The objective of the work entitled "Methodological Option for the development of the System of Costs by Processes" is to make a methodological proposal that will serve as reference material for teachers or students who teach this type of content.
To fulfill the previously stated objective, an extensive bibliographic review of different sources related to the subject was carried out, proceeding to the search, compilation of the necessary information and data, being defined the main aspects to have in each of the subjects developed in this work.
The work refers to the treatment received by the units involved during a productive period using the Process Costs system, under inventory costing methods. A production cost report is made, where the operations involved in a production cycle, as well as their accounting, will be reflected.
methodological-option-for-the-development-of-the-issue-system-of-costs-by-processesThe most significant results show that this bibliographic material is very useful as it becomes an effective support instrument for the preparation and improvement of both teachers and students who are related to the subject of Costs.
Process Cost Systems
The cost accounting system is one of the most extensive information systems in almost every organization and cost as a fundamental element within it constitutes an effective management instrument, as it acts as a thermometer of the use of the resources available to the entity.
The design of a cost accumulation system must be compatible with the nature and type of operations carried out in companies, whether they are productive or services. The cost-by-process technique is used for inventory costing. This is a system of accumulation, recording and control of production costs by department or cost center that commonly pass continuously through a series of operations or processes giving rise to the incurrence of manufacturing costs.
Departmental division
Most process costing situations have two or more departments within their production cycle.
In general, every company is divided into sections and each of these has objectives, human, material and financial resources, as well as assigned costs. In general, the sections usually coincide with the cost centers or departments of the company, this being the main functional division in a factory where manufacturing processes are executed. When two or more processes are executed in a department, it may be convenient to divide the departmental unit into cost centers, accumulating the costs in each of them, considering each department as a separate accounting unit from the other.
Departmental transfer
Due to the continuous process that characterizes the cost-per-process system, the units involved in a certain production flow through two or more departments before reaching the finished products warehouse, therefore what happens in one department is the continuity of the other.
When the units are finished in one department, they will be transferred to the next department or cost center with a certain degree of completion with respect to the final product, so that the units finished in one department will be the raw material for the next until they achieve be transformed into finished articles.
The units that are transferred to other departments are accompanied by their corresponding costs and as they flow, the unit cost of the same increases, since to these are added those that will be incurred for the completion of the units throughout of the production process, being accumulated by the different departments.
Objectives of the cost per process system
A cost per process system determines how the manufacturing costs incurred during each period will be allocated.
Cost allocation in a department is only an intermediate step; The last objective is to determine the total unit cost in order to determine the income.
During a certain period some units will be started, but not all will be finished at the end of it.
Consequently, each department determines what part of the total costs incurred in the department can be attributed to the units in process and what part to the finished ones, these constituting the costs of inventories.
Physical flow
As previously seen under a process cost system, the units must go through different departments and these are transferred with their respective costs. During a production process, all the units that start in it are not always finished or are not always transferred, so the production of each department can be analyzed in:
- Units in inventory at startup Units completed and transferred to the next department Units completed but remaining in the department (not yet transferred) Units still in process
All units must be accounted for in each department, each one being considered as a separate accounting unit. This accounting can be achieved through an equation and reflected in a specific account (production in process inventory).
In the work-in-process inventory account, the cost of the units that intervene in a certain production process is recorded, both those that enter and those that leave. The balance of the departmental account of products in process must represent at the end of the period, the final inventory cost of products in process. This account is debited for production costs: direct material (MD), direct labor (MOD), and manufacturing overhead (CIF) incurred in that department, in addition to the costs it receives from a previous department caused by the units that are transferred to it. When completed units are transferred, the work-in-process inventory is credited for the costs associated with those units.leaving in this account the balance of the units that have not yet completed the production process.
A product can flow through the factory by different routes or routes until its completion. The best known product flows are sequential, parallel and selective.
In a product SEQUENTIAL FLOW, the initial raw materials are located in the first department of the process and flow through each department of the factory, the additional materials may or may not be added in the other departments. All the articles produced go through the same processes, in the same sequence.
In the PARALLEL FLOW of the product, the initial raw material is added during different processes, starting in different departments and then joining in a final process or processes.
