bg management accounting chapter 3 3466

The production reportStep 2: Calculate equivalent unit costs Equivalent units are the product of the number of partially completed units and the percentage completion of those units.. Eq

PROCESS COSTING METHOD

CHAPTER 3

3.1 The process costing – an overview

Process costing is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes.

3.1.1 The concept of Process costing

3.1.1 The concept of Process costing

This is an appropriate system to use when:

- Units do not differ from each other

- Unit cycle time is relatively short

- The production process is continuous

Process costing is used most commonly in industries that convert raw materials into homogeneous

3.1.2 Characteristic of Process costing

- Direct material cost would be charged to each job

- Direct labor cost would be determined from detailed time records kept for each employee

- Overhead would be absorbed into the total cost of each job using the actual overhead absorption rate for each cost centre.

3.2 The process costing flow

3.2.1 Processing department

A processing department is an organizational unit where work is

performed on a product and where materials, labor, or overhead

3.2.1 Processing department

The features of processing department:

- The activity in the processing department is performed uniformly on all of the units passing through it.

- The output of the processing department is homogeneous; in other words, all of the units produced are identical.

- Materials costs can be added in any processing department, although it is not unusual for materials to be added only in the first processing department.

- Labor costs are traced to departments — not to individual jobs

3.2.2 The flow of Manufacturing Cost

Manufacturing overhead is applied to each processingdepartment based on a predetermined rate for eachdepartment

The predetermined rate does not have to be based on thesame cost driver for each processing department

Process Cost Flows (in T-account form)

Work in Process Department B

Work in Process Department A Manufacturing

Overhead

•Overhead

Applied to Work in Process

3.3 The Production report

Production report (statement) is the report that reflects the production situation incurring in each particular department (workshop)

There are 3 sections in a production report:

3.3 The production report

A computation of cost per equivalent unit

Ž Cost Reconciliation section shows the reconciliation of all cost flows into and out of the department during the period.

3.3 The production report

Step 1: Prepare quantity schedule

- Beginning work in process (WIP) (1)

- Ending WIP (2)

- Units started into production in period (3)

- Units completed and transferred out (4)

- Units started into production and completed in period (5)

3.3 The production report

Step 2: Calculate equivalent unit costs

Equivalent units are the product of the number of partially completed units and the percentage completion of those units.

Equivalent units of production always equals:

Units completed and transferred + Equivalent units remaining in work in process

Equivalent Units of Production

Weighted- Average Method

+

Equivalent units of ending WIP

Equivalent units

The FIFO method (generally considered more accurate that theweighted - average method) differs from the weighted -average method in two ways:

1 The computation of equivalent units.

2 The way in which the costs of beginning inventory

are treated in the cost reconciliation report.

+

Equivalent

of ending WIP

Equivalent units

of beginning WIP = Beginning WIP x Uncompleted Percent

Equivalent units of ending WIP: same formula in

Weighted – Average method

Step 3, 4: Determine total costs to account for

(Weighted – Average Method)

Total Costs for the period consist:

- Cost of beginning WIP

- Cost added in the period

To calculate the cost per equivalent unit for the period:

Step 3, 4: Determine total costs to account for

(FIFO Method)

Cost per

equivalent

Costs for the period

Equivalent units of production

for the period

Total Costs for the period consist only cost added

in the period

Step 5: Cost Reconciliation

= Costs for

Completed units

+ Costs for

equivalent units

Step 5: Cost Reconciliation

- Calculate the total cost from beginning inventory transferred

to the next department

- Calculate the cost of units started and completed during theperiod

- Calculate the costs in ending work in process inventory andthe sum of the cost accounted for

Step 5: Cost Reconciliation

• Weighted – Average Method:

Cost flows consists of:

- Costs of beginning WIP

- Costs added to production during the period

Allocated cost:

- To completed units

- To equivalent units of ending WIP

Total Unit cost

Costs for

equivalent units

of ending WIP =

Equivalent units X equivalent Cost per

unit

Step 5: Cost Reconciliation

• FIFO method

Cost flows consists of:

- Costs of beginning WIP

- Costs added to production during the period

Allocated cost:

- To completed units

- To equivalent units of beginning and ending WIP

Costs that allocated to equivalent units of beginning WIP had 2 parts:

- Cost in prior period

- Costs added in current period to complete beginning WIP

Cost per equivalent unit

Costs for units started

and completed in the

period

=

Quantity of units started and completed in the

period

X

Total Unit cost

Costs for equivalent

units of ending WIP =

Equivalent units

Cost per equivalent unit