KEY TERMS AND NOTES
two main concepts
in Chapter 3:
How do we organize the costs in the Work in Process inventory so that we can distinguish one batch of product from another,
separate products and determine the cost of
one unit of a product
How do we charge – we call it “apply” - the diverse costs contained under the general heading “overhead” to the products we are
making or the services we are performing?
FIRST, let’s look at how we begin to identify the cost of making a unit of a product or service.
PROCESS COSTING: (see also Chapter 4)
Continuous manufacturing of a single product: Ocean Spray makes cranberry juice, continuously, all the time)
Large quantities manufactured (a refinery counts output in millions of gallons of oil)
Units all the same (or virtually so) (a paper towel is a paper towel, different colors are a minor variation)
Units may be indistinguishable (how can you pick out one quart of vinegar in a 1,000 gallon vat?)
Costs are accumulated by processing department, and unit costs are computed in each department, then passed forward to be
further processed until the final product is reached.
JOB ORDER COSTING:
Small batches (could be a couple of thousand chairs; "small" is a relative term) – many different jobs worked on in a period.
Distinctive units (even in production, you could see individual chairs being built)
Unique items (units are separate - not like the big vat of vinegar)
Many products (company builds chairs, sofas, tables - all are truly different)
Unit costs are calculated for each job.
Cost of a "
," or a batch of one product, regardless of the system you use, usually consists of
The total of DM + DL + OH for a batch of product, divided by the number of good units you made, is the cost per unit; thus “cost per unit”
is almost always an average cost
. It is rare for a company to measure actual costs, unit by unit (maybe Ferrari does!)
Even in process costing the cost of a unit is the total cost divided by the total number of units.
But there is no real “beginning” or “end” to a “batch,” so we just use the “artificial” cutoff of the end of an accounting period to say, “OK,
how many good units did we produce this period (week, month, quarter)? What were the total costs to make these units? If we divide total
costs by total units … we have (average) cost per unit.” That is a fairly simple system, acceptable because of the homogeneity, or uniformity,
of the products being made.