In a SELECTIVE PRODUCT FLOW, various items are produced from initial raw materials. The final product is determined in the process it goes through. Each process will produce a different finished product.
Initial inventory of work in process.
For any production process in the departments where production takes place, there should generally be an initial inventory of work in process.
This condition is given because the cost per process is linked to a mass production of a continuous nature. As we have seen previously, not all the units started in a certain period will be finished in the same period, therefore units will remain in process at the end of the period, representing these the final inventory of work in process and this being, in turn, the initial inventory of work in progress for the period to come.
Organizations that use the Process Costs System
The process cost system is used in large manufacturing companies where production is continuous or massive.
Cost per process is most commonly found in chemical, oil, textile, paint, food canning, rubber, steel, glass, food processing, mining and cement industries, sugar refineries, and all other industries. companies where this type of system is compatible with their operations.
Characteristics of a process cost system
- The process costing system is used in industries where the final products are more or less identical. The process costing system assumes the cost as the average of all units produced during the period. A process costing system is used. to compute the costs of a product for a mass or a current production system. In the process costing system the product costs can be determined by adding the average unit costs for each operation periodically. In process costing the completed production from the last department is transferred to the finished goods inventory The process cost accumulation procedure follows the production flow,Control accounts are established for each process and direct costs and manufacturing overhead are allocated to each process.In process costing the cost is transferred from process to process and becomes cumulative as a production procedure and the addition of the costs of the last department determines the total cost.
Product costing
The ultimate goal of a process cost system is to determine the total unit cost of products in a given productive period by assigning accumulated costs to finished units and units still in process.
To achieve this, the analysis of a production cost report is necessary, which will provide a detailed record of the units and costs during a period.
The cost of production report is an analysis of the department or cost center operations over a period. All costs incurred in a department are presented separately by cost elements (MD, MOD and CIF).
The production cost report is often the source for summarizing journal entries for the period.
The production report that will be presented below will be comprised of five steps, being the same as follows:
- Unit movement report Production of equivalent units Costs to be accounted for Unit costs Accounted for costs
Through these five steps we will see how the flow of units occurs through the different departments and the treatment that will be given to said units in each one of them.
Each step will be explained by traditionally used methods and demonstrated through an integrative exercise. As these are developed, the terms previously exposed will be discussed.
To achieve a better understanding of the aforementioned, the information necessary to prepare a production cost report will be graphically didactic as shown below:
Where:
MI: Starting material.
MF: Final material.
II: Initial inventory.
IF: Final inventory.
PP: Put into production.
RDA: Received from the previous department.
T and T: Completed and transferred.
Product cost becomes more complicated when initial work-in-process inventories are present.
There are two costing techniques that allow you to value the initial inventory of products in the manufacturing process:
- Weighted Average Method First In First Out (FIFO) Method.
Proposed exercise:
The Manufacturing Company "Packages, SA" has a factory that develops its work by processes, it consists of two departments, in which it is manufacturing a unique product. In department II, materials are added that increase the number of units by 10,000, there are lost and damaged units in both departments.
The manufacturing cost for the week ended April 12 of the current year, has the following detail.
Products in process at the beginning of April:
| Detail | Dept. I ($) | Dept. II ($) |
| Cost in the previous apartment: | 0.00 | 25 320.00 |
| materials | 16 000.00 | 10 000.00 |
| Salary | 7 114.00 | 3 483.00 |
| Indirect expenses | 2 048.00 | 1 720.00 |
Manufacturing costs for the week ended April 12 of the current year:
| Detail | Dept. I ($) | Dept II ($) |
| materials | 84 000.00 | 62 800.00 |
| Salary | 54 720.00 | 22 385.00 |
| Indirect expenses | 8 800.00 | 17 000.00 |
The characteristics of the quantities produced are presented below:
|
Weighted Average Method
The weighted average method is based on the averaging of the costs of the products to determine the unit cost of the products by taking the accumulated cost of a department per cost element (included by the cost of the initial inventory of work in process plus the costs currents of a period) and the total divided by the number of existing units (whether completed or not), thus obtaining a weighted average unit cost.
