Companies that either produce a product or provide a service must have effective costing systems in order to manage their costs with the objective of making more profit. Among several costing systems out there today, we find Process Costing. Process Costing is a system for organizations to keep track of goods produced and the costs needed to produce them. Generally, the Process Costing system is used when the products manufactured and/or produced are identical or very similar, such as bottles of bleach, tooth paste, hardware tools. Electrical Appliance Manufacturers and Automobile manufacturers typically use Process Costing mainly because almost all products they make are similar and mass produced.
In the mass production scenario, goods move through different factory departments until completely finished. As the goods move through the production process, their associated costs move with them through the organizations books. Information systems trace the exact value of raw materials put into process and the value of direct labor and overhead used to transform those raw materials into finished goods. Said information systems ensure that
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According to Ronald Hilton, author of Textbook Managerial Accounting, “equivalent units refer to the amount of manufacturing activity that has been applied to a batch of physical units after adjusting for the stage of completion”. This is basically adding up the percent of completion per units. If at a given time you have 100 completed units and 200 units at 50% completion, you can report 200 equivalent units for cost calculations. When accountants need to know the costs per units made at a certain period of time, they use equivalent units to calculate them. This concept can also be applied to direct labor and overhead costs, or “conversion costs”; a term used by industry for direct labor plus overhead
Wilkerson uses a simple cost accounting system in which each unit is charged for direct labor and material costs in addition to overhead costs, which are allocated depending on the percentage of production-run direct labor usage. Under this system, the overhead percentage set by Wilkerson was 300%. This standardized system, however, did not reflect the specific complexities of each
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
In summary, the costing system a company adopts is controlled based on the nature of the production process and the link between the production stages. All of the costing systems deal with allocating the cost of material, labor, and overhead.
Also, please take into consideration how these reports are completed. These reports essentially summarize the cost of production activity with a specific reporting period and is a formalized summary of the four main steps that accounting uses to assign a fixed cost to units that are in and out in the final work-in-progress(WIP) inventory, which is inventory that is partially completed(Kimmel, et.al., 2017). In order for accounting to prepare its balance sheet, it is necessary to utilize these four steps to ensure that the production cost report reflects accurate data on inventory(Accounting Coach, 2017). The steps that were performed in creating this report were as
The purpose of this project is to implement computer software and hardware to automate production and value chain management in order to increase productivity of the company and reduce production costs. This project will implement three components of a single unifying system to improve the inventory management and control at Riordan Manufacturing based on the goals of each of three areas of the manufacturing processes. Raw materials receiving will receive a computerized inventory check-in system. Manufacturing will receive a computerized project management system. Final product shipping...
Costing as defined by Blocher, Stout, Juras, and Cokins (2016) ‘is the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead costs to cost objects, which most commonly are products, services, or projects” (p. 96). Further relayed by Blocher et al. (2016), is the type of costing system a company employs depends on the industry, product or service manufactured or provided, and the benefit versus the cost of the particular system chosen. Job and process costing systems are two different avenues by which companies can accumulate their costs as a first step in determining accurate pricing for their product or service. While one method tracks costs that can be specifically attached to a unique product, batch of products, or service, and then also allocates the overhead to the individual units or services, the other method also tracks the direct costs but accumulates the overhead costs for the shared services used to produce indistinguishable products, then assigns them to a functional department, and from there assigns them to products. Job and process costing system characteristics are examined in further detail, and examples of companies that use each are provided.
The current inventory processes we have in place are not as efficient as they could be. The main problem is there is no communication between departments, factories, and suppliers. This causing an abundance of wasted man hours, and inventory produced. Our goal is to provide more communication between departments, factories, and suppliers to create more efficiency and produce less waste.
A hybrid costing system is most suited for organisations producing in batches. Costs will be allocated to the batches. Hybrid costing is used for similar or identical products that have different modifications at the end. For example, laptops have screens and keyboards built in every unit but have different designs for each product type. With hybrid costing, managers find it easier to determine profits of individual jobs and also obtain some detailed statistics of production from different departments. Hybrid costing systems do not focus enough on costs that are based on activities, creating possibilities of understating
In the example above 6000 bikes were fully completed. However, in the real world not all units will be fully completed at the end of an accounting period, some will only be partially completed. Equivalent units of production will look at how to convert these partially completed units into completed units for accounting purposes. Equivalent unit calculations are used at the end of a month, to prepare monthly production reports. They are also used at the end of the year to determine ending inventory values.
Costing process involves costs of accumulation for long production runs involving products that are inseparable from each other. For example, the production of 100,000 liters of petrol, should be all the oil used in the process and all the work at the scene of the refinery to be built on an expense account, and then divided by the number of units produced for get the cost per unit.
Activity-based costing is used as a supplement of traditional cost accounting in a company to support manager in internal decision making. It focus on assigning the indirect cost to direct costs in order to get a more accurate cost on products. Activity-based costing uses several cost pools instead of one in traditional cost accounting. The system is easy to implement and it provides many benefits, it allows the company to respond to inefficiency by reallocating resources to more profitable activity from areas that absorb too many resources. It also allows the company to respond to manufacturing overhead cost and assumes a more accurate selling price on products in order to make more profits. Company that do not have internal expertise to conduct activity-based costing analysis may think to hire one or ask company that provides this kind of services for help.
UPS measure the product costs precisely in their G/L system. By using ABC Costing system, a more systematic and accurate product costs can be obtained. Cost insight can be improved with the precise work measurement standard and thus promote business improvement. The combination of costing and work measurement in ABC costing enables UPS to evaluate the financial performance of their organization and good decision-making can be made in product improvement, costing control and pricing.
Cost accounting system has two types, job order costing, and process cost system. These two cost systems are very different, almost every company uses order costing or process costing. Starbucks, is a coffee shop where citizens congregate to drink there morning coffee, study, and or socialize. Starbucks is one of the oldest and largest privately held specialty coffee retailer in the United States. (Starbucks) Their passion is to discover the flavors you love and always bring it home, delivering the look, taste and aroma of the world’s best coffee and teas. Job order costing is a very easy way in order to help Starbucks managers to know how much profit their company (Starbucks) made.
First we will talk about activity based costing and we will start by giving the definition of it ; Activity based costing means refining the costing system by concentrating on individual activities as essential or primary cost object or tool . ABC system has a lot of benefits and we will discuss them now, ABC helps in understanding overhead much better and the percentage of prim cost and overhead is the same in both ABC and traditional system; but what gives advantage of ABC over traditional is by using ABC system it helps to know the detail of overhead so that it can identifies how is the activity to avoid.
During this project, I am going to mention the details of TOYOTA production process system which was developed more than 40 years ago by Taiichi Ohno, the president of Toyota Motor company at that time. The production system that Toyota company uses now and before is relevant to the concept of the process costing system which is currently used in all department of the company.