Processing of products in a continuous (sequential) flow of steps; also called process manufacturing or process production.
Job Order Cost Accounting System
Cost accounting system to determine the cost of producing each job or job lot.
Process Cost Accounting System
System of assigning direct materials, direct labor, and overhead to specific processes; total costs associated with each process are then divided by the number of units passing through that process to determine the cost per equivalent unit.
Materials Consumption Report
Document that summarizes the materials a department uses during a reporting period; replaces materials requisitions.
Equivalent Units of Production (or EUP)
Number of units that would be completed if all effort during a period had been applied to units that were started and finished.
Department Activity accounting steps
(1) physical flow,
(2) equivalent units,
(3) cost per equivalent unit, and
(4) cost assignment and reconciliation.
Determine physical flow
Report that reconciles (1) the physical units started in a period with (2) the physical units completed in that period.
Compute equivalent units
The second step is to compute equivalent units of production for direct materials, direct labor, and factory overhead for April. Overhead is applied using direct labor as the allocation base for GenX. This also implies that equivalent units are the same for both labor and overhead.
Compute cost per equivalent unit
Equivalent units of production for each product (from step 2) is used to compute the average cost per equivalent unit. Under the weighted-average method, the computation of EUP does not separate the units in beginning inventory from those started this period; similarly, this method combines the costs of beginning goods in process inventory with the costs incurred in the current period.
Assign and reconcile costs
The EUP from step 2 and the cost per EUP from step 3 are used in step 4 to assign costs to (a) units that production completed and transferred to finished goods and (b) units that remain in process.
Process Cost Summary
Report of costs charged to a department, its equivalent units of production achieved, and the costs assigned to its output.
3 Reasons for Process Cost Summary
(1) help department managers control and monitor their departments,
(2) help factory managers evaluate department managers' performances, and
(3) provide cost information for financial statements.
Cost of Goods Manufactured
Total manufacturing costs (direct materials, direct labor, and factory overhead) for the period plus beginning goods in process less ending goods in process; also called net cost of goods manufactured and cost of goods completed..
process costing assigns costs to units assuming a first-in, first-out flow of product.
Accounting for a department's activity for a period includes four steps:
(1) determine physical flow,
(2) compute equivalent units,
(3) compute cost per equivalent unit, and
(4) determine cost assignment and reconciliation.
Determine Physical Flow of Units
A physical flow reconciliation is a report that reconciles (1) the physical units started in a period with (2) the physical units completed in that period.
Compute Equivalent Units of Production—FIFO
The FIFO method accounts for cost flow in a sequential manner—earliest costs are the first to flow out. (This is different from the weighted-average method, which combines prior period costs—those in beginning Goods in Process Inventory—with costs incurred in the current period.)
Three distinct groups of units must be considered in determining the equivalent units of production under the FIFO method:
(a) units in beginning Goods in Process Inventory that were completed this period,
(b) units started and completed this period, and
(c) units in ending Goods in Process Inventory.
Compute Cost per Equivalent Unit—FIFO
To compute cost per equivalent unit, we take the product costs (for each of direct materials, direct labor, and factory overhead) added in April and divide by the equivalent units of production from step 2
Assign and Reconcile Costs
The equivalent units determined in step 2 and the cost per equivalent unit computed in step 3 are both used to assign costs (1) to units that the production department completed and transferred to finished goods and (2) to units that remain in process at period-end
Two methods of costs allocations
(1) traditional two-state cost allocation and
(2) activity-based cost allocation.
Two-Stage Cost Allocation
An organization incurs overhead costs in many activities. These activities can be identified with various departments, which can be broadly classified as either operating or service departments.
2 Steps cost allocation
(1) service department costs to operating departments and
(2) operating department costs, including those assigned from service departments, to the organization's output.
Activity-based costing (ABC)
Cost allocation method that focuses on activities performed; traces costs to activities and then assigns them to cost objects.
Activity Cost Driver
Variable that causes an activity's cost to go up or down; a causal factor
Activity Cost Pool
Temporary account that accumulates costs a company incurs to support an activity.
departmental accounting system
Accounting system that provides information useful in evaluating the profitability or cost effectiveness of a department.
responsibility accounting system
System that provides information that management can use to evaluate the performance of a department's manager.
Business unit that incurs costs and generates revenues.
Department that incurs costs but generates no revenues; common example is the accounting or legal department.
Expenses traced to a specific department (object) that are incurred for the sole benefit of that department.
Expenses incurred for the joint benefit of more than one department (or cost object).
departmental contribution to overhead
Amount by which a department's revenues exceed its direct expenses.,
Investment center return on total assets
Center net income divided by average total assets for the center.,
Investment center residual income
The net income an investment center earns above a target return on average invested assets.,
Minimum acceptable rate of return (set by management) for an investment.
Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.
Costs that a manager has the power to control or at least strongly influence..
Costs that a manager does not have the power to determine or strongly influence.
Responsibility account budget
Report of expected costs and expenses under a manager's control..
responsibility accounting performance report
Responsibility report that compares actual costs and expenses for a department with budgeted amounts.
Cost incurred to produce or purchase two or more products at the same time
Unit Cost - No beginning/ending inventory
Total cost assigned to process (direct materials, direct labor, and overhead) / Total number of units started/finished in the period
Return on investment
Investment center net income / Investment center average invested assets
Investment center net income - Target investment center net income