The costs associated with units still in process lose their identity due to the merger with units put into production. Starting inventory is treated as if it were current period costs. There is no distinction between finished units and units in final process.
Production cost report. Department I
Steps
- Unit movement report.
In this section, the physical flow of the units inside and outside the department is recorded, that is, those entering or leaving the department.
We will use the equation of physical flow already presented to give additional explanation about the work in process:
Accounting for this physical flow and taking into account that the first department will be dealt with, the unit movement report will be made up of two sections:
- Amount to be accounted for:
In this first section are all the units that enter production in a certain period, therefore, it provides the number of units that are available in a department and that can be subjected to the production process.
Where:
Initial units in process or units at startup.
It is these units that made up the final inventory of the past period that were not completed and have passed to the present with a certain degree of completion.
Units started in process or put into production.
These units are also subjected to the production process within a department, but unlike the started units, they are not part of the period but are started in the current period.
- Distributed as follows:
In this second part of the report, the destination of the available units determined in the first part of said report will be represented, showing the distribution that they will have at the end of the production process.
Where:
Completed and transferred:
Within this category are those units that once started in the department included a 100% completion cost with respect to the departmental cost, being then transferred to the next department.
In process at the end.
All the units that are brought into production are not always finished or are not always transferred and these are precisely the ones that make up the Final Inventory of a department, since they do not achieve 100% completion in that period or are not transferred to the next department.
Lost units.
Lost units are those that arise in production due to waste, evaporation, or faulty work.
You will see below how the unit movement report is formed:
| Unit movement report | ||
| I) Amount to be accounted for: | ||
| Units in process at startup | xxx pcs | |
| Units put into production | xxx | |
| Total available | xxx pcs | |
| II) Distributed as follows: | ||
| Completed and transferred | xxx pcs | |
| In final process | xxx | |
| Losses | xxx | |
| Total Distributed | xxx pcs |
Using the proposed exercise and the graph previously represented, it will be observed that:
The first part of the report Amount to be rendered is represented in section 1 (S 1), while the information necessary to prepare the second part of said report is reflected in section 2 (S 2).
Taking into account the integrating exercise, this first step will be as follows:
| Unit movement report | ||
| I) Amount to be accounted for: | ||
| Units in process at startup | 12 000 pcs | |
| Units put into production | 40,000 | |
| Total available | 52000 pcs | |
| II) Distributed as follows: | ||
| Completed and transferred | 44 000 pcs | |
| In final process | 8,000 | |
| Total Distributed | 52 000 pcs |
Note that the total available must be equal to the total distributed, since the units that will be distributed are the same that are subjected to the production process.
- Equivalent production
In most cases, all the units are not finished in the period, so there must be units still in process in different phases of production. In this step, all the units involved in the production process are brought to the end of finished units, as these are essential for calculating unit costs. The equivalent production is commonly divided into the categories of material costs and conversion costs (MOD and CIF) depending on the amount of work applied up to that point for each of these elements.
The total equivalent units of production for each cost element is found by adding the number of units completed with the equivalent units of work in process.
The units in process are converted into equivalent units by multiplying the units in process by the percentage of completion, that is, the degree of completion must be completed for each cost element. Units still in process are multiplied by the level of completion in order to obtain equivalent units.
At this point, it seems appropriate to analyze how to determine the degree of completion by cost element for finished units and units in production process.
Materials and Conversion Costs
The materials can be added to the production at the beginning, at the end and / or during the process, that is, it can exist during a productive period Initial Material (MI), Progressive Material (PM) and / or Final Material (MF). For their part, labor costs and manufacturing indirect are applied uniformly throughout the process.
What happens to the previously mentioned units (completed and in production process) with respect to the cost of conversion and what happens when these materials are added during the period will be detailed below.
Finished
When a unit is finished in a department it is transferred to another with a 100% completion with respect to the costs of that department, even if any of these materials have been added to production, the finished units will have the costs of the complete materials (100%) without taking into account whether the department had units in process at the beginning of the period because it is working with the Weighted Average method.
