Cost 06 Handout 1
.pdf
School
La Consolacion University Philippines (formerly University of Regina Carmeli)**We aren't endorsed by this school
Course
BUSINESS A AC401
Subject
Accounting
Date
Dec 22, 2024
Pages
8
Uploaded by SuperHumanDiscovery13153
BM240406 Handout 1*Property of STIPage 1 of 8PROCESS COSTING PART 2 COMPARISON OF JOB ORDER COSTING AND PROCESS COSTINGA job order cost accumulation system is most suitable when a single batch or product is manufactured according to a customer's specifications. A process cost accumulation system is used when products are manufactured by mass production techniques or continuous processing. Process costing is suitable when homogeneous products are manufactured in large volumes. A customized cabinet manufacturer would use a job order cost system, whereas a manufacturer of 8-ounce jars of peanut butter would use a process cost system.Under a job order cost accumulation system, the three (3) elements of a product's cost (direct materials, direct labor, and factory overhead are accumulated according to identifiable jobs. Individual work-in-process inventory subsidiary cost sheets are set up for each and are charged with the cost incurred in the production of the specifically ordered units. Upon completion of each job, its cost is transferred from work in process to finished goods inventory.Under a process cost system, the three (3) basic elements of a product's cost are accumulated according to department or cost center. Individual work-in-process inventory accounts are set up for each department and charged with the costs incurred in processing the units that pass through them. Upon completion of the process, the cost of work-in-process inventory in the last department is transferred to thefinished goods inventory.Feature Job Order Costing Process Costing DefinitionAccumulates costs for each individual job or order. Accumulates costs for continuous processes over time. Production TypeUsed for customized, unique products (e.g., construction, custom furniture). Used for mass production of identical products (e.g., chemicals, textiles). Cost AccumulationSpecific job cost sheets track costs. Departments or processes accumulate costs. Cost FlowCosts are assigned to individual jobs as they are completed. Costs are averaged over all units produced in a period. Work in Process (WIP)Each job has its own WIP account. Each department has a WIP account reflecting the costs of all units in the process. Cost CalculationTotal costs for a job are determined when the job is completed. Costs are calculated at the end of each accounting period using equivalent units. Record KeepingMore detailed records are kept for each job. It is less detailed, as the department maintains records. FlexibilityHighly flexible, suitable for varying production. It is less flexible, as it standardizes production processes.
BM240406 Handout 1*Property of STIPage 2 of 8In a process system, a product may flow through several operations on its way to completion. Materials may be started in the first department (Dept. A). Both the units and costs will be identified for Dept. A over a period, such as a month. When the units are completed in Dept. A, the units with their costs are transferred to the next operation, Dept. B. Additional costs will be incurred and accounted for in Dept. B. At the completion of the operations in Dept. B, the units with their accumulated costs will be transferred to the next department. In each department, the unit cost will be computed by dividing costs incurred by the equivalent production in the department, under job order costing. The equivalent production is not being used because all units in the job are completed at the time the unit cost is computed, so it is proper that the units share in the cost equally. Under process costing, some units are still in process at the end of the month, and it will not be fair to charge these units for the same cost as the completed.
BM240406 Handout 1*Property of STIPage 3 of 8AVERAGE AND FIFO COSTINGThe existence of beginning work in process inventories creates a problem in process costing because of the following questions that must be considered.1.Should a distinction be made between completed units from thebeginning work in process inventory and completed units from the current period?2.Should all the units completed during the current period be included at 100% in equivalent production regardless of the stage of completion of beginning work in process inventory?3.Should the cost of the beginning work in process inventory be added to costs that have been added to production during the current period to arrive at "Costs added during the period?The answers to these questions will depend on the method chosen to account for beginning work in process inventory weighted average costing or first-in, first-out (FIFO) costing. Under the weighted average method, no distinction is made between completed units from thebeginning work in process and completed units from the current period. It is as if all completed units were started and completed during the period. Under the FIFO method, units in the beginning work in process inventory are reported separately from units of the current period.Feature FIFO (First In, First Out) Average Costing DefinitionAssumes that the oldest inventory items are sold first. Calculates the cost of inventory based on the average cost of all units available. Cost FlowThe cost of goods sold (COGS) reflects the cost of the oldest items. COGS reflects a blended cost of all items in inventory. Impact on COGSCOGS may be lower in times of rising prices first. COGS is smoothed out, leading to less variability in reported expenses. Impact on Ending InventoryEnding inventory is valued at more recent costs, which may be higher during inflation. Ending inventory reflects an average cost, which can be more stable over time. Effect on ProfitMay result in higher profits during inflationary periods due to lower COGS. Profits may be lower compared to FIFO during inflation, as COGS is averaged. ComplexityMore complex to implement as it requires tracking the cost of individual inventory items. Simpler to apply, as it averages costs and doesn’t require tracking specific item costs.Use CasesOften used in industries with perishable goods or fast-moving inventory. Common in industries with large volumes of similar items, like manufacturing or retail. Financial ReportingCan result in more fluctuations in net income, reflecting current market conditions. Provides a more stable income statement with less volatility. DIFFERENCES BETWEEN FIFO AND AVERAGE COSTINGA.Computation of equivalent production:1.FIFO—Work done last month on the units in the process; thebeginning is considered. The work needed to make the work in process 100% is the work assigned for the current month (100% ofwork done last month).
