Uses of Process Cost Systems
Use to apply costs to similar products that are mass- produced in a continuous fashion.
Process Cost for Service Companies
Service companies that provide individualized, nonroutine services will probably benefit from using a job order cost system.
Those that perform routine, repetitive services will probably be better off with a process cost system.
Similarities and Differences Between Job Order Cost and Process Cost Systems
Similarities
- Manufacturing cost elements
- Accumulation of the costs of materials, labor, and overhead
- Flow of costs
Differences
- Number of work in process accounts used(one/multiple)
- Documents used to track costs(Job cost sheet/Production cost reports)
- Point at which costs are totaled(each job/each period)
- Unit cost computations(cost of each job/units produced for the job_Total manufacturing costs/equivalent units produced during the period)
Assigning Manufacturing Costs
Accumulation of the cost of materials, labor, and overhead is the same as in job order costing.
► Debit Raw Materials Inventory for purchases of raw materials.
► Debit Factory Labor for factory labor incurred.
► Debit Manufacturing Overhead for overhead cost
incurred.
Assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system.
Assigning Manufacturing Costs (Material Costs)
Difference between process cost system and job order cost system
- A process cost system requires fewer material requisition slips than a job order cost system.
- Materials are used for processes and not specific jobs.
- Requisitions are for larger quantities of materials.
Weighted-Average Method
- Weighted-Average Method considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process.
- Most widely used method.
- Beginning work in process not part of computation of
equivalent units.
Units completed and transferred out + Equivalent units of Ending WIP = Equivalent units of production
What is included in conversion costs?
Conversion costs are labor costs plus overhead costs.
What is a production cost report?
- Key document used to understand activities
- Prepared for each department and shows Production Quantity and Cost data
What are the four steps of the production cost report?
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
What are Total units to be accounted for ?
Total units to be accounted for - units started (or transferred) into production during the period + units in production at beginning of period.
What are Total units accounted for?
Total units accounted for - units transferred out during period + units in process at end of period.
What are Unit Production Costs?
Costs expressed in terms of equivalent units of production.
When equivalent units of production are different for materials and for conversion costs, three unit costs are computed:
- Materials
- Conversion
- Total Manufacturing
What is operations costing?
combination of a process cost and a job order cost system.
What is operations costing?
combination of a process cost and a job order cost system.
- this hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product.
- At the same time, the product may have some customized, individual features that require the use of a job order cost system.
Equivalent units under FIFO are the sum of the work performed to:
- Finish the units of beginning work in process inventory.
- Complete the units started into production during the period (referred to as the units started and completed).
- Start, but only partially complete, the units in ending work in process inventory.
Under the FIFO method, the unit costs of production are based entirely on
the production costs incurred during the month.
FIFO and Weighted-Average
- Weighted-average is simple to understand and apply.
- In cases where prices do not fluctuate significantly,
weighted-average will be very similar to FIFO. - Conceptually, the FIFO method is superior because it measures current performance using only costs incurred in the current period.
- FIFO method provides current cost information, which the company can use to establish more accurate pricing strategies for goods manufactured and sold.
