CONCEPTUAL
Process operations produce large
quantities of similar products or services by passing them through a series of
processes, or steps, in production. Like job order operations,
they combine direct materials, direct labor, and
overhead in the operations. Unlike job order operations that assign
the responsibility for each job to a manager, process operations assign the responsibility
for each process to a manager.
Equivalent units of
production measure the activity of a process as the
number of units that would be completed in a period if all effort
had been applied to units that were started and finished.
This measure of production activity is used to compute the cost per
equivalent unit and to assign costs to finished
goods and work in process inventory. To compute equivalent units,
determine the number of units that would have been finished if all materials (or conversion)
had been used to produce units that were started and completed during
the period. The costs incurred by a process are divided by its equivalent
units to yield cost per equivalent unit.
A process cost summary
reports on the activities of a production process or department for a period.
It describes the costs charged to the department, the equivalent
units of production for the department, and the costs assigned to the
output. The report aims to (1) help managers control their
departments, (2) help factory managers evaluate department
managers’ performances, and (3) provide cost information for financial
statements. A process cost summary includes the physical flow of units,
equivalent units of production, costs per equivalent unit, and
a cost reconciliation. It reports the units and costs to account for during the
period and how they were accounted for during the period. In terms
of units, the summary includes the beginning work in
process inventory and the units started during the month. These units
are accounted for in terms of the goods completed and transferred
out, and the ending work in process inventory. With
respect to costs, the summary includes materials and conversion
costs assigned to the process during the period. It shows how these
costs are assigned to goods completed and transferred out,
and to ending work in process inventory.
The FIFO method for process
costing is applied and illustrated to (1) report the physical flow of
units, (2) compute the equivalent units of production, (3)
compute the cost per equivalent unit of production, and (4) assign
and reconcile costs.
ANALYTICAL
Process and job order manufacturing
operations are similar in that both combine materials, and conversion to produce
products or services. They differ in the way they are organized and managed. In
job order operations, the job order costing system assigns product costs to specific
jobs. In process operations, the process costing system assigns
product costs to specific processes. The total costs associated with
each process are then divided by the number of units passing
through that process to get cost per equivalent unit. The costs
per equivalent unit for all processes are added to determine
the total cost per unit of a product or service.
A hybrid costing system
contains features of both job order and process costing systems.
Generally, certain direct materials are accounted for by
individual products as in job order costing, but direct labor and
overhead costs are accounted for similar to process costing.
PROCEDURAL
Materials purchased are debited to a Raw
Materials Inventory account. As direct materials are issued to processes, they
are separately accumulated in a Work in Process Inventory account for that
process. As indirect materials are used their costs are debited to
Factory Overhead.
Direct labor costs are
assigned to the Work in Process Inventory account pertaining to each
process. As indirect labor is used its cost is debited to Factory
Overhead.
Actual overhead costs are
recorded as debits to the Factory Overhead account. Estimated overhead costs are
allocated, using a predetermined overhead rate, to the different processes. This
allocated amount is credited to the Factory Overhead account and
debited to the Work in Process Inventory account for each separate
process.
As units are passed through
processes, their accumulated costs are transferred across separate Work in Process Inventory accounts
for each process. As units complete the final process and are
eventually sold, their accumulated cost is transferred to Finished Goods
Inventory and finally to Cost of Goods Sold.
Guidance Answers to Decision
Maker and Decision Ethics
Budget Officer
By instructing you to classify a majority of costs as indirect, the manager
is passing some of his
department’s costs to a common overhead pool that other departments will partially absorb. Since overhead costs are
allocated on the basis
of direct labor for this company and the new department has a relatively low direct
labor cost, the new department will be assigned less overhead. Such action
suggests unethical behavior by
this manager. You must object to such
reclassification. If this manager
refuses to comply, you must inform someone in a more senior position.
Entrepreneur
By spreading the added quality-related costs across three customers, the
entrepreneur is probably
trying to remain competitive with respect to the customer that demands the 100% quality inspection. Moreover,
the entrepreneur is partly covering
the added costs by recovering two-thirds
of them from the
other two customers who are paying 110% of total costs. This act likely breaches the trust
placed by the two customers in this entrepreneur’s application of its costing system. The costing
system should be changed, and the entrepreneur should consider renegotiating the pricing and/or
quality test agreement with this one
customer (at the risk of losing
this currently loss-producing customer).
Cost Manager
Differences between the FIFO and weightedaverage methods
are greatest when large work in
process inventories exist and when costs fluctuate. The method used if
inventories are
eliminated does not matter; both produce identical costs.
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