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Chapters 20 and 21

Process operations

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..

FIFO method

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.

profit center

Business unit that incurs costs and generates revenues.

cost center

Department that incurs costs but generates no revenues; common example is the accounting or legal department.

Direct expenses

Expenses traced to a specific department (object) that are incurred for the sole benefit of that department.

Indirect expenses

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.,

hurdle rate

Minimum acceptable rate of return (set by management) for an investment.

balanced scorecard

Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date.

controllable costs

Costs that a manager has the power to control or at least strongly influence..

Uncontrollable costs

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.

Joint costs

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

Residual income

Investment center net income - Target investment center net income

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