Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs.

Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs.

CHAPTER OUTLINE

Discuss the uses of a process cost system and how it compares to a job order system.

1

 

2

LEARNING OBJECTIVES

Compute equivalent units.

3

Complete the four steps to prepare a production cost report.

4

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Use to apply costs to similar products that are mass-produced in a continuous fashion.

Examples include the production of Cereal, Paint, Manufacturing Steel, Oil Refining and Soft Drinks.

USES OF PROCESS COST SYSTEMS

ILLUSTRATION 16-1

Manufacturing processes

LO 1

 

LEARNING OBJECTIVE

Discuss the uses of a process cost system and how it compares to a job order system.

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Examples of companies that primarily use either a process cost system or a job order cost system.

USE OF PROCESS COST SYSTEMS

ILLUSTRATION 16-2

Process cost and job order cost companies and products

 

LO 1

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Which of the following items is not a characteristic of a process cost system:

Once production begins, it continues until the finished product emerges.

The focus is on continually producing homogenous products.

When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.

The products produced are heterogeneous in nature.

Question

USE OF PROCESS COST SYSTEMS

 

 

LO 1

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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.

PROCESS COST FOR SERVICE COMPANIES

 

LO 1

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Job Order Cost

Costs assigned to each job.

Products have unique characteristics.

Process Cost

Costs tracked through a series of connected manufacturing processes or departments.

Products are uniform or relatively homogeneous and produced in a large volume.

SIMILARITIES AND DIFFERENCES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS

 

LO 1

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ILLUSTRATION 16-3

Job order cost and process cost flow

Job Order Cost and Process Cost Flow

 

LO 1

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Similarities

Manufacturing cost elements.

Accumulation of the costs of materials, labor, and overhead.

Flow of costs.

Number of work in process accounts used.

Documents used to track costs.

Point at which costs are totaled.

Unit cost computations.

Differences

JOB ORDER COST AND PROCESS COST FLOW

 

LO 1

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ILLUSTRATION 16-4

Job order versus process cost systems

LO 1

JOB ORDER COST AND PROCESS COST FLOW

 

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Indicate which of the following statements is not correct:

Both a job order and a process cost system track the same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead.

b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.

c. Manufacturing costs are accumulated the same way in a job order and in a process cost system.

d. Manufacturing costs are assigned the same way in a job order and in a process cost system.

Question

Use of Process Cost Systems

 

 

LO 1

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False

False

True

False

 

 

 

 

Indicate whether the following statements are true or false.

A law firm is likely to use process costing for major lawsuits.

A manufacturer of paintballs is likely to use process costing.

Both job order and process costing determine product costs at the end of a period of time, rather than when a product is completed.

Process costing does not keep track of manufacturing overhead.

LO 1

 

DO IT!

Compare Job Order and Process Cost Systems

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PROCESS COST FLOW

Tyler Company manufactures roller blade and skateboard wheels that it sells to manufactures and retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining Department shapes, hones, and drills the raw materials. The Assembly Department assembles and packages the parts.

ILLUSTRATION 16-5

Flow of costs in process cost system

LO 2

 

LEARNING OBJECTIVE

Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs.

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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

 

LO 2

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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.

Journal entry to record materials used:

Material Costs

ASSIGNING MANUFACTURING COSTS

 

LO 2

Work in Process—Machining XXXXX

Work in Process—Assembly XXXXX

Raw Materials Inventory XXXXX

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Time tickets may be used in both systems.

All labor costs incurred within a production department are a cost of processing.

The journal entry to record factory labor costs:

Factory Labor Costs

ASSIGNING MANUFACTURING COSTS

 

LO 2

Work in Process—Machining XXXXX

Work in Process—Assembly XXXXX

Factory Labor XXXXX

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Objective of assigning overhead is to allocate overhead to production departments on objective and equitable basis.

Use the activity that “drives” or causes the costs.

Machine time used – primary driver.

