UNIT COSTS

UNIT COSTS

UNIT COSTS

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

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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.