63. Process costing and equivalent production

A Process costing system. because it makes no attempt to associate costs with particular job orders, assigns the costs incurred in a process, department or work cell to the units worked on during an accounting period by computing an average cost per unit. Equivalent production also called equivalent units) is a measure that applies a percentage-of-completion factor to partially completed units to calculate the equivalent № 01 whole units produced in an accounting period for each type of input li e.. direct materials. direct labor. & overhead). The № of equivalent units produced is the sum of total units started & completed during the period & an amount representing the work done go partially completed products in both the beginning & the ending work in process inventories.

Equivalent production must be computed separately for each type of input because of differences in the ways the costs are incurred. Direct materials are usually added to production at the beginning of the process. The costs direct labor & overhead are often incurred uniformly throughout the production process. Thus. it is convenient to combine direct labor & overhead when calculating equivalent units. These combined costs are called conversion Cost or processing costs.

Method that aggregates manufacturing costs by departments or by production processes. Total manufacturing costs are accumulated by major categories-direct materials, direct labor, & factory overhead applied. Unit cost is determined by dividing the total costs charged to a cost center by the output of that cost center. Process costing is appropriate for companies that produce a continuous mass of like units through a series of operations or processes-generally used in such industries as petroleum, chemicals, oil refinery, textiles, & food processing. A Cost of Production Report is a cost sheet used for process costing that summarizes the total cost charged to a department & the allocation between the ending work-in-process Inv & the units completed & transferred to the next department or finished goods Inv. The output of a processing department during a given period is measured in terms of equivalent units of production which is the expression of the physical units of output in terms of doses or amount of work applied thereto. In computing the unit cost for a processing center, when a beginning Inv of work-in-process exists, two specific assumptions about the flow of cost are used-Weighted Average & FIFO. Under weighted average, the costs in the beginning Inv are averaged with the current period's costs to determine one average unit cost for all units passing through the cost center in a given month. Under FIFO, costs in the beginning Inv are not mingled with the current period's costs but transferred out as a separate batch of goods at a different unit cost than units started & completed during the period.

64. Activity-based systems.

Are info systems that provide quantitative info about an ORG activities. They create opportunities to improve the cost info supplied to managers. They also help ti view an ORG as a collection of activities. Activity-based cost info help to improve operating processes & make better pricing decisions,

The traditional –could beseveral defects that can result in distorted costs for decision-making purposes. It allocates the cost of idle(неиспользуемый) capacity to products. Accordingly, such products are charged for resources that they did not use. Seeking to remedy such distortions, many companies have adopted a different cost-allocation approach called activity-based costing (ABC)., ABC systems first accumulate overhead costs for each organizational activity, & then assign the costs of the activities to the products, services, or customers (cost objects) causing that activity. As one might expect, the most critical aspect of ABC is activity analysis. Activity analysis is the processes of identifying appropriate output measures of activities & resources (cost drivers Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase. The № of times materials are ordered, the № of production lines in a factory, & the № of shipments made to customers are all examples of activities that impact the costs a company incurs. When using ABC, the total cost of each activity pool is divided by the total № of units of the activity to determine the cost per unit.) & their effects on the costs of making a product or providing a service. Significantly, as discussed in the next section, activity analysis provides the foundation for remedying the distortions inherent in traditional cost-accounting systems. IMPLEMENTATION In most cases, a company's traditional cost-accounting system adequately measures the direct costs of products & services, such as material & labor. As a result, ABC implementation typically focuses on indirect costs, such as manufacturing over-head & selling, general, & administrative costs. Given this focus, the primary goal of ABC implementation is to reclassify most, if not all, indirect costs (as specified by the traditional cost-accounting system) as direct costs. As a result of these reclassifications, the accuracy of the costs is greatly increased.

Benefits- Margin accuracy for individual products & services, as well as customer classifications, is becoming increasingly difficult to achieve given that direct labor is rapidly being replaced with automated equipment. Accordingly, a company's shared costs (i.e., indirect costs) are becoming the most significant portion of total cost.

Since the rapid pace of technological change continues to reduce product life cycles, companies do not have time to make price or cost adjustments once costing errors are detected. Companies with inaccurate cost measurements tend to lose bids due to over-costed products, incur hidden losses due to under-costed products, & fail to detect activities that are not cost-effective.Since computer technology costs are decreasing, the price of developing & operating ABC systems also has decreased. ACTIVITY-BASED MANAGEMENT.In order to manage costs, a manager should focus on the activities that give rise to such costs. Using ABC systems to improve financial management is called activity-based management (ABM). The goal of ABM is to improve the value received by customers &, in doing so, to improve profits.

The key to ABM success is distinguishing between value-added costs & non-value-added costs. A value-added cost is the cost of an activity that cannot be eliminated without affecting a product's value to the customer. In contrast, a non-value-added cost is the cost of an activity that can be eliminated without diminishing value. Some value-added costs are always necessary, as long as the activity that drives such costs is performed efficiently. However, non-value-added costs should always be minimized because they are assumed to be unnecessary. Examples of non-valued-added activities include storing & handling inventories; transporting raw materials or partly finished products, such as work-in-process Inv items, from one part of the plant to another; & redundancies in production-line configurations or other activities. Oftentimes, such non-value activities can be reduced or eliminated by careful redesign of the plant layout & the production process.

To Do : 1.Plan: identify activities that add value; identify resources needed; identify the price 2.Perform : examine those activities that are not being performed; measure how well they are perform; determine which resources are actually being consumed; determine the actual cost 3.Evaluate. Determine if cost reduction goals for non value adding Activities are met; identify actions that will reduce the full product cost 4.Communicate : prepare internal reports about Profitability performance ; external reports. Another way of stepping: Identify & define activities & activity pools; Directly trace costs to activities (to the extent feasible); Assign costs to activity cost pools ; Calculate activity rates; Assign costs to cost objects using the activity rates & activity measures previously determined; Prepare & distribute management reports