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PROGRAMMING AND CONTROL (SUMMARY)

CHAPTER 1) THE MANAGEMENT CONTROL SYSTEM

The programming and control system can be divided into three different systems:
PLANNING SYSTEM: This is referred to as strategic planning, which starts from an unstructured
process called strategic analysis and consists of the planning of long-term objectives that are to be
developed by the organisational system. Through strategic analysis, all the strengths and
weaknesses of the organisation are identified, as well as all possible actions to resolve the system's
weaknesses.
PROGRAMMING SYSTEM: This system develops short-term objectives, which are structural to the
first system. Short-term objectives are developed in order to implement long-term objectives
appropriately and correctly.
CONTROL SYSTEM: The control system is unique to the programming system in that it consists of
checking that short-term objectives are being correctly processed.
The first to formulate the system is Anthony, who defines it as part of the business subsystems
and divides it into three parts:
STRATEGIC ANALYSIS
MANAGEMENT CONTROL
EXECUTIVE CONTROL
These three phases are embodied in the development of the planning, programming and control
system mentioned above.
Anthony's model went into crisis from 1970 onwards for two fundamental reasons:
- First of all, the model focuses on economic and financial resources and not on fundamental
aspects due to changing consumer needs such as customer satisfaction, such as the shape
of the product or the way it is packaged. In fact, these aspects are contemplated in the
system, but not given too much importance.
- Secondly, there was no longer a time to make a strategy and a time to implement it. This is
because the sudden changes in the market did not allow for two separate moments, but
these procedures are implemented continuously within the organisation.
The planning and control system has several purposes:
MONITORING AND SUPPORT OF DECISION-MAKING ACTIVITIES: as it helps the system to make
the most appropriate decisions for good performance.
COORDINATION: enables the coordination of workers' activities.
LEARNING: enables workers to learn best from the system's activities. MOTIVATIONAL FUNCTION:
function through which individuals are motivated through their involvement in the decisions taken
by the organisation.
MERITOCRATIC FUNCTION: a function through which workers' performance is rewarded.
EMPOWERMENT
ORIENTATION
the characteristics of the system, on the other hand, are manifold:
Consistency: the objectives developed must be consistent with the system.
Completeness: there must be no ambiguities.
Relevance: the relevance of information relates to the type of decisions made.

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Selectivity: the system must focus on the most important activities and not on the relatively useless
ones.
flexibility: the system allows costs and benefits to be worked out.
Formal accountability: makes employees responsible for the activities to be performed.
Orientation: allows for the best possible targeting of workers.
Reactivity: the system can detect internal and external changes.
Timeliness: a function that allows the organisation to adapt immediately to the
changes.
Reliability: an attribute that derives from the degree to which information is effectively accepted
through the structure.
Understandability: the data provided must be clear and comprehensible.
The programming and control system consists of a static and a dynamic structure. The static
structure in turn consists of:
ORGANISATIONAL CONTROL STRUCTURE: refers to the set of economic responsibilities of the
organisation and the way they are distributed within the organisation. INFORMATION-AUDIT
STRUCTURE: refers to the set of control tools through which the organisation processes, receives
and captures information.
The information processed can be of three different types:
- Monetary information processed through accounting solutions.
- Non-monetary quantitative information processed through non-accounting solutions.
- ITC: set of technological tools enabling data processing.
The dynamic structure, on the other hand, consists of:
CONTROL PROCESS: this is the structure through which the organisation is managed. It embodies
the style of control, which depends on various factors, namely: the degree of acceptance of
information, participation in the objectives and the difficulty of these objectives. The combination
of these elements leads to two different control strategies:
- External pressure: it is characterised by a lack of participation by subordinates who are
entrusted with mandatory targets to achieve.
- Internal motivation: through which subordinates have a wide choice on how to develop
their objectives.
These three dimensions form the material structure of control and beyond these, there are three
other dimensions which are respectively:
STRATEGIC CONTROL: this is that form of control which concerns the elaboration of corporate
strategies and the results achieved on the basis of its implementation.
ORGANISATIONAL CONTROL: can be defined as the combination of the planning and control
system and strategic control. It deals on the one hand with the control and support of decision-
making processes, while on the other hand it deals with the monitoring of environmental variables
that may influence decisions.
MANAGERIAL CONTROL: this is the control of actions and relates to the set of actions that are
carried out by individuals in the organisation and how they benefit the organisation. This control
entails significant direct costs even though it is used to prevent problems related to the
performance of actions by individuals in the organisation.

