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Chapter 4 Outline
Product Costing and Hybrid Product-Costing Systems
- Same purpose: Both product-costing systems have the same ultimate purpose—assignment of production costs of units.
- Flow similar: The flow of costs through the manufacturing accounts is the same in the two systems.
- Example: See Exhibit 4-1 (Text at p. 121).
- Example: 100% of materials may be present in the product, but only 50% if the conversion work (labor and overhead) may have been produced.
- Example: If 100 units are 60% of the way through the process, 60 equivalent units have been produced. Notice that none of the units are completed—the firm is said to have done the work equivalent to manufacturing 60 finished units.
- Consider when material added: When considering materials, determine at what point the ending in-process costs are and evaluate whether or not the materials have been added.
- Once added 100% complete: If added, the units are 100% complete with respect to materials; if not, the units are 0% complete.
- Analyze flow: Analyze the physical flow of actual units.
- Calculate equivalent units: Calculate the equivalent units for the various direct materials and conversion.
- Calculate unit cost: Calculate the cost per equivalent unit.
- Analyze total costs: Analyze the total costs to determine the cost of completed production and the cost of ending work-in-process inventory.
- Note: Step d is accomplished by multiplying equivalent units (step b) by the equivalent unit costs (step c).
- Non-labor related cost driver:If a cost driver other than labor is used, overhead and direct labor should be separated on the production-cost report and not combined into one conversion cost amount.
- Separate because goods may be at different stages: This procedure is needed because goods may be at different stages of completion with respect to labor and other cost driver.
- Example: The manufacture of fruit juice requires similar conversion processes but different direct materials (e.g., artificial sweetener versus sugar). Direct materials would be tracked by job, but the other cost elements would be more efficiently tracked by process. This hybrid of the two systems is called operation costing.
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