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Accounting II | © |
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© 1989 John Petroff
PROCESS COST SYSTEM
The process cost system is used by firms manufacturing identical
products in a continuous mass production. As opposed to job order
cost systems where unit costs are determined for separate jobs,
in process cost systems, there is only one product and, therefor,
only one overall unit cost. But, separate unit costs for each
department reflect the manufacturing process as the product moves
from department to department.
PROCESS COST INVENTORIES
Each department work in process inventory is debited for
1- the goods transferred to it and
2- the conversion costs (made of direct materials, direct labor
and an apportioned factory overhead).
It is credited for the goods transferred to the next department
(or finished goods).
EQUIVALENT UNITS OF PRODUCTION
The number of products which could have been manufactured from
start to finish by a department in a given period is known as
the equivalent units of production. This number takes into
account the beginning and ending inventory being made of products
in different stages of production: both are converted to full
or
equivalent units before being added and subtracted (respectively)
from actual total production of completed units.
UNIT PROCESSING COST
The unit processing cost is calculated by dividing the total
processing cost assigned to the department by the equivalent
units of production. This cost is further broken down into
direct materials unit cost and conversion unit cost.
JOINT PRODUCT COST
When two or more products are produced simultaneously in a
single manufacturing process, the joint material, labor and/or
overhead must be apportioned to the different products. A common
allocation method is based on the relative sales value of each
product. When one of the products has a much lower value, it is
called a byproduct. A byproduct is valued at net realizable
value.
MANAGERIAL ACCOUNTING REPORTS
The desirable features of a managerial accounting reports are
accuracy, clarity, conciseness, relevance and timeliness. Reports
are not desirable if their cost exceeds any potential benefit.
GROSS PROFIT ANALYSIS
Gross profit analysis reveals whether a change in gross profit
is attributable to sales volume, selling price or cost of
production. The cost of production is further analyzed with
variable costing or absorption costing. The purpose of the
analysis is to help management make production, pricing, sales
mix decisions as well as control costs.
VARIABLE COSTING
In variable costing, also known as direct costing, all the
variable cost, and only variable costs, are assigned to cost of
goods. A manufacturing margin (or marginal income) is derived
by
subtracting this variable cost from sales, and the factory
overhead together with other selling and administrative
expenses are deducted from it to arrive at net income. Variable
costing reveals the effect of changing volume of production on
net income.
Sales minus Variable costs = manufacturing margin (or marginal income)
Manufacturing margin
minus factory overhead
minus other selling and administrative expenses
--------------------------------------------------------
Net income
ABSORPTION COSTING
In absorption costing, both variable and allocated overhead
costs are assigned to cost of goods sold. Variable and absorption
costing are similar if goods sold and goods manufactured are
equal. When they are not equal, the absorption costing method
reveals the effect of changes in inventory on net income.
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