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CHAPTER 2) THE PROCESS AND INFORMATION-TECHNICAL STRUCTURE OF CONTROL
The control process can be defined as the process by which resources are distributed and utilised
within the organisation. It starts with the formulation of scenarios and the definition of objectives
using budgeting, finalising, budgeting and reporting techniques. The control process also makes
use of operational mechanisms such as feed back and feed forward, which are responsible for
guiding the organisation's decisions. In the former, decisions are oriented in the present, while in
the latter, decisions are oriented in the future for better decision management. In addition to
operational mechanisms, the control process makes use of simulation mechanisms that orient
decisions to an even more advanced future.
The control process consists of several steps:
prospect analysis; target
hypothesis formulation; sectoral steps in the control process
budget formulation;
formulation of physical-technical and economic-financial objectives. Annual and
interim objectives are linked;
internal motivation to direct the work of individuals to achieve objectives; measuring results;
comparison of the results of different
management areas; corrective actions;

THE ORGANISATIONAL STRUCTURE OF CONTROL:

The motivational function of employees is realised through budget formulation or through social
control and self-control mechanisms. In the former, the subjects do not have much choice as to
how to achieve the goals, in the latter, on the other hand, forms of self-control allow the subjects
to make autonomous decisions regarding the achievement of the goals. The control style is the
management's ability to guide the system towards the company's objectives. Sometimes it may
happen that the objectives of individuals differ from those of the entire organisation, which is why
forms of organisational control, social control and self-control must be promoted.
In the organisational structure of control, the structural elements of control are:
the organisational structure;
the accounting information structure with reference to goal-setting systems; the
technical IT equipment with reference to data processing technologies; the role system;
the system of relations;
responsibility centres corresponding to organisational units;
the organisational structure of the control makes it possible to analyse the roles and responsibilities of
individual workers in relation to all ramifications of the organisational structure.

THE CONTROL INFORMATION-ACCOUNTING STRUCTURE:

It supports management through the various systems of physical-technical and economic-financial
measurement of management objectives and results. The central element of this structure is the
management accounting system, which includes analytical and general accounting. This system
represents the results of management, i.e. the operations performed. Its fundamental elements
are three:
Plans, budgets and standards;

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Analysis of deviations and reporting: they address the process of formulating strategies and
objectives, from the strategic to the operational level in relation to internal and environmental
variables.
Management accounting.
Objective planning must be preceded by 'reasoning' and 'forecasting' about future prospects
through the formulation of alternative hypotheses in relation to different environmental scenarios.
In addition, objective planning involves two types of analysis:
Historical analysis: this is carried out on the available data at both the physical and economic-
financial level by means of hardware and software for decision support.
Analysis of perspectives: is achieved t h r o u g h historical analysis by integrating knowledge of the
software tools and that of the decision-makers.

THE TECHNICAL-INFORMATIVE INSTRUMENTATION OF THE CONTROL.

This is the entire set of tools that enable the processing of data that have
four different levels of automation corresponding to four evolutionary stages:
1) The first level consists of data processing limited to the administrative-accounting area.
2) The second level becomes more operationally oriented, with the involvement of
commercial and production functions.
3) The third level stems from the need for coordination that has arisen as a result of the
widespread
of second-level automated systems.
4) The last level of automation allows not only the analysis of information from internal
sources, but also analysis from external sources, thus becoming capable of supporting
decision-making and strategic control processes.
The most significant changes come from the transition from the third to the fourth level as both
the information that includes information from external sources and the role of information
technology change. As time goes on, the level of evolution of technology will be increasingly
decisive in determining the success of companies.

THE ROLE OF MANAGEMENT ACCOUNTING.

Management accounting consists of two different records:
General: these relate to the financial movements of operations, follow the 'general' economic
movements of operations as measured by the financial movements, and periodically ratchet up
the values for income and working capital.
Analytical accounting: concerns movements of a mainly internal nature. The fundamental
objective of analytical accounting is to determine costs, revenues and analytical results for the
period, measure production efficiency and provide support for operational decision-making.
Analytical accounting is kept using the double-entry method and is done by observing
management transactions at source.

GENERAL MANAGEMENT ACCOUNTING.

Based on two types of accounts:
Civil-tax and management accounts: these are drawn up to meet civil-tax and internal information
requirements for management control purposes.
Management-only accounts: include both accounts with continuous or permanent operation and
accounts with periodic or intermittent operation:
- Continuous operation: These accounts are of considerable importance in information
systems as they allow the accounting system to be fed with predetermined values from
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 software. They recognise values for easily reversible transactions such as supplier invoices.
- Periodic operation: some management accounts can only be operated periodically. This
category includes: depreciation, amortisation, cost and revenue accruals, which at the end
of the year will undergo the reversal procedure with the consequent formulation of
reversal entries from the management accounts to the statutory management accounts.
- Integration of management accounts: the accounts can be separated into two categories:
a purely statutory category and a purely management category.
Of course, it must be remembered that the statutory and management accounts must be
constantly updated.

THE ROLE OF BUDGET AND STANDARDS.

