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Handout_Ch._4__1__BUS_121

Handout_Ch._4__1__BUS_121 - BUS 121 Managerial Accounting...

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BUS 121 - Managerial Accounting Chapter 4: System Design – Process Costing I. Process Costing vs. Job Order Costing A. Process costing is used in industries that produce homogeneous products such as bricks, chemicals, flour, cement, etc., items mass-produced on an assembly-line basis, or numerous product that moves from one distinct department to another. B. Comparison to Job-Order Costing: 1. Similarities: a. Same basic purpose – to accumulate and assign factory material, labor, and overhead costs to the company’s products. b. Both systems use the same general ledger accounts: RM, WIP, FG, and CGS. c. The flow through the manufacturing inventory accounts is basically the same. 2. Differences: a. Single or a few relatively homogeneous products produced on a continuous basis over a typically lengthy period of time. b. Total costs are accumulated by department rather than by individual job; accordingly, a department production report is the key document rather than a job cost sheet. c. Unit costs are computed by department over the course of an accounting period, usually monthly, rather than by job. C. Process costing uses the concept of cost flows through a processing department. 1. Department location serves as the focal point where material, labor, and overhead are added to the product. 2. The activity in the department should be the same for all units that pass through the department. 3. Output of the department is homogeneous; costs are accumulated and then assigned equally to the units of product that pass through the department. II. Equivalent Unit (EU) of Production A. EU is the basic concept behind assigning cost to product in a process cost environment. B. An EU (equivalent unit) is the amount of an input required to bring one unit from where it is entering a department to the point it is ready to move on to the next stage. C. There are two methods used in calculating equivalent units: 1. Weighted Average: Combines the beginning inventory and the completed work that was added during the period in determining total and unit cost. It assumes each of those units had one full equivalent unit during the period. This method has the advantage of being simple and easy to calculate, although it is not theoretically accurate.
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