Production and quality Costs for industrial engineering


The satisfactory Quality of the product and service is at the hands of satisfactory quality and service costs. One of the main obstacles to establishing a more dynamic quality program in previous years was the mistaken notion that achieving better quality requires much higher cost. Nothing could have been farther from the truth in industrial experience.

Manufacturing for an industrial Engineer and its Organization is consuming or transforming inputs for the production of goods or services. Manufacturing is a process of transformation that demands a set of goods and services, called elements, and are the parts with which a product or service is produced

Costs can be classified in a variety of ways:

According To Accounting Periods:
Current costs: those incurred during the production cycle to which they are allocated (ex.: Motive force, wages).
Expected costs: They incorporate the charges to the costs in advance when the payment is actually made (eg.: periodic social charges).
Deferred costs: Expenditures which are carried out in a delayed manner e.g.: Insurance, rentals, depreciations, etc.

DePending on the function they perform: they indicate how the accounts are disaggregated by function in Process Production and Service Departments, in such a way that they enable the obtaining of precise unit costs:
Industrial costs
Commercial costs
Financial costs

According to the form of imputation to the product units:
Direct costs: those whose monetary impact on a product or a work order can be established accurately (raw material, wages, etc.)
Indirect costs: those that cannot be allocated accurately; Therefore, a basis of apportionment (insurance, lubricants) is needed.

DePending on the type of variability:
Variable costs: The total change in relation to the changes in a cost factor.
Fixed costs: They Do Not Change despite changes in a cost factor.
Semifixed costs.

Cost Factor: Distribution Base for cost allocation, depending on the cost object.

Unit or average Cost — Arises from dividing the total cost by a number of units.

Products in Process: It Is the incomplete production; Materials that are only partially converted into finished products that may be at any time.
Costs: They represent a portion of the purchase price of items, properties or services, which has been deferred or has not yet been applied to the realization of income.
Expenses: These are costs that have been applied against the income of a given period.
Losses: Reductions in the participation of the company for which no compensatory value has been received, excluding capital withdrawals.


The three elements of the manufacturing cost are:

Raw Materials: All physical elements that are essential to consume during the process of elaboration of a product, its accessories and its packaging. This on the condition that the consumption of the input must have a proportional relationship with the quantity of units produced..
Direct Labor: Value of the work done by the workers contributing to the productive process.
Manufacturing Load: These Are All costs in which a centre needs to be incurred for the achievement of its aims; Costs which, unless exception cases, are of indirect allocation, therefore require distribution bases.
The sum of the raw materials and the direct labor constitute the prime cost.

The combination of the direct labor and the industrial load constitutes the cost of conversion, so called because it is the cost of converting the raw materials into finished products.

Cost accounting Cycle: The flow of production costs follow the physical movement of raw materials as they are received, stored, spent and converted into finished items. The flow of production costs leads to statements of results, cost of sales and cost of manufactured goods.

Cost Systems: A cost system is a set of procedures and techniques to calculate the cost of the different activities.

DePending on the treatment of fixed costs:

Cost per absorption: All manufacturing costs are included in the cost of the product, as well as all non-manufacturing costs are excluded. The basic characteristic of this system is the distinction that is made between the product and the costs of the period, i.e. the costs that are of manufacture and those that are not.

Variable Cost: Manufacturing costs are allocated to manufactured products. The main distinction under this system is that which exists between the fixed costs and the variables.. The variable costs are the only ones that are directly incurred in the manufacture of a product. Fixed costs represent the ability to produce or sell, and regardless of whether or not the products are manufactured and carried over to the period, they would not be invented. Total fixed manufacturing costs remain constant at any production volume. Total variable costs increase in direct proportion to changes occurring in production.

The quantity and presentation of the profits varies under the two methods. If the variable cost method is used, variable costs must be deducted from sales, as these are costs that normally would not be incurred if the items were not produced.

According To the form of cost concentration:

Order Cost: used when manufactured according to customer’s special orders.

Cost-per-process: used when production is repetitive and diversified, although the items are fairly uniform with each other.

According To the Costing method:

Historical or resulting Cost: First It is consumed and then the cost is determined by virtue of the actual inputs. It Can be used in both order costs and process costs.

Predetermined Cost: Costs are calculated according to estimated consumptions. Within These predetermined costs we can identify 2 systems:

Estimated Cost or budget: applies only when working on orders. These Are costs that are fixed according to previous experiences. Its Basic objective is to set selling prices.

Standard Cost: Applies in case of work by process. Standard costs can be scientifically based (if you intend to measure operational efficiency) or empirical (if your goal is to set selling prices). In Both cases the variations are considered inefficiencies and are out of profit and loss.


Manufacturing is consuming or transforming inputs for the production of goods or services. Manufacturing is a process of transformation that demands a set of goods and services, called elements, and are the parts with which a product or service is produced:

Direct Materials
Direct Labour
Indirect manufacturing Costs.
The Registration of these elements consists of two parts:

Concentration of costs per item (account must)
Transformation of the elements by their incorporation to the processes (to have of the account).
The administration, planning and control make another function: coordination, which is especially concerned with:

Number and quality of the component parts.
Inventories (physical resources) or availability (human resources) Levels.
Procurement and procurement Policies.
Cost Schemes.

Prime Cost: Or first cost, composed of the sum: MATERIALS + LABOR.

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