National Accounting Standard No. 13 – analysis and presentation of product cost issues

On 16 April 2019 The Accounting Standards Committee adopted a resolution on the adoption of National Accounting Standard No. 13 „Cost of manufacturing as a basis for product valuation’ 1 (hereinafter: CRS No 13).

Its subject matter is complicated and very diverse in the accounting practice of entities operating in which stocks of products, finished products and semi-finished products are created. It is therefore intended to assist the accounting departments of these units.

This standard will apply to financial statements for 2019, It is therefore subject to use for accounting purposes already this year. The subject of this study is an approximation of CRS No. 13 issues and their impact on the accounting of undertakings.

1. Introduction

The International Accounting Standards Board shall adopt the basis for determining the accounting rules applied by international entities. 2 in the form of appropriate recommendations and their interpretation.

These International Accounting Standards (hereinafter IAS) are intended to ensure that the accounts of companies operating in different countries are directly comparable.

This is particularly important in a time of globalisation and an open capital market, where investors play an increasingly important role by investing and assessing the value of companies on the basis of their financial statements. The obligation to apply IAS applies for example to all listed companies of the European Union[3].

In Poland, the primary source of accounting law is the Act with 29 September 1994 on accounting 4 (Further: u.o.r.). Only in the absence of regulation of a given area can units use an appropriate CRS, and in the absence of such a, support to international standards is allowed[5] .

Despite attempts to introduce solutions based on international standards, u.o.r. continues to include general principles different from IAS. Attempts to detail certain areas and bring them closer to the solutions set out in the IAS are achieved through the introduction of National Accounting Standards (hereinafter CRS).

National Accounting Standards act as optional and complementary rules, their aim is to assist individuals in the correct application of u.o.r. They are set up by the Accounting Standards Committee and remain largely consistent with their international counterparts.

They can therefore be described as a link between the Polish Accounting Act and IAS.

Recently published CRS No. 13 provide, to a large extent, explanations concerning:

• • setting the cost of manufacturing finished products, intermediate products and products in progress,
• • setting the costs of unused capacity,
• • the valuation of the products at the initial date and at the balance sheet date,
• • the presentation and disclosure of information on the manufacturing costs of products and the costs of unused production capacity in the accounts.

The Standard analysed therefore corresponds to its scope of IAS 2 „Stocks’ and the provisions used to determine the cost of production as the basis for the valuation of products contained in u.o.r. 6 .

This does not include the issue of valuation, recognition, presentation and disclosure of products of plant and animal production and short-term services, which are generally free of stocks and long-term services covered by other standards, as well as the application of tax rules.

It is also worth noting that the introduction of Standard No. 13 repeals Resolution No 1/07 Accounting Standards Committee with 16 January 2007 adopting the position ‘Determining the production cost for the balance sheet valuation of stocks’ 7 .

As shown in the analysis below, unambiguous entries in CRS No. 13, introducing certain definitions, ways of selecting methods of cost sharing, cost allocation or capacity calculation will undoubtedly limit the doubts as to how indirect costs should be counted against the cost of production. In addition, the extended examples and descriptions of the different stages of determining the cost of production are an ideal benchmarking tool for planning the actual allocation of costs.

2. General principles for product valuation

The question of product stock valuation and associated concept of manufacturing cost is regulated under Article 28(3) u.o.r. The basis for the valuation of the products produced in the company is the cost of their production, which is not, in fact, subject to any greater doubts.[8].

Under the Manufacturing Costs Act, there are costs that are directly linked to the product concerned and a reasonable proportion of indirect costs. first neither does the components raise any objections.

This means the value of direct materials used in production, labour costs, wages and benefits for direct workers, foreign services rendered in connection with production and the like.

The concept of ‘reasonable part of the costs indirectly linked to the production of this product’ raises more doubts. 9 . Indirect costs of production are costs which cannot be directly attributed to the product itself, as they are common to different products.