In addition to being a management control tool, the budget is also the result of a complex
decision-making, coordination, communication and control process involving several
organisational units based on control style and responsibility centres. Alongside the budget is
the system of standards, both at an operational level, with particular reference to the
production bill of materials, and from a management and strategic perspective, for the
purposes of information and organisational integration.

THE ROLE OF THE REPORTING SYSTEM FOR ANALYSING DEVIATIONS.

A reporting system means a narrower set of information, those related to management control
and presented in documentary form referring to both internal and external 'relevant' variables.
The constituent elements of the reporting system are:
- Articulation: the subdivision of the report into elementary, interrelated documents.
- Integration: the process that takes place between accounting and non-accounting data,
internal and external data.
- Flexibility: refers to the ability of the information system to adapt to changes
of the surrounding environment.
- Acceptability: the system must be able to be accepted by all users.
- Relevance: data must be relevant and significant according to their use.
- Selectivity: the system must provide a truly useful amount of data.
- Timeliness: this relates to the effectiveness of the information system and consists of three
characteristics: periodicity, time interval covered by the information and processing time or
delay.
- Accuracy of information and reliability of the information system: this requirement
expresses the ability of the information system to produce data that are as closely related
to organisational reality as possible, within the limits of 'approximation' and 'abstraction'.
- Verifiability: the system must be verifiable with regard to the accuracy of data collection,
selection, classification and storage.

THE COHERENCE BETWEEN THE ELEMENTS DETERMINING THE ORGANISATIONAL STRUCTURE.

The elements of the organisational structure must be perfectly coherent, and assessing this
coherence takes place from the organisational structure in the following areas:
- Among the constituent elements of the information-accounting structure: budgets and
standards.
- Between the information structure and the organisational structure: management of
responsibility centres.
- Between the information structure and the technical-accounting structure: database
design and management.
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 - Between structural and process elements: deviations, reporting and operational control
mechanisms.

CONSISTENCY BETWEEN THE INTERNAL ELEMENTS OF THE INFORMATION STRUCTURE.

Consistency in this case must be developed with regard to budget, standards, reporting and
management accounting. The results of management accounting must be integrated with the
budget targets in order to correctly interpret deviations and realise the necessary control-
guidance.

CONSISTENCY BETWEEN THE STRUCTURAL ELEMENTS OF THE CONTROL.

In the design of a control system, it is essential to define a map of responsibilities and to carry
out a consistent evaluation of results in order to direct organisational behaviour on that basis
and to activate appropriate management intervention levers.

CONSISTENCY BETWEEN STRUCTURAL AND PROCESS ELEMENTS IN MANAGEMENT CONTROL.

This consistency occurs through the use of operational mechanisms such as feed-back and feed-
forward that are well suited to traditional and future-oriented accounting systems. Objective
planning has as its central element the planning of formalised budgets through which planning on
the achievement of objectives is implemented. It should be remembered that the budget has the
characteristic of adaptation to different environmental contexts. As far as the role of the budget is
concerned, it is to push individuals towards the achievement of goals on the assumption that goals
are difficult to achieve.

THE BIG DATA PERSPECTIVE.

As business realities have evolved, there has been an increasing need to process and accumulate
more data. For these reasons, the concepts of big data, data mining, data analytics and data
science have developed. When talking about big data, in fact, the main characteristic referred to is
the granularity of the data, i.e. the ability to capture specific data despite the large amount of
data. However, it is necessary to distinguish the difference between data and information. The
former, in fact, are of both internal and external origin, and related to them are the concepts of
data analytics and data mining, which make it possible to extract information from collected data.
The term data analytics covers all solutions

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statistical, technological and IT technologies that allow large volumes of data to be aggregated. In
the literature, these technologies are classified according to three dimensions:
- Domain: the domain within which the analyses are carried out.
- Orientation: identifies the perspective of the analysis.
- The analysis techniques used.
Data analytics can be described in turn in three categories:
- Descriptive and diagnostic
- Predictive
- prescriptive
The adoption of such data collection and analysis tools allows for an improved ability to measure
performance, but also allows management to consider new types of data from different
technologies such as sensors. The use of new technologies allows management to take on new
skills, but the challenges are different in that the sheer volume of data could persuade decision-
makers to make higher-quality decisions; in addition, another challenge to be managed is how the
data are processed and collected; and finally, the trade-off between the quality and quantity of the
data collected, despite the use of big data and data analytics, it is never possible to obtain an exact
representation of the phenomena under investigation, but only models.

CHAPTER 3) ORGANISATIONAL CONTROL.