BM240406 Handout 1*Property of STIPage 4 of 82.AVERAGE- Work done last month on the units in process beginning is ignored and not considered in the computation of the equivalent production.B. Computation of unit cost:First In, First Out = Current period costs Equivalent units of current work done AVERAGE = Costs in beginning inventory + Current period cost Equivalent units in beginning inventory + Equivalent units of current work done C.Computation of the cost of goods transferred out and the cost of ending inventory.Step 1: Gather Necessary Information Beginning Inventory Costs associated with the inventory at the start of the period. Costs Added During the Period This includes direct materials, direct labor, and manufacturing overhead incurred during the period. Units Started and Completed The total number of units started during the period and how many were completed. Ending Inventory The number of units still in process at the end of the period and their percentage of completion. Step 2: Calculate Equivalent UnitsFor completed unitsAll units completed during the period are considered 100% complete. For ending inventoryCalculate equivalent units based on the percentage of completion for direct materials, direct labor, and manufacturing overhead. Step 3: Compute Total CostsTotal Costs = Beginning Inventory + Costs Added During the Period Step 4: Compute Cost per Equivalent UnitCost per equivalent unit is calculated using the formula: Cost per Equivalent Unit = Total Costs Step 5: Calculate Costs Cost of Goods Transferred Out: Cost of Goods Transferred Out = Cost per Equivalent Unit × Units Completed Cost of Ending Inventory: Cost of Ending Inventory = Cost per Equivalent Unit × Equivalent Units in Ending Inventory
BM240406 Handout 1*Property of STIPage 5 of 8ILLUSTRATIVE PROBLEM 1Computation of Equivalent ProductionUnits in process, beg. (40% completed 5,000 Units started 20,000 Units completed 18,000 Units in process, end (80% complete) 7,000 Materials in this department are added 100% at the beginning of the process.Materials Labor & Overhead A. Average Method Actual WD EP WD EP Units completed 18,000 100% 18,000 100% 18,000 Units IP, end 7,000 100% 7,000 80% 5,600 25,000 25,000 23,600 B. FIFO Method Units completed Units IP, beg 5,000 - 60% 3000 Started & completed 13,000 100% 13000 100% 13000 Units IP, end 7,000 100% 7000 80% 5600 25,000 20,000 21,600 No material was added to the units in processbeginning during the month because, as of the end of last month, they were already 100% complete in terms of materials.ILLUSTRATIVE PROBLEM 2The following information relates to the operations of LMN Company for August 2022.Units In process, Aug. 1 (40% complete) 1,000 Received from Dept. I 8,000 Completed & transferred 8,200 In process, Aug. 31 (20% complete) 800 Costs In Process Aug. 1 Cost-Aug. Cost from preceding dept. P 13,500 P 81,000 Materials 9,000 72,000 Conversion costs 5,036 83,580 Materials in this department are added 100% at the beginning of the process.
BM240406 Handout 1*Property of STIPage 6 of 8A.Average MethodLMN COMPANY COST OF PRODUCTION REPORT For the month ended August 31, 2022 Materials Labor & Overhead Quantity Schedule Actual WD EP WD EP Units in process, beg. 1,000 Units received 8,000 9,000 Units completed 8,200 100% 8,200 100% 8,200 Units in process, end. 800 100% 800 20% 160 Physical Units 9,000 9,000 8,360 Costs charge to the department Costs from preceding department In process, August 1 P 13,500 Transferred-in during the month 81,000 P 94,500 P 10.50 Cost added in the department In process, August 1 Materials P 9,000 Labor & overhead 5,036 Added during the month Materials P 72,000 P 9.00 Labor & overhead 83,580 10.00 Total cost added in the dept. 169,616 19.60 Total cost to be accounted for P 264,116 P 30.10 Costs accounted for as follows: Completed & transferred P 264,820 In process, August 31 Cost from preceding department P 8,400 Materials 7,200 Overhead 1,696 17,296 Total costs as accounted for P 264,116 Computations: - Units cost Cost from preceding department = 13,500 + 81,000 P 10.50 9,000 Materials = 9,000 + 72,000 P 9.00 9,000 Labor & overhead = 5,036 + 83, 580 P 10.60 8,360
BM240406 Handout 1*Property of STIPage 7 of 8B. FIFO Method LMN COMPANY COST OF PRODUCTION REPORT For the month ended August 31, 2022 Materials Labor & Overhead Quantity Schedule Actual WD EP WD EP Units in process, beg. 1,000 Units received 8,000 Physical Units 9,000 Units completed In Process, beginning 1,000 - 60% 600 Recorded and completed 7,200 100% 7,200 100% 7,200 Units in process, end. 800 100% 800 20% 160 9,000 8,000 7,960 Costs charge to the department Cost-in process, beg. P 27,536 Costs from preceding department 81,000 P 10,125 Costs charged to the department Materials 72,000 9.00 Labor & overhead 83,580 10.50 Total cost added in the department 155,580 19.50 Total costs to be accounted for P 264,116 P 29,625 Costs accounted for as follows: Completed & transferred From IP, beg. P 27,536 Cost last month Cost added this month Materials Labor & overhead 6,300 33,836 Total completed 213,00 247,136 In process, end Cost from preceding department 8,100 Materials 7,200 Labor & overhead 1,680 16,980 Total costs as accounted for P 264,116 Computations: - Units cost Cost from preceding department = 81,000 = P 10.125 8,000 Materials = 720,000 = P9.00 8,000
BM240406 Handout 1*Property of STIPage 8 of 8Labor & overhead = 83,000 = P10.50 7,960 REFERENCE: Cabrera, E. (2021). Cost accounting and control. EESM Bookstore. De Leon, N. (2022). Cost accounting and control. Readers Knowledge Bookstore. Cecily Raiborn, (2021), Cost Accounting and Control, Cengage Learning Mike Piper, (2022), Cost Accounting Made Simple, Simple Subjects, LLC