Job-order costing is used when a company produces individual products or batches of products that are unique. Generally, each unique product or batch is a “job” for which the company needs cost information. Therefore, manufacturing costs must be traced to specific jobs. Process costing, on the other hand, is used when a company produces large quantities of identical items. It is basically a system of averaging. The production costs are divided by the number of units to arrive at an average unit cost.
Student answers will vary but here is one possible answer. Three types of manufacturing companies which might use process costing include pharmaceutical firms, paint manufacturers, and chemical manufacturers. In each of these companies, the products are relatively homogenous and produced in large batches. In many cases, a product suitable for process costing will be a low-cost product, but not necessarily (i.e., various drugs can be expensive, as can various chemicals).
Equivalent units is the quantity of partially completed units expressed in terms of whole units. To calculate equivalent units, the number of units is multiplied by the percentage of completion.
Direct labor and overhead, together, are called conversion costs.
The costs associated with units received from a preceding department within the company for further processing are called transferred-in costs.
Material may enter at the start of a production process while labor and overhead are incurred throughout the process.
Cost to account for = Cost in beginning work in process + Cost incurred in current period.
Reconciliation helps to ensure that mistakes are not made in calculations and units are not “lost.”
Transferred-in costs are the costs associated with units received from a preceding department within the company received for further processing. Therefore, they occur in all production departments except the first.
The four steps involved in preparing a production cost report are as follows:
a. Account for the number of physical units
b. Calculate the cost per equivalent unit for material, labor, and overhead
c. Assign costs to items completed and items in ending work in process
d. Account for the amount of product cost
[LO 2, 3]. In the production of chips, much of manufacturing overhead is a fixed cost. This cost is assigned to completed items and work in process. By starting a large number of items at year end, and given the simplifying assumption that items in process are 50% complete, a significant proportion of the fixed manufacturing overhead will end up in work in process, which reduces the cost of finished items and ultimately the cost of goods sold. The result is that profit will be artificially inflated in the current period.
This approach to increasing profit may mislead investors and other stakeholders and cause them to make bad decisions. Thus, the behavior is not ethical.
[LO 3]. Cost per equivalent unit is calculated for material, labor and overhead. For each of these items, we sum the cost in beginning work in process and the cost incurred during the period. This becomes the numerator of the calculation. Then, we determine the number of units completed and the equivalent units in ending work in process. This becomes the denominator of the calculation.
It is important to note that the equivalent units in ending work in process may be different for material, labor, and overhead. This is because material, labor, and overhead enter the production process at different times. Materials often enter the process at the beginning of the process, and labor and overhead are added evenly throughout the process.
There are 6 steps:
Auger—the grain is cracked by steel grinders. Step 2,...
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