A DIFFERENT APPROACH TO CONTROL
Studies analysing management control have identified two different strands STRUCTURALIST
PHILONE: which guides management towards the achievement of the objectives defined in
strategic planning through a cybernetic system that allows the company to self-regulate through
the feed-back mechanism. At the heart of this approach, there is a feature identified earlier by
Anthony, namely the hierarchy in which a process of delegation is activated between top
management and middle management and a process of supervision between the latter and the
various operational levels.
COMPORTAMENTALISM FILON: concerns studies that analyse the psychological and behavioural
aspects of control, in the awareness that the human resource is one of the main resources and
cannot be equated with others. This approach analyses how individual behaviour is not neutral,
but can be conditioned by corporate objectives. Of particular relevance are motivational theories
that aim to identify behavioural change. Such theories were developed by Maslow analysing the
needs scale, by Hertzberg analysing hygiene factors and motivating factors, and finally McGregor's
theeroia of individual X and Y.
In reality, these two different approaches fit perfectly with organisational control, which can be
defined as an extension of management control. Organisational control can be defined as a set of
techniques and actions aimed at influencing the behaviour of individuals in such a way as to
achieve corporate objectives.

ORGANISATIONAL CONTROL: CONCEPTUAL ASPECTS.

Analysed under the subjective aspect, control is more difficult to analyse as this field includes the
actions of individuals who by their nature can develop behaviour that is not suitable for achieving
the company's goals. Therefore, the main causes of the control problem have been identified,
which can be developed in three directives:

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 - Lack of direction: the behaviour of individuals becomes inconsistent with the
objectives because they do not know what the company expects of them.
- Lack of willingness to pursue goals: this phenomenon develops when despite the fact that
individuals know exactly what the company expects of them, it develops goals that are not
in line with individual goals and therefore a lack of willingness to pursue develops.
- Personal limitations: when objectives are not developed due to limitations concerning the
subjects such as: lack of experience, skills or preparation.
For this reason, organisational control must activate mechanisms of a formal and informal nature
that are able to manage the interactions of the subjects within the company, in the hope that the
control instruments have implications for individual behaviour, but also that these may impact on
the effectiveness of the instruments. In the literature, organisational control can take on three
different connotations:
- Mere contextual reference: indicative of the business unit as a whole.
- The second interpretation is within the traditional framework of management control :
articulated in two structures, one static and one dynamic, consisting of operational
mechanisms that compare the pursuit of objectives and the results achieved.
- The third meaning places control within the broader range of instruments of different
natures that can influence the behaviour of individuals with different tools and costs for
the development of the company's objectives.

THE ORGANISATIONAL DIMENSION IN THE CONTROL STRUCTURE.

The control organisational structure overlaps with the basic organisational structure to reinforce
its component elements. It can only be analysed after a careful examination of the relationships
and roles within the company. The former can be defined as the set of tasks that individuals
perform within the company, the relations represent the relationships between the various
organisational units. In particular, the organisational structure is linked to the process of
delegation that is grafted onto vertical relationships, since an organisation cannot centralise all
decisions, but they must be distributed vertically among the various organisational units. This is
why a map of responsibility centres is created, through which timely responses are obtained to the
ever-changing demands coming from the market. In order to define the organisational structure of
control, it is first necessary to identify the relevant organisational units that possess knowledge
and expertise regarding the factors employed, after which a manager is identified who has
decision-making authority and who has certain decision-making levers. Next, it is necessary to
assign to each centre of responsibility the objectives it must achieve. The allocation of
responsibilities must respect two principles:
- Principle of fairness: it is based on the assumption that the objectives assigned to each
manager are dependent on his or her behaviour.
- Principle of consistency: this also extends to horizontal relationships as it requires that
managers pursue objectives in line with the overall objectives of the company.
The responsibility centres on which control is most often set are:
- Expenditure centre: it is characterised by the fact that it is not possible to unambiguously
define the output derived from it and, as a consequence, there is the impossibility of
defining utilisation coefficients for the resources used. (professionalism)
- Cost centre: is characterised by the possibility of identifying cause-effect relationships
between resource use processes and the results obtained. (efficiency)

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 - Revenue centre: mainly concerns the organisational units dealing with sales, with little
possibility of determining the limited resources and their cost, but an easy determination
of the output in both physical and monetary terms. (effectiveness)
- Profit centre: it is possible to define the resources used as in cost centres, and to
determine the output in both physical and monetary terms as in revenue centres. (profit
margin to be maximised)
- Investment centres: characterised by the possibility of influencing the final economic
result and rates of return on investment. (return)

THE ORGANISATIONAL DIMENSION IN THE CONTROL PROCESS.