In general, indirect production costs can be divided into variable costs (e.g. costs of material and energy consumption and fuel of the plant taken for the purposes of the production cell or telephone services) and fixed indirect production costs (e.g.

depreciation of equipment at a linear rate, rent of the production hall, leasing of machinery or property insurance of production equipment). The variable indirect costs of production are characterised by the fact that their value changes with the increase in production, in principle in a linear manner.

On the other hand, fixed indirect production costs are costs incurred regardless of production volume. The Accounting Act does not directly define how these indirect costs should be allocated to the cost of production in order to obtain a reasonable proportion of them.

It is only the general way in which they can be calculated: ‘To a reasonable part of the indirect costs corresponding to the period of production of the product, the variable indirect costs of production and the part of the fixed indirect costs of production which correspond to the level of these costs with normal capacity utilisation’ 10 .

The mere determination of capacity can be quite a challenge in practice.

It should be stressed, however, that the Act prohibits the cost of producing the cost of:

• • the general management, which is not related to the introduction of the product to the form and place at which it is situated for the moment of sale,
• • storage and storage if this is not an essential element of the production process 11 ,
• • the cost of sales, including marketing, advertising, promotion,
• • production losses 12 ,
• • as a consequence of unused production capacity (which will be developed later in the article).

CRS No 13 is intended to assist in determining the accounting policies used to determine the cost of manufacturing by companies by specifying the terms contained in the Act as well as clearly defining the relevant definitions needed to calculate the cost of manufacturing.

3. Cost facilities

In order to correctly determine the cost of production of the product, the relevant components for calculation should be selected, as it is not always justified to use the quantity of the product produced in this respect.

CRS No 13 The term ‘Act of Costs’ is read here, defining it as ‘any reference object or entity or grouping or calculating costs, identified according to the criteria set out by the company in adaptation to external (financial) and internal (management) needs.

The cost facility may be, in particular, products or their groups, places of cost, functions (activity), recipients, etc.’ 13 .

Both the selection and the number of cost facilities depend mainly on the manner and nature of the production carried out and the processing process. The more complex this process is, the more different cost facilities need to be identified. This may apply not only to the different types of product range produced but also to different production phases.

In this case, it is also important to separate the place where the costs arise. This is the term not occurring in u.o.r., CRS No. 13 is therefore defined as follows: ‘Place of cost creation — organisationally or contractually separated area of activity of the undertaking (e.g. plant, department, outlet or production centre, group of machinery or single machine, production line, brigade, manual work station) the costs of which are a separate cost facility’ 14 .

Indirect costs shall be collected according to the separate cost facilities where the costs arise. Listed in CRS No 13 The examples clearly illustrate the different types of production activities carried out and the way in which cost facilities can be allocated further.

4. Cost of production in coupled production

Part of CRS No 13, concerning the scope of the cost of manufacturing and its elements, these are, in fact, more precise descriptions of the provisions contained in the Act, specifying the characteristics and examples of direct and indirect costs, the costs excluded from the cost of manufacturing or the main types of places where indirect costs of production arise; therefore, there is no reason to dwell on this case again.

An interesting issue, however, is the raised issue of setting the cost of production for coupled production (total, combined) when it comes to the production input of the unit technology operation shall be obtained by force two or more products with different characteristics 15 , as in flour production, where the by-product is bran, or tar as a by-product of coke production. Products obtained during coupled production are divided into main product, by-product and by-product waste[16]. Calculation of the cost in this case involves some estimate, divided into two stages. In the first phase By-products should be measured according to Article 28(3) u.o.r., i.e. at the net sales price of the same or similar product, less the gross profit on average when selling the products, on sales[17]. The net sales price method is chosen as it is unable to estimate the valuation on the basis of the cost of production. In determining the average gross sales profit, account shall be taken of the profitability of the total (main and by-products) resulting from the process. The production costs of all production should then be increased by the possible amount of waste disposal costs and reduced by the pre-calculated value of the production costs of by-products.[18]. In the presence of several main products, the cost of producing them is determined by dividing the coefficients. It shall be drawn up by establishing the following data:

