process_costing_2007 - ORIE 350 Spring 2007 Process Costing...

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ORIE 350 Spring 2007 Process Costing Comparison of Job-Order Costing and Process Costing Both product-costing systems have similar objectives: accumulate total product costs and assign those costs to each unit manufactured. A company that uses a job-costing system produces goods by order or in distinct batches, and the products tend to differ significantly from each other. With a process-costing system, a company works in a repetitive production environment, manufacturing a large number of like units in a continuous flow. Industries that use process costing include those involved with paper, petroleum, lumber, disposable diapers, and chemicals. Cost Accumulation Costs in a job-order system are accumulated by job; in a process-costing system, the costs are accumulated by department or process. The flow of costs through general ledger accounts is similar in both systems: through Work in Process, to Finished Goods, to Cost of Goods Sold. In a sequential production operation, each department establishes its own Work-in-Process (WIP) account. Each department’s WIP account is used to accumulate costs. The cost remaining in each department’s WIP at the end of each period is of interest, as is the cost assigned to those products that are transferred to the next department. Most of the time, once a product has been completed, it is transferred to the next department. At the end of the period, we may have some units that have not been completed, and these units must have cost assigned to them. Since these units are only partially completed, we have to look at the percentage completion of these units before we assign costs. Equivalent Units Equivalent units is a key concept in process costing. The term equivalent unit cost refers to the amount of conversion and direct-materials dollars that have been applied to physical units after adjusting for the stage of completion. Units in the ending Work-in-Process Inventory are only partially completed and may be in different stages of production. For example, 100% of the materials may be present in the product, but only 50% of the conversion 1 work (labor and overhead) may have been performed. Conversion costs are usually added continuously throughout the process. Thus, if 100 units are 60% of the way through the process, the company is said to have performed 60 equivalent units of work during the period. The firm is said to have done the work equivalent to manufacturing 60 finished units. But, none of the units are actually complete! 1 conversion = the sum of direct labor and overhead costs, by definition
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If a cost driver other than direct labor is used to assign overhead costs to products, they we will have to keep direct labor and overhead separated. We will not consider that case here, however, so we lump them together in a single “conversion” account. Direct materials are often added at discrete points in the process.
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This note was uploaded on 04/05/2009 for the course ORIE 350 taught by Professor Callister during the Summer '08 term at Cornell.

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process_costing_2007 - ORIE 350 Spring 2007 Process Costing...

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