The control process can be defined as the dynamic component of the system through which, using
the structural component, the purposes of the system itself are pursued. Therefore, it is divided
into several phases, and each phase exerts a preventive control action in guiding people's
behaviour towards the achievement of corporate objectives.
Goal setting: this concerns the formulation of short-term goals and the communication to
managers of guidelines for implementing individual and collective actions. Three fundamental
aspects are relevant at this stage:
- The level of objectives: difficult but easily attainable objectives are implemented.
- The clarity and quantity of the objectives.
- Corporate objectives must be congruent with individual ones: as divergent objectives
could lead to managerial tricks that would make individual interests prevail over individual
ones.
Measuring results: The measurement of results is an activity that takes place ex post, i.e.
after the action has been performed. The focus is on the output of the measurement process,
which is informative, since it is used both to support decision-making and to evaluate employees.
For this reason, this phase of the control process calls attention to certain critical issues strictly
related to the control information structure:
- There must be consistency between the measurements used and the object of measurement.
- The information acquired must be clear and reliable, since without such requirements it
would have little motivational value.
The evaluation of results: this evaluation can be seen as a kind of 'reckoning', rigorously verifying
the conformity of results to plans, or as a 'learning moment' in which reflection is stimulated on
the results achieved, in order to increase the participation of subordinates in the management of
the company or in problem solving. The evaluation of results is also a method through which
individuals are rewarded with a monetary prize, which must be proportional to the effort made
and respect the principle of equity.

THE CONTROL VARIABLES.

The control variables were consolidated by Merchant into a trichotomous distinction into: results
(output), actions (behaviour) and culture (input).
Checking the results: implies an empowerment of individuals on the outcomes of their activities,
so they provide a system that rewards individuals according to their achievements in a way that
increases their motivation.
Control of actions: represents all those administrative and physical mechanisms aimed at directing
individual actions that lead individuals to develop corporate objectives.
Control over people and culture: controls on people relate to the selection and training
of personnel, so as to identify those who are best suited to perform a

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specific task. Controls on culture, on the other hand, aim at the sharing of values transmitted
through: norms, traditions and attitudes.

THE DESIGN OF ORGANISATIONAL CONTROL.

The design of organisational control depends on two elements:
Contextual factors determine its feasibility and are expressed in two conditions:
1) The ability to define the individual actions that enable an objective to be achieved;
2) The ability to easily measure the result.
The second element is the efficiency orientation that can condition individual control mechanisms,
since each control mechanism has specific costs. Among these, one can distinguish direct control
costs associated with the monetary sacrifices incurred in designing and implementing such
mechanisms, and indirect control costs associated with the human nature of people leading to
specific reactions often with counterproductive effects with respect to the very purpose of the
activated controls. These costs are defined as 'decision costs' referring to the transmission of
information necessary for business decisions and 'distribution costs', linked to the presence of
possible opportunistic behaviour and referring to the efforts needed to ensure a fair distribution of
results among actors. This set of costs represent the criticalities associated with any control
mechanism. The criticalities are:
- Behavioural distortions.
- Managerial tricks.
- Operational delays.
- Negative attitudes.

THE CONTROL STYLE.

The control style can be defined as the approach that management implements to incentivise the
managers of individual organisational units to implement behaviour in line with corporate
objectives. It exerts its effects in the following aspects:
- Participation in the objectives .
- The difficulty of the objectives.
- The way results are evaluated.
The control style can be authoritarian or participative. The former takes the form of:
- The definition of objectives set to a top-down logic.
- The targets transmitted to the lower units are 'narrow' and difficult to achieve.
- The performance appraisal process is particularly binding and closely linked to the reward
and punishment system.
The participative control style has the following characteristics:
- It requires the contribution of subordinates in a bottom-up logic.
- The definition of 'broad' and not particularly difficult targets.
- An 'orientation' performance evaluation, based on an overall assessment of performance.
In companies, alongside organisational control there is individual control, which is based on the
individual's values and skills. The other, on the other hand, is social control, based on groups of
people sharing the same goals whose relationships are governed by non-formalised norms that
drive the group to implement their goals in a joint action perspective.

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CHAPTER 5) THE ANALYTICAL ACCOUNTING SYSTEM.

ANALYTICAL ACCOUNTING AND MANAGEMENT CONTROL SYSTEM.

The control information structure consists of the set of instruments that collect and process data
for the purpose of proper management control. This structure can be divided into two categories:
- The technical-accounting information structure : it collects information of a quantitative-
monetary nature and includes: general accounting, analytical accounting, the budget and
standards system and the variance system.
- The extra-accounting information structure : physical/technical and qualitative information
expressing the causes of economic/financial performance.

FUNCTIONS OF ANALYTICAL ACCOUNTING.

Analytical accounting is the tool used by management as decision support and enables the
collection and processing of quantitative and monetary information. The information collected by
cost accounting concerns: costs, revenues and differential economic results of particular
identifiable objects within the business system. The role of analytical accounting can be analysed
through the influence it exerts on the various moments of management control, which in turn can
be divided into:
- Antecedent or preventive control.
- Concurrent control.
- Subsequent or final control.
The first takes the form of budgeting and is aimed at verifying the consistency of the budget with
the objectives contained in the company's strategic plan. The second, on the other hand, is aimed
at monitoring management performance through periodic analyses at predetermined intervals. The
third, finally, takes place once the results have already manifested themselves.