Journal entry to allocate overhead:

Manufacturing Overhead Costs

ASSIGNING MANUFACTURING COSTS

 

LO 2

Work in Process—Machining XXXXX

Work in Process—Assembly XXXXX

Manufacturing Overhead XXXXX

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LO 2

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Monthly Entry to transfer goods to next department:

Entry to transfer completed goods to Finished Goods:

Entry to record Cost of Goods sold at the time of sale:

Transfers

ASSIGNING MANUFACTURING COSTS

 

Work in Process—Assembly XXXXX

Work in Process—Machining XXXXX

Finished Goods Inventory XXXXX

Work in Process—Assembly XXXXX

Cost of Goods Sold XXXXX

Finished Goods Inventory XXXXX

LO 2

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In making the journal entry to assign raw materials costs:

a. The debit is to Finished goods Inventory.

b. The debit is often to two or more work in process accounts.

c. The credit is generally to two or more work in process accounts.

d. The credit is to Finished Goods Inventory.

ASSIGNING MANUFACTURING COSTS

 

Question

 

LO 2

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Blue Diamond Company manufactures ZEBO through two processes: blending and bottling. In June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending $6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The Bottling Department transfers units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.

LO 2

 

DO IT!

Manufacturing Costs in Process Costing

2

 

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Journalize the assignment of these costs to the two processes.

To Record Materials Used:

Work in Process—Blending 18,000

Work in Process—Bottling 4,000

Raw Materials Inventory 22,000

To Assign Factory Labor to Production:

Work in Process—Blending 12,000

Work in Process—Bottling 5,000

Factory Labor 17,000

LO 2

 

DO IT!

Manufacturing Costs in Process Costing

2

 

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To Assign Overhead to Production:

Work in Process—Blending 6,000

Work in Process—Bottling 2,500

Manufacturing Overhead 8,500

Journalize the assignment of these costs to the two processes.

LO 2

 

DO IT!

Manufacturing Costs in Process Costing

2

 

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Journalize the transfer of units as appropriate.

To Record Transfer of Units to the Bottling Department:

Work in Process—Bottling 19,000

Work in Process—Blending 19,000

To Record Transfer of Units to Finished Goods:

Finished Goods Inventory 11,000

Work in Process—Bottling 11,000

LO 2

 

DO IT!

Manufacturing Costs in Process Costing

2

 

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Illustration: Suppose you have a work-study job in the office of your college’s president, and she asks you to compute the cost of instruction per full-time equivalent student at your college. The college’s vice president for finance provides the following information.

Costs:

Total cost of instruction $9,000,000

Student population:

Full-time students 900

Part-time students 1,000

ILLUSTRATION 16-6

Information for full-time

student example

LO 3

 

LEARNING OBJECTIVE

Compute equivalent units.

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Total cost of instruction $9,000,000

Number of full-time equivalent students ÷ 1,500

$ 6,000

Illustration: Part-time students take 60% of the classes of a full-time student during the year. To compute the number of full-time equivalent students per year, you would make the following computation.

Cost of instruction per full-time equivalent student =

 

 

Compute Equivalent Units

 

ILLUSTRATION 16-7

Full-time equivalent unit computation

LO 3

 

 

 

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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.

WEIGHTED-AVERAGE METHOD

 

ILLUSTRATION 16-8

Equivalent units of production formula

LO 3

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Illustration: The output of Kori Company’s Packaging Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending work in process which are 70% completed.

Calculate the equivalent units of production.

Completed units 10,000

Work in process equivalent units (5,000 x 70%) 3,500

Equivalent units of production 13,500

 

WEIGHTED-AVERAGE METHOD

 

LO 3

 

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Illustration: Kellogg Company has produced Eggo® Waffles since 1970. Three departments produce these waffles: Mixing, Baking, and Freezing/Packaging. The Mixing Department combines dry ingredients, including flour, salt, and baking powder, with liquid ingredients, including eggs and vegetable oil, to make waffle batter.

ILLUSTRATION 16-9 provides information related to the Mixing Department at the end of June.

REFINEMENTS ON THE WEIGHTED-AVERAGE METHOD

 

LO 3

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Illustration: Information related to the Mixing Department at the end of June.

 

Refinements Weighted-Average Method

ILLUSTRATION 16-9

Information for Mixing Department

LO 3

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Conversion costs are labor costs plus overhead costs.

Beginning work in process is not part of the equivalent-units-of-production formula.

