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
--------------------------------------------------------
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.