• • quantities produced during the reporting period,
• • The conversion factor for each product can be determined, inter alia, on the basis of the physical or chemical characteristics of the products or their selling price 19 ,
• • the total number of conversion units to be determined by multiplying the actual quantities of each product type by the corresponding coefficients,
• • the total cost of production incurred by way of each calculation line — in this case it would be the value of the main production, increased by the costs of waste disposal and reduced by the costs of by-products,
• • the cost of manufacturing the conversion unit, which is obtained by dividing the sum of the production costs incurred by the total number of conversion units,
• • the unit cost of production of products which is determined as a result of multiplying the cost of production of the conversion unit by the factor of the calculated product[20].

The costs thus determined can then be increased without hindrance by costs relating separately to each product, e.g. processing.

5. Allocation of indirect costs

As already stressed, indirect costs are divided into variables and constants. In practice, however, their distribution is not so unambiguous, which is all the more important, that all variable derived costs are included in the cost of production and that only a reasonable proportion is included in fixed costs.

In addition, many indirect costs are mixed in nature, including both variable and fixed parts. It is therefore important that the accounting policy of the company clearly distinguishes between what indirect costs are considered to be fixed and what variables. This is done by applying an appropriate method of division.

The following table shows the methods listed in CRS No. 1321.

As new production techniques and technologies develop, the level of complexity of the allocation of indirect costs to the cost of manufacturing products is increasing. The absolute amount of these costs is also increasing. This makes choosing the right allocation a more important element in correct cost calculation.

Create a transparent and at the same time precise accounting policy with regard to such calculation by dividing these costs into jobs and applying real-world accounting keys 22 may determine the profitability of the product concerned. Therefore in CRS No.

13 It attaches great importance to the precise description of the ways in which the costs arise, indicating the determinants of such a division as the type and type of production, its structure, organisation, size of the company, etc.

Guidance shall also be given on the method of dividing the places of cost formation depending on whether production is individual, small series, large series or mass.

However, it is worth noting that the examples contained in this standard are open in nature and do not restrict in any way other ways the calculation of the corresponding cost of production. They only support entities that plan to develop an appropriate policy for calculating manufacturing costs.

In CRS No 13 it is pointed out that the simplest way to settle indirect costs is to consider the whole company as one location for the costs. This is of course a very limited form and useful only in some types of mass and bulk production, where the same machines, equipment and workstations are used to manufacture several products in the manufacturing process.[23].

Example 1

‘Stonoga’ produces three types of apple juices A, B and C, which in this example will be the objects of calculation. Their processing time in subsequent phases is similar and all production is closed in two phases.

In May 201X indirect costs of production of 450,000 PLN, of which In the first phase high 200,000 PLN, a In the second 250,000 PLN. In addition, the following value of direct materials has been used for each product: A – 50,000 PLN, B — 60,000 PLN, C — 40,000 PLN.

According to the accounting policy, companies’ indirect costs of production are accounted for by a common key to the weight of the raw materials used, which is characterised by the cost of direct materials. The overlay ratio therefore takes on a value of: 500,000/150,000 = 3 PLN the cost of indirect production of direct materials.

The calculation of the indirect costs of production per product is as follows: product A - 50,000 PLN x 3 = 150,000 PLN, Product B - 60,000 PLN x 3 = 180,000 PLN, product C - 40,000 PLN x 3 = 120,000 PLN. After summing these indirect costs with direct costs, we will get the cost of producing each product.

Of course, this is an example of a very simplified, full use of normal production capacity and limiting many naturally occurring variables in a production company. However, it explains the grounds and the importance of selecting the relevant clearing key.

If the situation from the example were more complicated, it would have to be adapted accordingly. Let us consider a case where the production of each product in different phases is significantly different.

Instead of using a single billing key, more time should be taken into account for machines or workers in the various phases, as in the example below.

