ACT202 Chapter Notes - Chapter 5: Perpetual Inventory, European Cooperation In Science And Technology, Management Accounting
ACT 202 Management Accounting
Product costing: Process Costing with Equivalent Units
Process costing
•Process Costing Systems are production costing systems where the COST OBJECT is a
PROCESS that produces a mass of similar units of a product or service
• Individual unit costs are computed by averaging total costs of the process over the total
number of similar units produced.
SIMILARITIES IN JOB ORDER AND PROCESS COSTING
• BOTH SYSTEMS o determine a product cost by measuring the amount of direct materials
and direct labour used and allocating overhead costs.
• allocate overhead using a predetermined overhead rate (or activity-based costing).
• maintain perpetual inventory records with subsidiary ledgers for materials, work in process,
and finished goods
• Process-costing is a system where the unit cost of a product or service is obtained by
assigning total costs to many identical or similar units.
• Each unit receives the same or similar amounts of direct materials costs, direct labour costs,
and manufacturing overheads.
• Unit costs are calculated by dividing total costs incurred by the number of units of output
from the production process.
• Direct materials are usually (but not always) added at the beginning of the production
process, or at the start of work in a subsequent department down the assembly line.
• Five-Step process-costing allocation:
• summarise the flow of physical units of output
• calculate output in terms of equivalent units
• summarise total costs to account for
• calculate cost per equivalent unit
• assign total costs to units completed, and to units in ending work-in process.
• Equivalent units
• A derived amount of output units that:
- takes the quantity of each input in units completed and in unfinished units of work in
process, and
- converts the quantity of input into the amount of completed output units that could be
produced with that quantity of input
- are calculated separately for each input (direct materials and conversion cost)
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