According to this costing, units in process at the beginning of the period are treated as if they had been started and finished during the period. All finished units are included in the production equivalent to 100% completion with respect to materials and conversion costs, since as we have seen there is no distribution between the initial units and those started, because both lose their identity in the fusion.
Production costs are applied uniformly throughout the production process.
In final process
Units that were not completed during a productive period were recorded in the final inventory of work in process with a given percentage of completion depending on the costs that were incorporated in the production process (MD and CC). Because materials can be incorporated at any point in production, it will be seen to occur with units in final process under these three conditions:
- Initial Material (MI)
Because this material is added at the beginning of production, when this occurs all units, both those that were finished and the units that are in final inventory, must have the full cost of this material included, brought to production equivalent to the 100% with respect to the initial material.
- Progressive Material (MP)
This material can be added at any time of production and there may be more than one material in process in a certain period, therefore the units of the final inventory of work in process must be included in the equivalent production in correspondence with the amount of costs that were incorporated during the process with respect to this or these materials.
- Final Material (MF)
It is the one that is incorporated at the end of the production process, under this condition the units that have not yet been finished should not have any percent included in their cost with respect to the final material since they will reach the full cost of this material once they have have been completed and therefore have completed the production process, so they will not be included in the equivalent production.
Taking into account the above and taking as a basis the data for the proposed exercise, the equivalent production will be made up of the following:
| Equivalent Production Status | ||
| Detail | Starting material | Conversion costs |
| Finished | 44 000 pcs | 44 000 pcs |
| In final process | 8,000 | 3 200 |
| Equivalent units | 52 000 pcs | 47 200 pcs |
- Costs to account
This section of the cost of production report indicates which costs were accrued by the department. For the first department, this section includes the initial inventory costs treated as initial balance and the costs that are added to the units that begin the production process, considering current costs. To obtain the total cost of production using the Weighted Average method, the costs are divided by elements (MD, MOD, CIF) and the costs corresponding to the initial balance and current costs are added for each of these, obtaining the total cost per element and giving rise to the total cost of production.
Taking into account the proposed exercise:
| Costs to account | |||
| Details | Cumulative total cost (CTA) | Starting material | Conversion costs |
| Initial balance | $ 25 162.00 | $ 16,000.00 | $ 9 162.00 |
| Running costs | 147 520.00 | 84 000.00 | 63 520.00 |
| Cumulative total cost (CTA) | $ 172 682.00 | $ 100 000.00 | $ 72 682.00 |
- Unit Costs
If the total accumulated cost has been calculated, the unit cost is easy to elaborate and within a productive period it is easy to determine it. Based on the weighted average costing, the initial work-in-process inventory costs are added to the current costs for the period and each of the totals is divided by its related equivalent production, with the objective of obtaining the weighted average unit cost of MD, MOD and CIF. The total unit cost will be represented by the sum of these three elements.
Working with the previous exercise:
| Unit costs. | |||
| Detail | CTA | Starting material | Conversion Costs |
| Total accumulated cost
÷ |
$ 172 682.00 | $ 100 000.00 | $ 72 682.00 |
| Equivalent production | --- | 52 000 pcs | 47 200 pcs |
| Unit cost | $ 3.462948 / u | $ 1.923076 / u | $ 1.539872 / u |
- Accounted Costs
In this section of the production cost report, the accumulated costs are distributed both to the units still in process, as well as to the units completed and transferred to other departments or transferred to finished items. The total costs section to post must be equal to the total costs posted section.
Unit costs will be used to determine total costs for finished items and work in progress. This section will take into account:
- The finished units: as these, as explained above, when multiplied by the total unit cost, they have the complete production cost of a department incorporated. Units in the final process: the equivalent units found in the second step within the section are multiplied. in final process for the unit cost corresponding to each element of the production cost (MD, MOD, and CIF) because they have not completed the production process.
If we use the data from the previous exercise, this section would be:
| Accounted costs | |||
| Finished | $ 152 370.00 | ||
| In final process | 20 313.00 | ||
| Starting material | $ 15 385.00 | ||
| Conversion costs | 4 928.00 | ||
| Total accumulated cost | $ 172 683.00 |
With this last step, the production cost report for a first department is completed under the weighted average method.