COGNITIVE PURPOSES, COST OBJECTS AND COST CONFIGURATIONS.

The quantitative-monetary information required to meet business needs is diverse:
- Those produced for cognitive purposes: different information is associated with different
criteria for processing cost and revenue data. Analytical accounting is inspired by the
principle of relativism, i.e. determinations are quantities that must be configured according
to different criteria and procedures depending on the cognitive purposes pursued.
- Those produced at different cost objects: they may be different in relation to the different
decisions that management is called upon to take. With reference to a single object, the
useful cost configurations may be multiple depending on the cost elements considered.
In order to support managerial decisions, it may be appropriate to consider cost elements that,
although they make a decisive contribution to obtaining/operating the object, do not entail any
monetary output. We speak in this case of 'notional costs', i.e. relative charges that derive from
resources contributed by the entrepreneur, but which in theory should represent lost revenue.
Another important aspect of cost accounting is the analysis of core business operations only, i.e.
costs and revenues that relate to the activity that constitutes the company's raison d'être.

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COST CLASSIFICATIONS USED IN ANALYTICAL ACCOUNTING.
The classification of costs by nature is specific to general accounting and is based on the physical
and economic characteristics of production factors. The most frequently used cost classifications in
cost accounting concern the following aspects:
- Referability to the company's functional sectors.
- Modalities of assignment to cost objects.
- Behaviour when a reference driver changes.
- Controllability.

CLASSIFICATION OF COSTS ACCORDING TO THEIR REFERENCE TO THE COMPANY'S FUNCTIONAL

AREAS.
In the first classification we have two macro-categories:
- Industrial costs: these are incurred in the area of production and concern those costs
through which raw materials are transformed into final products.
- Non-industrial costs: these are grouped by function and can be classified into:
1) Commercial costs: related to the commercial area, they are incurred for the sale, the
distribution and delivery of products to the customer.
2) Research and development costs: these are incurred in order to design new products to be
placed on the market.
3) Administrative costs: these are incurred for the operation of the corporate administrative
area and relate to bookkeeping, preparation of employee payroll, invoicing, etc....

CLASSIFICATION OF COSTS ACCORDING TO HOW THEY ARE ALLOCATED TO COST OBJECTS.

According to this criterion, there are two categories:
- Direct costs: production factors used exclusively for the cost object such as a production
department, production factors in which it is convenient to measure the quantity
consumed by the cost object and multiply it by its price and finally by its unit price.
- Indirect costs: production factors used for several cost objects for which it is not possible to
objectively measure the quantity consumed by each cost object and factors
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 production for which it is possible, but not economically viable to measure
objectively the quantity consumed by the cost object.
It must be specified that costs are not direct or indirect in an absolute manner, but are so with
specific reference to the specific cost object considered. Direct costs may be allocated to the
cost object by means of allocation, in its entirety, of the cost incurred or to be incurred, or by
objective measurement of the quantity of the input factor used and multiplied by the relevant
unit price. Indirect costs, on the other hand, may be allocated to the cost object through an
allocation or allocation procedure.
The allocation process involves the following steps:
- Identification of indirect cost elements with respect to the cost object considered.
- Choice of allocation base(s), in case several homogeneous aggregations of indirect costs
are identified to be allocated to the undesired cost object.
- Calculation of the allocation coefficients by making the ratio of the aggregate indirect costs
to the total volume of the allocation base.
- Determining the proportion of indirect costs to be allocated to the cost object in question.
The allocation of indirect costs is a crucial aspect of cost accounting. The most complicated
choice to be made is the choice of allocation base, as there are different allocation bases.

OTHER COST CLASSIFICATIONS:

- Fixed costs: these are those costs whose total amount does not vary with changes in the
volume of activity.
These costs can be subdivided into:
1) Committed fixed costs that result from long-term decisions by which the company
equips itself with a certain production or service capacity, which imposes a set of costs
that the company has to bear irrespective of the degree of utilisation of the factors of
production.
2) Discretionary fixed costs that arise at the budget decision-making stage to determine
the allocation of funds for certain activities.
- Semi-variable costs: these consist of a fixed and a variable component that changes
proportionally to the change in the volume of activity.
- Variable costs: costs that vary according to the volume of activity always within the area of
relevance. (Relevance area means the range of variation of the cost driver within which
there is no change in the way the cost under analysis reacts to a change in the cost
determinant.

CLASSIFICATION OF COSTS ACCORDING TO PLANNING METHODS. STANDARD COSTS.

Depending on how they are planned, costs can be classified into:
- Parametric costs: they concern production factors whose consumption by the cost object
can be identified a priori through technical parameters.
- Discretionary costs: these are those costs the amount of which is determined year by year
through management assessments.
- Committed costs: these are capacity costs, the amount of which depends on decisions
taken upstream, so that management's margin of discretion in annual planning is very
limited.
- Standard costs: budgeted costs that reflect assumptions about the future course of
business, however, they are not just assumptions, but actual targets that the company
must achieve. In essence, these costs define what the value of the inputs used to obtain a
certain unit of product should be,
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 also considering in detail the various components and processing steps carried out in the
departments where the product is processed. The physical standard unit is the target
quantity of input required to obtain a unit of product. The standard unit price, on the other
hand, is the target price to be paid for one unit of input.