 

Refinements Weighted-Average Method

ILLUSTRATION 16-10

Computation of equivalent

units—Mixing Department

LO 3

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ILLUSTRATION 16-11

Refined equivalent units of production formula

 

Refinements Weighted-Average Method

LO 3

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The Mixing Department’s output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversions costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are:

a. 22,600 b. 23,000

c. 24,000 d. 25,000

Question

 

Compute Equivalent Units

 

LO 3

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LO 3

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The fabricating department Outdoor Essentials has the following production and cost data for the current month.

Beginning Units Ending

Work in Process Transferred Out Work in Process

–0– 15,000 10,000

Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.

LO 3

 

DO IT!

Equivalent Units

3

 

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Compute the equivalent units of production for (a) materials and (b) conversion costs.

Units transferred out 15,000

Ending work in process units 10,000

Equivalent units of production for materials 25,000

The fabricating department has the following production and cost data for the current month.

Beginning Units Ending

Work in Process Transferred Out Work in Process

–0– 15,000 10,000

 

 

LO 3

 

DO IT!

Equivalent Units

3

 

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Compute the equivalent units of production for (a) materials and (b) conversion costs.

Units transferred out 15,000

Equivalent unit in ending WIP (10,000 x 30%) 3,000

Equivalent units of production for conversion costs 18,000

 

The fabricating department has the following production and cost data for the current month.

Beginning Units Ending

Work in Process Transferred Out Work in Process

–0– 15,000 10,000

 

LO 3

 

DO IT!

Equivalent Units

3

 

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A production cost report is the

Key document used to understand activities.

Prepared for each department and shows Production Quantity and Cost data.

Four steps in preparation:

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

 

LO 4

 

LEARNING OBJECTIVE

Complete the four steps to prepare a production cost report.

4

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ILLUSTRATION 16-12

Flow of costs in making

Eggo® Waffles

Production Cost Report

 

Flow of costs to make an Eggo® Waffle and the related production cost reports for each department.

LO 4

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LO 4

 

ILLUSTRATION 16-13

Unit and cost data—Mixing Department

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Physical units – actual units to be accounted for during a period, regardless of work performed.

Total units to be accounted for – units started (or transferred) into production during the period + units in production at beginning of period.

Total units accounted for – units transferred out during period + units in process at end of period.

Compute the Physical Unit Flow (Step 1)

Production Cost Report

 

LO 4

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Production Cost Report

 

Compute the Physical Unit Flow (Step 1)

ILLUSTRATION 16-14

Physical unit flow—Mixing Department

LO 4

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Mixing Department

Department adds materials at beginning of process and

Incurs conversion costs uniformly during the process.

 

Compute Equivalent Units of Production (Step 2)

Production Cost Report

 

ILLUSTRATION 16-15

Computation of equivalent units—Mixing Department

LO 4

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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

Compute Unit Production Costs (Step 3)

Production Cost Report

 

LO 4

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Work in process, June 1

Direct materials costs $ 50,000

Cost added to production during June

Direct material cost 400,000

Total material costs $450,000

 

Compute total materials cost related to Eggo® Waffles:

 

 

 

 

 

ILLUSTRATION 16-17

 

 

 

ILLUSTRATION 16-16

Production Cost Report

 

Compute Unit Production Costs (Step 3)

LO 4

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Work in process, June 1

Conversion costs $ 35,000

Costs added to production during June

Conversion costs 170,000

Total conversion costs $205,000

 

 

 

 

 

 

 

 

 

ILLUSTRATION 16-18

Production Cost Report

 

Compute total materials cost related to Eggo® Waffles:

Compute Unit Production Costs (Step 3)

LO 4

ILLUSTRATION 16-19

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Compute total manufacturing costs per unit:

ILLUSTRATION 16-20

 

 

 

Production Cost Report

 

Compute Unit Production Costs (Step 3)

ILLUSTRATION 16-19

LO 4

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Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows.

Costs to be accounted for

Work in process, June 1 $ 85,000

Started into production 570,000

Total costs $655,000

 

 

ILLUSTRATION 16-21

Prepare a Cost Reconciliation Schedule (Step 4)

Production Cost Report

 

 

LO 4

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Production Cost Report

 

ILLUSTRATION 16-22

Cost reconciliation schedule—Mixing Department

LO 4

Prepare a Cost Reconciliation Schedule (Step 4)

16-‹#›

 

Prepare the Production Cost Report

ILLUSTRATION 16-23

Production cost report

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Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is:

a. $45,000.

b. $55,000.

c. $75,000.

d. $100,000.