Example 2

Stonoga has developed its production and improved the quality of the manufactured products by exchanging production technologies. This caused that in both phases, the operation of machines varied significantly.

In August 201X, the company incurred similar production costs in different phases: phase first - 200,000 PLN, a phase second - 250,000 PLN. The costs of used direct materials have also not changed and have been incurred for product A 50,000 PLN, and for product B 60,000 PLN and for product C 40,000 PLN.

The total working time of machines in August of this year in subsequent phases was 100 machine hours (MG), which gave a total value 200 MG. When changing accounting policy, it was assumed that the more effective clearing key would be accounting separately for each phase compared to MG.

The rate will therefore be in phase first 200,000 PLN divided by 100 = 2,000 PLN/ MG and in phase second 250,000 PLN divided by 100 MG = 2,500 PLN/MG.

If the working time of the machines was – in product A – in phase first 20 MG and in phase second 10 MG, this product will be subject to indirect production costs of 40,000 PLN (20 x 2,000) Phase first and 25,000 PLN (10 x 2,500) Phase second.

This would give a total cost of manufacturing product A of: 50,000 PLN + 40,000 PLN + 25,000 PLN = 115,000 PLN. Similar calculations should be made for other products.

The above examples assume the assumption of real rates of indirect production costs, both variable and fixed, which, of course, requires records of actual production costs incurred in such a division. However, this is not an obligation because CRS No. 13 provides the possibility to apply the planned indirect cost rates of production, e.g. from budgets or other cost planning tools.

However, the assumption of normal capacity utilisation during this period remains inviolable. This is simple enough that many fixed costs are based on long-term contracts (e.g. for media, rent; remuneration of staff employed, leasing of machinery) which are relatively stable.

6. Production capacity and product valuation

As already stressed in this analysis, it is pointed out in u.o.r. that only that part of the indirect costs of fixed production corresponding to the level of these costs at normal capacity utilisation can be included in the cost of production of the product. Naturally, production does not always reach the level referred to as unused production capacity. In CRS No 13 guidance is given on how the costs associated with the non-use of capacity should be excluded when calculating the cost of production of the product.

According to the definition presented in this standard, the production capacity is “a production capacity that can be produced in a unit of time (month, quarter, year, working on one, two, three changes) by means of production potential (machinery and equipment – their number, type, performance, degree of consumption and efficient technical and organisational conditions of production, such as production technology, qualifications, experience and knowledge of workers, quality, labour intensity and complexity of manufactured products)’ 24 . Distinguished three capacity types:

• theoretical – this is the maximum possible production volume with the assumption of full use of working time and technical and organisational conditions, resulting from the technical capacity, determined by the designers or manufacturers, of production machinery or equipment. In other words, this is the maximum, physically possible production volume, assuming continuous work,
• normal production capacity is obtained on average, according to the expected typical conditions, of production volumes over a given period. This implies that there are factors limiting the possibility of full capacity utilisation, for example due to the number of days at work, the working system or the time of planned maintenance, renovation or improvement. It shall be calculated by reference to factors limiting the possibility of full use of the theoretical capacity of machinery and equipment,
• actual capacity utilisation over the period[25]. The same measurement unit shall be used for all types of production capacity. Using these types, the value of unused production capacity can be determined as the difference between normal and actual production capacity.

CRS No 13 contains a number of indications which the measurement unit should use depending on the nature of the production, e.g.

companies with mass production and a limited range of products should express it in the number of products produced in the unit of time, whereas the same companies, but with a differentiated assortment, will express their capacity in conversion units that bring different product ranges into common measure, such as by using machine-hours[26].

As with the place where the costs and the billing key are incurred, the production capacity may be established for the entire company or its smaller components, such as departments, production lines, staff brigades, premises, etc.

As capacity determination may cause considerable difficulty in practice, it should be carried out by the cells responsible for the various areas of production.

‘The unit, defining its potential measures, the method of measuring the normal potential and the potential actually used and the persons responsible for their current measurement, has the possibility to comply with the requirements of the Act within the calculation of the cost of production used’ 27 .

