almost always differences between the actual costs and the standard costs, and
those differences are known as variances.
Standard costing and the related variances is a valuable management tool. If a
variance arises, management becomes aware that manufacturing costs have differed
from the standard (planned, expected) costs.
 If actual costs are greater than standard costs the variance is unfavorable. An
unfavorable variance tells management that if everything else stays constant the
company's actual profit will be less than planned.
 If actual costs are less than standard costs the variance is favorable. A
favorable variance tells management that if everything else stays constant the actual
profit will likely exceed the planned profit.
The sooner that the accounting system reports a variance, the sooner that
management can direct its attention to the difference from the planned amounts.
Standard costing is based on predetermination of what it should cost to
manufacture a product, and the inventory accounts are debited for these standard
costs.
Standard cost accounting is based on the following procedures:
1. Standard costs are determined for the three elements of cost: direct
materials, direct labor, and factory overhead.
2. The standard costs, the actual costs, and the variances between the actual
and standard costs are recorded in the appropriate accounts.
3. Significant variance are analyzed and investigated and then appropriate
action is taken. Two components are investigated:
• Quantity
• Price
Management should not look at each individual variance in a vacuum but
rather at the relationship of that variance to other variances.
4. Materials cost standard is based on estimates of the quantity of materials
required for a unit of product and the unit cost to purchase the materials used.
5. Labor cost standard is based on estimates of the labor hours required to
produce a unit of product and the cost of labor per unit.
A variance represents the difference between the actual and the standard costs
of materials, labor, and overhead.
A debit balance in a variance account indicates an unfavorable variance. A
credit balance reflects a favorable variance, indicating that actual costs were less than
the standard
The fact that standards are based on estimates does not make them unreliable.
Standards will change as conditions change. The purpose of using a standard cost
system is to provide continual incentive for factory personnel to keep costs and
performance in line with predetermined management objectives [2].
Though most companies do not use standard costing in its original application
of calculating the cost of ending inventory, it is still useful for a number of other
applications. In most cases, users are probably not even aware that they are using
standard costing, only that they are using an approximation of actual costs. Here are
some potential uses:
 Budgeting. A budget is always composed of standard costs, since it would
be impossible to include in it the exact actual cost of an item on the day the budget is
finalized. Also, since a key application of the budget is to compare it to actual results
in subsequent periods, the standards used within it continue to appear in financial
reports through the budget period.
 Inventory costing. It is extremely easy to print a report showing the periodend inventory balances, multiply it by the standard cost of each item, and instantly
generate an ending inventory valuation. The result does not exactly match the actual
cost of inventory, but it is close. However, it may be necessary to update standard
costs frequently, if actual costs are continually changing.
 Overhead application. If it takes too long to aggregate actual costs into cost
pools for allocation to inventory, then you may use a standard overhead application
rate instead, and adjust this rate every few months to keep it close to actual costs.
 Price formulation. If a company deals with custom products, then it uses
standard costs to compile the projected cost of a customer’s requirements, after which
it adds on a margin. This may be quite a complex system, where the sales department
uses a database of component costs that change depending upon the unit quantity that
the customer wants to order. This system may also account for changes in the
company’s production costs at different volume levels, since this may call for the use
of longer production runs that are less expensive.
Nearly all companies have budgets and many use standard cost calculations to
derive product prices, so it is apparent that standard costing will find some uses for
the foreseeable future. In particular, standard costing provides a benchmark against
which management can compare actual performance [3].
Given the need for the management of any enterprise, engaged to the food
industry, to conduct ongoing business of tracking and analyzing the results of
production, appears as a useful and timely option for enterprises in the food industry.
In conclusion, each firm need to acquire the modern management techniques
and to provide the formation of an adequate information system to the specific
activity carried out.
References:
1. Don R. Hansen, Maryanne M. Mowen, Liming Guan. “Cost management:
Accounting and control”. 6th edition. 2009. South-Western, a part of
Cengage Learning.
2. Principles of Cost Accounting, 16th Edition, Edward J. VanDerbeck, 2013
Cengage Learning.
3. Dennis Caplan. “Management accounting: concepts and techniques”.
Oregon State University College of Business. Retrieved 2010-05-08.