As previously stated, the units involved in production (both those entering and leaving) must be accounted for.
Below you will see how these units are registered:
| Accounts and Details | Should | To have | |
| ---one--- | |||
| Inventory of Production in Process, Dept. I | $ 147 520.00 | ||
| Materials inventory | $ 84,000.00 | ||
| Payroll payable | 54 720.00 | ||
| Manufacturing overhead applied | 8 800.00 | ||
| Registering the costs that the Department incorporates. | |||
| ---two--- | |||
| Inventory of Production in Process, Dept. II | 152 370.00 | ||
| Inventory of Production in Process, Dept. I | 152 370.00 | ||
| Registering the transfer of costs to Dept. II |
The following will cover how the five steps of the cost of production report for the second department are developed.
Production cost report. Department II
Steps:
For a second department, the steps to follow for the preparation of the production report are very similar to those carried out in the first department, they only differ in that for this one must take into account the units that were transferred from the previous department with their respective costs and the units added if they were present in the process.
Generally, during a production process, the first department is the add direct material, the remaining departments add only conversion costs (direct labor and indirect manufacturing costs). However, in certain productions it is necessary to add direct materials in departments after the first. This addition can have the following effects on units and costs:
- No increase in units, but costs increase Increase in units without increase in cost Increase in units and cost
- Unit movement report
Remember that this report was based on the physical flow of units already represented, to account for both the units entering and leaving the department. Taking into account that a second department will be treated, the units that were transferred from the previous department and the units that are added to the process should be included in the first section of the report, within the category of units that enter or enter production within this department, the rest remaining unchanged.
Taking as an example the exercise and the graph shown above, the production cost report would be:
| Unit movement report | ||
| I) Amount to be accounted for | ||
| Units in process at startup | 8 000 pcs | |
| Received from the previous department (RDA) | 44,000 | |
| Units added | 10,000 | |
| Total available | 62 000 pcs | |
| II) Distributed as follows | ||
| Completed and transferred | 44 000 pcs | |
| In final process | 8,000 | |
| Losses | 10,000 | |
| Total Distributed | 62 000 pcs |
- Equivalent production
To determine the equivalent production we had to multiply the units once converted into equivalents by their completion level. This same treatment will be given to the units in this department regardless of whether there is added material, the units received from the previous department must be taken into account.
Based on the previous exercise, you will have:
| Equivalent Production Status | |||
| Detail | RDA | Starting material | Conversion costs |
| Finished | 44 000 pcs | 44 000 pcs | 44 000 pcs |
| In final process | 8,000 | 8,000 | 4,000 |
| Equivalent units | 52 000 pcs | 52 000 pcs | 48 000 pcs |
- Costs to account
As in the previous steps, the units received from the previous department will be present in this, since this cost must be accumulated with the current cost of the period to determine the total accumulated cost.
| Detail | CTA | RDA | Starting material | Costs of C. |
| Initial balance | $ 40 523.00 | $ 25 320.00 | $ 10 000.00 | $ 5 203.00 |
| Running costs | 254 555.00 | 152 370.00 | 62 800.00 | 39 385.00 |
| Total accumulated cost | $ 295 078.00 | $ 177 690.00 | $ 72 800.00 | $ 44 588.00 |
- Unit cost
The unit cost calculation will not change. The total accumulated cost will be divided by the equivalent production including the units received from the previous department.
Regarding the previous example:
| Unit costs | ||||
| Detail | CTA | RDA | Starting material | Costs of C. |
| Total accumulated cost
÷ |
$ 295 078.00 | $ 177 690.00 | $ 72 800.00 | $ 44 588.00 |
| Equivalent production | 52 000 pcs | 52 000 pcs | 48 000 pcs | |
| Total accumulated cost | $ 5.74604 | $ 3.41712 / u | $ 1.40 / u | $ 0.92892 / u |
- Accounted Costs
The distribution of total accumulated costs will be equal to that of department one. Those units that are transformed from the previous department will be taken into account in the final production in process.
| Accounted Costs | |||
| Finished | $ 252 826.00 | ||
| In final process | 42 253.00 | ||
| RDA | $ 27 337.00 | ||
| Starting material | 11 200.00 | ||
| Conversion costs | 3 716.00 | ||
| Total accumulated cost | $ 295 079.00 |
Generally, during a production process, the first department is the add direct material, the remaining departments add only conversion costs (direct labor and indirect manufacturing costs). However, in certain productions it is necessary to add direct materials in departments after the first.
