General Cost Theory: general concepts and principles

The General cost theory It is based on the construction of analysis schemes that interpret and explain the reality of the productive phenomenon. It links the factors with the objectives by defining functional relationships between the different actions that make up the production process in question and its valorization.

In the beginning the discipline was handled with the “Criteria of opposites”: If one cost is true, the others will necessarily be false. Currently the “Complementary criteria”, where all costs, as long as it has been determined respecting the fundamental theoretical principles, can be useful to some objective of the analysis.

To understand each of the principles, it is necessary to define concepts such as production, production process, factors, among others. Let's start

What is a productive process?

A productive process It is a set of actions executed on certain assets to give them different utility to the one they had before the exercise of those.

Production: any economic activity that aims to increase the capacity of goods to meet needs or, what is the same, to generate or create utility, whether this is a utility "of form", "place", "time" , "exchange".

In every productive process, conceived this both for the "unit" company and for each particular action that is developed within it, it is feasible to recognize – on the one hand – factors, means and productive resources objectively "entered" and – on the other- products or results objectively "out."

Definition of Costs

From the economic perspective then, cost is the valid link between a result given and the factors considered necessary to obtain it. But, since this “linkage” can only be done through the set of actions that make up the Process, its “validity” will necessarily have to do with the reasonableness of the interpretation of the phenomenon particular productive that is intended to be paid. In addition, it should be taken into account that the ability to meet the needs of the process is greater than the capacity of the factors in isolation.

It is the sum of expenditures and resources consumed necessary for the manufacture of a good or service, from the moment it is designed, until the product is sold to the customer, including after-sales service. This includes the entire value chain of the company

Every cost has two components:

  1. Component physical: amount of factor used expressed in certain units thereof (man hours, machine hours, liters, kilos, kw, etc).
  2. Component monetary: value assigned to each factor.

Fundamental principles of the General Theory of Cost

1. The concept of cost and its extension: defines cost in a generic way as any valid relationship between an objective or result and the factors, means or resources necessary to obtain it in a productive process.

2. The cost as an economic physical phenomenon rather than monetary: the physical relationship between the incoming amounts of resources with quantities coming out of objectives in a productive process in economic terms.

3. The monetization of cost as an instrumental need: due to the different natures of the resources used, the need arises to find an element that allows to express the cost of a certain productive result as the totalizing term. Thus, the monetary unit is determined as the most usual homogenizing element, although not necessarily the only one.

4. The component physical and the component monetary of the cost: at all costs it is possible to recognize:

  • A physical component consisting of the amount of factor that is sacrificed in pursuit of a certain objective.
  • A monetary component represented by the unit value or price taken into account to express in terms of currency the respective physical component

5. The need quantitative: one aspect of the need has to do with the amount of factor that can be considered as necessary to obtain a goal. Although there is no single and exclusive criterion, it can be considered as a necessary amount of factor at least:

  • Physical: a) the amount actually used. b) to the amount that normally should be used.
  • Monetary: a) the actual negotiated price for the purchase of a factor (the one actually paid or paid). b) the hypothetical or ideal price at which each unit of the factor should be acquired.

6. The need qualitative: it has to do with the characteristic or quality that can be demanded from said factor to be considered necessary to measure the cost.

7. The nature of the production process and functional relationships: It is not possible to establish cause-effect relationships between all the actions that make up a productive process. So it is necessary to admit only the possibility of functional relationships that have an important degree of subjectivity between a large part of the different actions that make up the production processes and that link the factors with the objectives.

8. The relations objectives between productive factors and the actions that make up the production process: when analyzing the factors used and consumed during the process, the resources used in each action or set of actions that make up the production process must be objectively identified.

9. The factors of accrual of resources: they explain how much and why the sacrifice of a resource is to say its efficient cause.

10. The relativity The concept of cost: relativity is due to the fact that there is more than one cost depending on the methodology used. For example, if a full or partial costing is used, different costs will be obtained, but nevertheless both will be correct since they consider different costs to be included, depending on the objective.

Bibliography: TGeneral cost theory, Cartier Enrique.

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