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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON# 23 & 24
PROCESS COSTING SYSTEM
(Opening balance of work in process)
Work-in-process and equivalent units
Partially-processed units
At the end of a period there may be some units which have been started but have not been
completed. These are closing work-in-process units.
At this stage we assume for simplicity that there is no opening work-in-process. In that case the
output for a period will consist of two classes of finished units of production:
Those that have been started and fully processed within the period
Those that have been started during the period, but not finished by the end of the period. This
closing work-in-process will be completed during the following period;
Further costs will be incurred in order to achieve this.
Equivalent units
Once processing has started on a unit; of output, to the extent that it remains in an uncompleted
state it can be expressed as a proportion of a completed unit. For example, if 100 units are exactly
half-way through the production process in terms of the amount of cost they have absorbed, they
are effectively equal to 50 complete units. Therefore, 100 units which are half-complete can be
regarded as 50 equivalent units that are complete.
Practice Question
A manufacturer starts processing on 1 March. In the month of March he starts work on 20,000
units of production. At the end of March there are 1,500 units still in process and it is estimated
that each is two thirds complete. Costs for the-period total Rs19,500.
Calculate the value of the completed units and the work-in-process at 31 March.
In practice it is unlikely that all inputs to production will take place at the same time, as was
suggested in the example above. For instance, materials are frequently added at the beginning of a
process, whereas labor may be applied throughout the process. Thus, work-in-process may be
more complete as regards one input or cost element than as regards another. Equivalent units must
thus be calculated for each input and costs applied on that basis,
Practice Question
In this activity, use the same data as in Activity 1 except that:
 all materials have been input to the process
 work-in-process is only one-third complete as regards labor
Costs for the period are as follows:
Materials
10,000
Labor
9,500
Total
19,500
Costs for a process are allocated to equivalent units to calculate valuations for finished goods and
work-in-process.
The FIFO and weighted average methods of cost allocation
In the previous examples it was assumed that there was no opening stock of work-in-process. In
reality, of course, this is unlikely to be the case, and changes in levels of work-in-process during me
period can give rise to problems. There are basically two methods of accounting for such changes.
The weighted average (or averaging) method
The FIFO method.
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Table of Contents:
  1. COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION:COST CLASSIFICATION,
  2. IMPORTANT TERMINOLOGIES:Cost Center, Profit Centre, Differential Cost or Incremental cost
  3. FINANCIAL STATEMENTS:Inventory, Direct Material Consumed, Total Factory Cost
  4. FINANCIAL STATEMENTS:Adjustment in the Entire Production, Adjustment in the Income Statement
  5. PROBLEMS IN PREPARATION OF FINANCIAL STATEMENTS:Gross Profit Margin Rate, Net Profit Ratio
  6. MORE ABOUT PREPARATION OF FINANCIAL STATEMENTS:Conversion Cost
  7. MATERIAL:Inventory, Perpetual Inventory System, Weighted Average Method (W.Avg)
  8. CONTROL OVER MATERIAL:Order Level, Maximum Stock Level, Danger Level
  9. ECONOMIC ORDERING QUANTITY:EOQ Graph, PROBLEMS
  10. ACCOUNTING FOR LOSSES:Spoiled output, Accounting treatment, Inventory Turnover Ratio
  11. LABOR:Direct Labor Cost, Mechanical Methods, MAKING PAYMENTS TO EMPLOYEES
  12. PAYROLL AND INCENTIVES:Systems of Wages, Premium Plans
  13. PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS
  14. LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY OVERHEAD COST
  15. ALLOCATION AND APPORTIONMENT OF FOH COST
  16. FACTORY OVERHEAD COST:Marketing, Research and development
  17. FACTORY OVERHEAD COST:Spending Variance, Capacity/Volume Variance
  18. JOB ORDER COSTING SYSTEM:Direct Materials, Direct Labor, Factory Overhead
  19. PROCESS COSTING SYSTEM:Data Collection, Cost of Completed Output
  20. PROCESS COSTING SYSTEM:Cost of Production Report, Quantity Schedule
  21. PROCESS COSTING SYSTEM:Normal Loss at the End of Process
  22. PROCESS COSTING SYSTEM:PRACTICE QUESTION
  23. PROCESS COSTING SYSTEM:Partially-processed units, Equivalent units
  24. PROCESS COSTING SYSTEM:Weighted average method, Cost of Production Report
  25. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Accounting for joint products
  26. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Problems of common costs
  27. MARGINAL AND ABSORPTION COSTING:Contribution Margin, Marginal cost per unit
  28. MARGINAL AND ABSORPTION COSTING:Contribution and profit
  29. COST VOLUME PROFIT ANALYSIS:Contribution Margin Approach & CVP Analysis
  30. COST VOLUME PROFIT ANALYSIS:Target Contribution Margin
  31. BREAK EVEN ANALYSIS MARGIN OF SAFETY:Margin of Safety (MOS), Using Budget profit
  32. BREAKEVEN ANALYSIS CHARTS AND GRAPHS:Usefulness of charts
  33. WHAT IS A BUDGET?:Budgetary control, Making a Forecast, Preparing budgets
  34. Production & Sales Budget:Rolling budget, Sales budget
  35. Production & Sales Budget:Illustration 1, Production budget
  36. FLEXIBLE BUDGET:Capacity and volume, Theoretical Capacity
  37. FLEXIBLE BUDGET:ANALYSIS OF COST BEHAVIOR, Fixed Expenses
  38. TYPES OF BUDGET:Format of Cash Budget,
  39. Complex Cash Budget & Flexible Budget:Comparing actual with original budget
  40. FLEXIBLE & ZERO BASE BUDGETING:Efficiency Ratio, Performance budgeting
  41. DECISION MAKING IN MANAGEMENT ACCOUNTING:Spare capacity costs, Sunk cost
  42. DECISION MAKING:Size of fund, Income statement
  43. DECISION MAKING:Avoidable Costs, Non-Relevant Variable Costs, Absorbed Overhead
  44. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS
  45. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS:MAKE OR BUY DECISIONS