CLASSIFICATION OF COSTS ACCORDING TO CONTROLLABILITY.

According to the classification criterion identified, costs can be divided into:
- Controllable costs: the amount of which can be significantly and directly influenced by
managers at the head of the responsibility centre.
- Non-controllable costs: input costs for which the manager has no decision-making
leverage.
This classification of costs is referred to as 'responsibility accounting' and is the instrument
through which the authority-responsibility pair underlying the valuation process is
implemented. The controllability of costs is linked to the possibility of exerting a significant
influence on the consumption of the inputs underlying the costs and not necessarily a full
control by management.

CHAPTER 6) FULL PRODUCT COSTING METHODS. PROBLEMS OF PRODUCT

COSTING.
Product cost is a fundamental piece of information for management decision-making and control,
in particular to achieve greater efficiency in the manufacture and sale of products. To determine
product costing, the allocation of direct costs is not critical, but alternative calculation
methodologies can be used in determining product costing such as single and multiple base
allocation and activity based costing. The calculation methodologies can be traced back to the
manner in which the phases are implemented:
- The way in which the different categories of indirect costs are aggregated.
- To the type of allocation bases used.
- To the product cost structure arrived at.

SINGLE BASE AND MULTIPLE BASE ALLOCATION OF INDIRECT COSTS.

They are based on a representation model of resource consumption, according to which products
require the consumption of inputs.

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The single base on the one hand is characterised by a simplicity of calculation, but on the other hand
can be
applied to companies with a low level of indirect costs.

Although the multiple base is a more functional calculation methodology than the single base, it
can hardly lead to satisfactory results in terms of reliable cost information.

COST CENTRE ACCOUNTING.

This accounting is based on the logic according to which resources are used for the operation of
organisational units, cost centres, in which the operations are carried out to obtain the various
products. Cost centres, coincide with organisational units of the company, and as such, are not
mere groupings of indirect costs with respect to products, but are configured as true intermediate
cost objects to which the costs relative to the production factors used for their operation must be
assigned. The consideration of intermediate cost objects makes it possible to make explicit:
- The ways in which organisational units consume resources.
- The way products use the output of different cost centres.
The identification of cost centres is influenced by the organisational structure and takes place in
accordance with certain principles:
- Homogeneity of the operations carried out in order to identify an unambiguous output of
the centre to which costs should be allocated.
- Homogeneity of the endowment of inputs with which the cause of incurring indirect costs
can be identified.
- Significance of the costs incurred at a given centre to actually benefit from the information
produced.
In order to comply with these principles, a responsibility centre may be subdivided into several
cost centres for which no manager can be identified.
Once identified, cost centres can be classified according to the nature of the operations performed and
according to hierarchy. We have:

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 - Production cost centres: organisational units in which production factors are transformed
into finished products.
- Auxiliary cost centres: provide services to the production cost centres.
- Functional or structural cost centres: outside the production area, they are part of the area
administrative, commercial and various general services.
Considering a hierarchical criterion, cost centres are subdivided into:
- Intermediate cost centres: these are allocated not to products, but to other cost centres
that benefit from the services they provide.
- Final cost centres: are those centres whose costs are allocated to products.

PROCEDURE FOR COST CENTRE ACCOUNTING.

Product costing takes place:
- Localisation of costs in cost centres.
- Closure of intermediate cost centres on final cost centres.
- Closure of final cost centres on products.
In the first step, costs are localised in the various centres. These costs are used for the operation of
certain centres. In the second phase, the intermediate cost centres are closed or passed on to the
final cost centres, i.e. the costs allocated to them are allocated to the centres that used the
services they provided. In the third step, the costs of the intermediate centres are borne. The costs
located in them must be apportioned to the products that required their operation. In practice,
allocation bases are used that quantify the activity of the production centre in terms of machine
hours and labour hours. These bases are generally volumetric since they are expressed by
parameters related to production volumes and linked to product units.

The calculation methodology considered was developed in production contexts in which the
production area played a major role and the products were rather standardised. In such a
situation, the weight of production support costs was rather limited and these costs were derived
from services provided to production centres.