There are no increases in units, but costs increase.
Increase in units without increase in cost.
Increase in units and cost.
Economic effect of the units added.
Remember that when material is added to the production process, this addition can have the following effects on units and costs:
- No increase in units, but costs increase Increase in units without increase in cost Increase in units and cost
The economic effect will be discussed when the added material brings with it an increase in units and cost. When the volume of production increases, it can condition a decrease in unit costs, resulting in the economic effect being favorable to these effects, even when the total cost increases. During a productive period, the added units do not receive a separate treatment with respect to the remaining units, so they are included in the equivalent production within the RDA section.
Using the previously proposed exercise as an example, the economic effect caused by the added units on the unit cost under this condition will be demonstrated.
As can be seen, when there are added units, the unit cost of the product may decrease, since the total accumulated cost will be distributed among a greater number of units.
The units involved in the production process will then be recorded in journal entries.
| Accounts and Details | Should | To have | |
| ----one--- | |||
| Production in process inventory, Dept. II | $ 152 370.00 | ||
| Inventory of production in process, Dept. I | $ 152 370.00 | ||
| Registering the cost of units received
of the previous Department |
|||
| ----two--- | |||
| Inventory of Production in Process, Dept. II | 102 185.00 | ||
| Materials inventory | 62 800.00 | ||
| Payroll payable | 22 385.00 | ||
| Manufacturing overhead applied | 17 000.00 | ||
| Registering the costs included in the Department II | |||
| ----3--- | |||
| Finished production inventory | 252 826.00 | ||
| Production in process inventory, Dept. II | 252 826.00 | ||
| Registering the transfer of finished production |
First In First Out Method (FIFO)
The FIFO method is used like the weighted average method to treat units that are in initial work-in-process inventory.
Under this method, the initial units will be the first to complete the production process and therefore the costs incurred in the department will be applied first to these units than to the one that started during that period. This is why the units that were in the inventory in process at the beginning are reported separately from the units of the new production.
Production cost report: Department I
Steps
Under this method, the production cost report will remain unchanged, that is, the five steps previously discussed will be worked on.
As it has been observed, the FIFO method treats the units started differently from the weighted average method, this means that the five steps will undergo changes in the course of their development.
The previously proposed exercise will be used to demonstrate the production report through this method.
- Unit movement report.
Remember that this report will account for the flow of the units inside and outside the department.
Using the FIFO method, this first step will be elaborated in the same way as for the Weighted Average method, it will not undergo changes in its structure since the units are reflected separately in this method.
Taking the data of the proposed exercise, the report will be presented as follows:
| Unit movement report | ||
| I) Amount to be accounted for: | ||
| Units in process at startup | 12 000 pcs | |
| Units put into production | 40,000 | |
| Total available | 52 000 pcs | |
| II) Distributed as follows: | ||
| Completed and transferred | 44 000 pcs | |
| In final process | 8,000 | |
| Total Distributed | 52 000 pcs
|
- Equivalent production
When units exist at the beginning of the period (initial inventory of work in process), it is because such units were partially finished in the previous period and consequently receive only a part of their cost in the current period.
Keep in mind that in this step the incomplete units must be translated into terms of complete units. Under the FIFO method, the inventory of work in process at the beginning includes in the equivalent production only what the current period incorporates to these. For their part, the units that were started and completed in the current period will receive 100% completion with respect to the departmental cost. The FIFO method assumes that the initial units of the work-in-process inventory are finished before the units started.
Bear in mind that there may be materials included at any time in the production process, when this situation occurs, the units will normally be worked on, only that in the finished units, the units in process at the beginning and those started and finished with their corresponding grades will be taken into account. termination. Conversion costs are applied uniformly throughout the production process.