Production Cost Report

 

Question

 

LO 4

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Companies often use a combination of a process cost and a job order cost system.

Called operations costing, 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.

COSTING SYSTEMS – FINAL COMMENTS

Production Cost Report

 

LO 4

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In March, Rodayo Manufacturing had the following unit production costs: materials $6 and conversion costs $9. On March 1, it had zero work in process. During March, Rodayo transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process.

Costs transferred out $180,000

Work in process, March 31

Materials (800 x $6) $4,800

Conversion costs (200 x $9) 1,800 6,600

Total costs $186,600

 

 

 

 

LO 4

 

DO IT!

Cost Reconciliation Schedule

4

 

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EQUIVALENT UNITS UNDER FIFO

Equivalent units 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.

LO 5

 

LEARNING OBJECTIVE

APPENDIX 16A: Compute equivalent units using the FIFO method.

5

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ILLUSTRATION 16A-1

Physical unit flow—Assembly Department

EQUIVALENT UNITS UNDER FIFO

 

 

LO 5

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ILLUSTRATION 16A-2

Computation of equivalent units—FIFO method

EQUIVALENT UNITS UNDER FIFO

 

 

LO 5

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LO 5

 

COMPREHENSIVE EXAMPLE

 

ILLUSTRATION 16A-3

Unit and cost data—Mixing Department

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Compute the Physical Unit Flow (1)

ILLUSTRATION 16A-4

Physical unit flow—Mixing Department

EQUIVALENT UNITS UNDER FIFO

 

 

LO 5

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LO 5

EQUIVALENT UNITS UNDER FIFO

 

 

ILLUSTRATION 16A-5

Physical unit flow (FIFO)—Mixing Department

Compute the Physical Unit Flow (1)

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EQUIVALENT UNITS FOR MATERIALS

Kellogg adds materials at the beginning of the process. 100% of the materials costs has been incurred on ending WIP.

Compute Equivalent Units of Production (2)

EQUIVALENT UNITS UNDER FIFO

 

 

ILLUSTRATION 16A-6

Computation of equivalent units—materials

LO 5

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LO 5

The Mixing Department required 30,000 equivalent units (100,000 units x 30%) of conversion costs to complete the beginning inventory. In addition, the 200,000 units of ending work in process were 60 percent complete in terms of conversion costs.

EQUIVALENT UNITS FOR CONVERSION COSTS

EQUIVALENT UNITS UNDER FIFO

 

 

Compute Equivalent Units of Production (2)

ILLUSTRATION 16A-7

16-‹#›

 

Under the FIFO method, the unit costs of production are based entirely on the production costs incurred during the month.

ILLUSTRATION 16A-8

Costs incurred during production in June

Compute Unit Production Costs (3)

EQUIVALENT UNITS UNDER FIFO

 

 

LO 5

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Compute unit materials cost, unit conversion costs, and total unit cost.

ILLUSTRATION 16A-9

Unit cost formulas and computations—Mixing Department

 

 

 

 

 

 

 

 

 

Compute Unit Production Costs (3)

EQUIVALENT UNITS UNDER FIFO

 

 

LO 5

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Kellogg is now ready to determine the cost of goods transferred out of the Mixing Department to the Baking Department and the costs in ending work in process. The total costs charged to the Mixing Department in June are as follows.

ILLUSTRATION 16A-10

Costs charged to Mixing Department

Prepare a Cost Reconciliation Schedule (4)

EQUIVALENT UNITS UNDER FIFO

 

LO 5

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LO 5

EQUIVALENT UNITS UNDER FIFO

 

 

ILLUSTRATION 16A-11

Cost reconciliation report

Prepare a Cost Reconciliation Schedule (4)

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Internal document for management that shows production quantity and cost data for a production department.

Provides a basis for evaluating the productivity of a department.

Managers can use the cost data to assess whether unit costs and total costs are reasonable.

Top management can also judge whether current performance is meeting planned objectives.

Prepare the Production Cost Report

EQUIVALENT UNITS UNDER FIFO

 

 

LO 5

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Prepare the Production Cost Report

ILLUSTRATION 16A-12

Production cost

report—FIFO method

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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.

FIFO AND WEIGHTED-AVERAGE

 

LO 5

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Copyright

 

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