ACTIVITY-BASED COSTING.
It is a product costing methodology based on the logic that resources at
available to the company are consumed in the performance of activities, which are required for the

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production of various products. Activities are defined as intermediate cost objects and make it
possible to make them explicit:
- The ways in which activities consume resources and in particular the type and value of
inputs used.
- How the products 'employ' activities and, specifically, which activities are required by
the different products and with what frequency and intensity.
Activity can be defined as any work effort performed within the company. Activity mapping
constitutes a fundamental step in the design and subsequent implementation of the acticity-based
costing methodology. Each activity must be identified with reference to its characterising
elements, which are represented by:
- Events external to the activity that trigger its execution.
- Inputs, i.e. the inputs and procedures used to perform the activity.
- Elementary operations performed by persons and systems.
- Output, i.e. the result of the activity that can be destined for an internal customer of the
company.
- Transactions, i.e. the electronic documents through which the business receives or transmits
information.
In order to favour a correct allocation of indirect costs, in each case, activities can be distinguished in
relation to the degree of traceability to the product. Specifically, they can be divided into:
- Activities at the unit of product level in the case of activities that produce one more unit of
product.
- Batch-level activity when moving or processing a new batch.
- Product-level activities in the case of activities generated by the very existence of the product.
- Organisational support activities in the case of operational support activities
of the company.

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PROCEDURE FOR CARRYING OUT ACTIVITY-BASED COSTING.
1) Localisation of costs in activities;
2) Identification of allocation bases or acticity drivers and allocation of activity costs to
products.
In the first step, the costs incurred in carrying out the activity are located in the activities. The
input costs that are exclusively attributable to an activity are direct costs, thus objectively
attributable to it. Costs are localised by determining the "quantity of resouce driver" employed by
each activity. After determining the total cost of each activity, we proceed, in accordance with the
functional principle, to identify the allocation bases or activity drivers to allocate the cost of the
activities to the various products. Activity drivers are expressly the factors that determine the
demand for activities, in terms of frequency and intensity of use, by the different products. For
each category of activity, different types of activity drivers should be used, since the factors that
determine the demand for them by the products are different in nature. There will therefore be:
- Activity drivers related to production volumes.
- Lot-related activity drivers.
- Product-related activity drivers.
In any case, in order to facilitate the determination of the product cost and to make the calculation
system less complex, it is possible to provide for groupings of activity costs, so-called activity cost
pools characterised by a common activity driver.

In activity-based costing, the allocation bases are not volumetric and do not constitute the core
element of the activity. In modern production systems, in fact, an increasing weight is assumed by
the costs generated by the performance of activities aimed at ensuring: quality, flexibility and
product differentiation.

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THE CHOICE OF MODERN CAPACITY MEASURES TO BE USED IN DETERMINING THE
ALLOCATION COEFFICIENT.
The capacity associated with a given factor of the company's production is used to indicate the
amount of activity that can be achieved in a given period of time. The choice of the level of
capacity to be used has an important bearing on the calculation and management of company
costs. There are, in fact, various capacity measures that differ on the basis of the characteristics
taken into consideration. In particular, a distinction is made between:
- Theoretical capacity: refers to "ideal" conditions under which the business activity is
carried out. Ideal in that it is assumed that there is no waste in the activity.
- Practical capacity: takes into account physiological conditions under which business activity
is carried out. This measure considers all unavoidable factors that generate a reduction in
theoretical capacity.
- Normal capacity: is defined on the basis of the average demand trend in the market,
expected in the medium to long term.
- Budget or planned capacity: represents the level of activity that the company schedules
to be achieved in the budget period.
- Current or actual capacity: this is the only certain variable among the various types.
The choice of capacity measure has an impact on product cost and subsequent decisions, so the
critical issues must be analysed:
- The first is that the indirect cost allocation coefficient does not reflect the real conditions
efficiency of the company.
- The second is that the level of full product cost fluctuates from year to year in relation to
planned activity levels.
- The third concerns the risk of associating indirect fixed costs with cost objects that have
not consumed them. By using the planned capacity for the calculation of the allocation
coefficient, the cost of the unused capacity is allocated to the product and thus borne by
the final consumer.
When choosing the capacity measure to be used, it should be borne in mind that the limitations
highlighted in the use of production capacity are often emphasised by the actual capacity. The use
of theoretical capacity is not desirable because it is not realisable. The use of practical capacity, on
the other hand, is desirable because many of the expedients that are realised with planned
capacity can be avoided, so through it the allocation coefficient can be calculated, just as it is
possible to use normal capacity to calculate it.

FULL COSTING SYSTEM VERSUS VARIABLE COSTING SYSTEM.

In order to meet the different needs of management, it is appropriate to arrive at different
product cost configurations, including different cost elements in the calculation. In some cases, it is
necessary to reason in terms of total cost, i.e. to consider all cost elements attributable to the
product. For other needs, instead, one focuses only on certain cost elements, thus arriving at a
cost configuration called prime cost, or including in addition to direct industrial costs, also a part of
indirect industrial costs, thus arriving at a cost configuration called full industrial or production
cost. Full cost systems allocate the costs of all inputs used, while variable cost systems allocate
only the costs incurred in producing the product.

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