Using the proposed example, the equivalent production will be presented as follows:
| Equivalent Production Status | |||
| Detail | Starting material | Conversion costs | |
| Finished | |||
| In initial process | --- You | 7 200 pcs | |
| Started and completed | 32,000 | 32,000 | |
| In final process | 8,000 | 3 200 | |
| Equivalent units | 40 000 pcs | 42 400 pcs |
- Costs to account
In this step the total accumulated cost per department is determined.
The FIFO costing method assumes that the initial work-in-process inventory will be completed before the other units. The costs of the beginning inventory are separated from the current costs of the period and for the accumulation only the costs added in the production and the total cost of the initial units are taken into account, without taking into account the initial cost per item.
In relation to the previous example, this step can be elaborated as shown below:
| Costs to account for. | |||
| Details | CTA | Starting material | Conversion costs |
| Initial balance | $ 25 162.00 | --- | - |
| Running costs | 147 520.00 | $ 84,000.00 | $ 63 520.00 |
| Total accumulated cost | $ 172 682.00 | $ 84,000.00 | $ 63 520.00 |
- Unit costs
To determine the unit cost, only the total accumulated cost of the previous step should be taken and divided by the equivalent production.
This fourth step according to the FIFO method does not vary, initially it differs from the Weighted Average in that the total accumulated cost per item does not include the cost of the initial units in process. Despite the FIFO method being present, this step requires averaging (dividing the total accumulated costs by the equivalent production) to determine the unit cost.
Working with the example raised it would be:
| Unit cost | |||
| Detail | CTA | Starting material | Conversion costs |
| Total accumulated cost
÷ |
$ 172 682.00 | $ 84,000.00 | $ 63 520.00 |
| Equivalent production | 40 000 pcs | 42 400 pcs | |
| Unit cost | $ 3.598113 / u | $ 2.1 / u | $ 1.498113 / u |
- Accounted costs
Taking into account the method that we are analyzing in this section, the accumulated costs will be distributed to the units in final process and to the finished units. The latter will be separated into units in initial process and units started and completed.
Since only a part of the cost will be incorporated to the initial units in the current period, it must be detailed what part of the cost was added during the production process and then the equivalent units of the second step that are in the section in process will be multiplied. initial by the unit cost of the element that was added, while the units started and completed will be multiplied by the total unit cost, since they completed the process.
Taking into account the proposed exercise, this last step will be presented:
| Accounted costs. | |||||
| Detail | |||||
| Completed and transferred | $ 151 088.00 | ||||
| In process at the beginning | $ 35 948.00 | ||||
| Initial balance | $ 25 162.00 | ||||
| Added costs | 10 786.00 | ||||
| Conversion Costs. | $ 10 786.00 | ||||
| Started and completed | 115 140.00 | ||||
| In final process | 21 594.00 | ||||
| Initial Material. | 16 800.00 | ||||
| Conversion Costs | 4 794.00 | ||||
| Total accumulated cost | $ 172 682.00 |
Counting the units treated in this department.
| Accounts and Details | Should | To have | |
| ---one--- | |||
| Inventory of production in process, Dept. I | $ 147 520.00 | ||
| Materials inventory | $ 84,000.00 | ||
| Payroll payable | 54 720.00 | ||
| Indirect manufacturing costs applied | 8 800.00 | ||
| Registering the costs that the Department incorporates. | |||
| ---two--- | |||
| Production in process inventory, Dept. II | 151 088.00 | ||
| Inventory of production in process, Dept. I | 151 088.00 | ||
| Registering the transfer of costs to Dept. II |
Once this first department has been treated, the production report for the second department will be analyzed under this method.
Production report. Department II
Steps.
For the second department, the steps to carry out for the production report do not differ much from those elaborated in department one.
Note that the units received from the previous department must be included and that there may be added units and losses.