The operator should continuously document and record the normal level of its production capacity for accurate measurement.

In order to calculate the cost of unused capacity, it is necessary to first have information on the normal capacity level. It shall calculate the rate of fixed intermediate production costs for the unit using normal capacity.

The actual capacity utilisation over the period is then determined and on this basis the calculated difference, which will constitute unused capacity.

The number of units of unused production capacity is then multiplied by the rate of fixed indirect production costs per unit and the amount thus determined carries to the costs of sold production, while reducing the indirect production costs of the period[28].

Example 3

The normal production capacity of production centre B in the company ‘Stonoga’ is 450 hours A month.

In October 201X the production in this center was performed only within 400 hours By deducting from normal monthly production capacity the actual utilisation of Centre B this month will be obtained the unused capacity of 50 hours Monthly planned fixed indirect costs amounted to in October 900,000 PLN, and the actual fixed indirect costs of production only 600,000 PLN.

It is therefore necessary to calculate the cost of unused production capacity on the basis of the planned fixed indirect costs of production. Their rate per hour will be 2,000 PLN (900,000 PLN divided by 450 hours). Therefore, the cost of unused capacity for the centre of Bwysta in October 100,000 PLN.

It is also important to emphasise that over a period of more than normal production, the fixed intermediate production costs assigned to the unit of measurement are reduced accordingly. This prevents the valuation of stocks of products above their actual cost of production.

In the end, all factors affecting the cost of manufacturing products, i.e. direct, indirect variable and justified part of indirect fixed costs, taking into account unused production potential, represent the value of the product in question. In Section X of the CRS no. 13 are listed the different stages of determining the cost of production of the product in the following cases:

• • where the product is attributed direct costs of the amount actually incurred and indirect production costs of the amount planned, taking into account unused normal production capacity,
• • where the direct and indirect costs of the planned production are attributed to the products, taking into account unused production capacity,
• • where normal production capacity is established for individual resources generating fixed costs.

The standard contains additional attachments with an accurate presentation of the individual stages on numerical examples.

7. Simplifications when determining the cost of production

An important distinguishing element of CRS No 13 from IAS No. 2 it is possible to apply simplifications in the calculation of the manufacturing costs of products. Under the Accounting Act, entities fulfilling certain conditions may charge indirect costs regardless of the level of capacity utilisation. These are units that have not crossed at least two of the following sizes:

• • 25,500,000 PLN – for the sum of the assets of the balance sheet at the end of the financial year,
• • 51,000,000 PLN – for net revenue from the sale of goods and products for the financial year,

• 50 persons — in the case of average annual full-time employment and are not simultaneously mentioned under Article 3(1e)(1-629). However, it is also important that this does not have a significant negative impact on the implementation of the obligation to present the assets and financial situation and the financial result in a fair and clear manner. This should be guided by the principle of balancing costs and benefits, taking into account a number of factors, such as the variation in product status per year.

This simplification allows the actual cost of indirect production to be calculated in such a way as to be normal cost of production, so it is not mandatory to deduct unused production capacity. This is a solution specific to the Polish market and does not occur in international standards.

8. Summary

The primary task of CRSs is to bridge the gaps that arise in accounting regulations, due to the excessive generalisation of the provisions of the Act. CRS No 13 does not introduce anything revolutionary to the way products are valued, as accounting theory has developed them in practice.

However, the emergence of explicit provisions introducing certain definitions, ways of selecting methods of cost sharing, cost allocation or capacity calculation will certainly limit doubts as to how indirect costs should be calculated against the cost of manufacturing the product.

In addition, the extended examples and descriptions of the different stages of determining the cost of production are an ideal benchmarking tool for planning the actual allocation of costs.

In addition, this standard clearly shows where the individual items described in this standard and related to the cost of production should be presented and disclosed in the accounts, which will allow them to be transferred to the practice of the accounting departments of production companies in the annual reports.

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