- Unit movement report.
| Unit movement report | ||
| I) Amount to be accounted for | ||
| Units in process at startup | 8 000 pcs | |
| Received from the previous department | 44,000 | |
| Units added | 10,000 | |
| Total available | 62 000 pcs | |
| II) Distributed as follows | ||
| Completed and transferred | 44 000 pcs | |
| In final process | 8,000 | |
| Losses | 10,000 | |
| Total Distributed | 62 000 pcs |
- Equivalent production.
| Equivalent Production Status | ||||
| Detail | RDA | Starting material | Conversion costs | |
| Finished | ||||
| In process at the beginning | ////// | - | 4 800 pcs | |
| Started and completed | 36 000 pcs | 36 000 pcs | 36,000 | |
| In final process | 8,000 | 8,000 | 4,000 | |
| Equivalent units | 44 000 pcs | 44 000 pcs | 44 800 pcs |
The RDA column under this method for the process at the beginning is disabled, this is conditioned to the fact that in the initial inventory of work in process there is no unit that has been transferred from a previous department, but this inventory is the final inventory of work in process of the past period.
- Costs to account
| Costs to account | ||||
| Detail | CTA | RDA | Starting material | Costs of C. |
| Initial balance | $ 40 523.00 | - | - | - |
| Running costs | 253 273.00 | $ 151 088.00 | $ 62,800.00 | $ 39 385.00 |
| Total cost | $ 293 796.00 | $ 151 088.00 | $ 62,800.00 | $ 39 385.00 |
- Unit cost
| Unit cost | ||||
| Detail | CTA | RDA | Starting material | Costs of
conversion |
| Total accumulated cost
÷ |
$ 293 796.00 | $ 151 088.00 | $ 62 80.00 | $ 39 385.00 |
| Equivalent production | 44 000 pcs | 44 000 pcs | 44 800 pcs | |
| Unit cost | $ 5.740219 / u | $ 3.433818 / u | $ 1.427272 / u | $ 0.879129 / u |
It should be noted however, that FIFO costing as used in a process costing system is not a pure FIFO cost stream. The costs transferred to the following departments (called costs that transferred to the next department) are averages among the units in the department at that time. In other words, they lose their identity in the following departments and become an average cost.
- Accounted costs
This step remains unchanged, only the costs of the units received from the previous department should be included.
| Accounted costs | |||||
| Finished | $ 251 391.00 | ||||
| In initial process | $ 44 743.00 | ||||
| Initial balance | $ 40 523.00 | ||||
| Running costs | 4 220.00 | ||||
| Added costs | $ 4 220.00 | ||||
| Started and completed | 206 648.00 | ||||
| In final process | 42 406.00 | ||||
| RDA | 27 471.00 | ||||
| Starting material | 11 418.00 | ||||
| Conversion costs | 3 517.00 | ||||
| Total accumulated cost | $ 293 797.00 |
The flow of production units will then be accounted for.
| Accounts and Details | Should | To have | |
| ----one--- | |||
| Production in process inventory, Dept. II | $ 151 088.00 | ||
| Inventory of production in process, Dept. I | $ 151 088.00 | ||
| Registering the cost of the units
received from the previous Department |
|||
| ----two--- | |||
| Inventory of Production in Process, Dept. II | 293 796.00 | ||
| Materials inventory | 62 800.00 | ||
| Payroll payable | 22 385.00 | ||
| Manufacturing overhead applied | 17 000.00 | ||
| Registering the costs included in the Department II | |||
| ----3--- | |||
| Finished production inventory | 251 391.00 | ||
| Inventory of Production in Process, Dept. II | 251 391.00 | ||
| Registering the finished production transfer |
Economic effect of added units:
Using the previously proposed exercise as an example, the economic effect caused by the added units on the unit cost under this condition will be demonstrated.
In this work the Process Costs System was discussed, delving into the techniques used to treat the units that are in the Inventory accounts of production in process, as well as everything related to the flow that these units follow during a productive process.
Bibliography:
- Amat, Oriol and Soldevila, Pilar. Accounting and cost management. 2000Carlos Mallo, Cost Accounting and Management. Part One Horngren, Charles. Cost accounting. 1990Neuner, John. Cost Accounting Polimeni, Ralph. Cost accounting for managerial decision making. Macgrew 1990.
