n04 - Chapter 4 Notes Page 1 Process Costing and Control...

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Chapter 4 Notes Page 1 Please Send Comments and Corrections to me at mconstas@csulb.edu Process Costing and Control Process Costing is used when the goods or services being produced are the same or uniform. For example, the television sets that Sony sells to K-Mart are the same as the television sets sold to Wal-Mart or Target. Similarly, the gallon of gas that ARCO sells to you is the same as the gallon that ARCO sells to your neighbor. These are typically assembly-line operations. You can also have process costs in service industries (e.g., check processing in a bank, checking baggage at an airport; washing and ironing shirts, and doing a basic estate plan). Because the products are the same, then the costs for every product should be identical. Therefore, there is no reason to keep track of how much each order costs to produce. With Process Costing, you find the average cost of all the units that you produced during the period in question and treat the average as the actual cost of each unit. For example, if Sony makes 300,000 television sets at a cost of $6,000,000, then each television costs $20. Because you are not keeping records on every order, Process Costing is less expensive to maintain. Cost Allocation Recall that there are three components of cost: Direct Materials; Direct Labor; and Manufacturing Overhead. In Process Costing, you calculate a separate average cost for each of these components. The reason that you calculate a separate average cost for each component of cost is because the components may be incurred differently. If the components of cost are incurred in the same manner (e.g., they have the same Cost Driver) then you can combine them and treat them as one cost pool. For example, if you apply Manufacturing Overhead using Direct Labor Hours as its Cost Driver, then you can combine Manufacturing Overhead and Direct Labor, and treat the Conversion Costs as one cost. This is because the same driver (Direct Labor Hours) is being used to measure both components.
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Chapter 4 Notes Page 2 Please Send Comments and Corrections to me at mconstas@csulb.edu Grouping Of Units As noted above, in Process Costing we calculate average costs for each component of cost for a given period of time. For example, we would calculate the average cost for this month as follows: Cost Incurred This Month --------------------------------------------- Work Done During This Month This average cost calculation can become more complicated if you are dealing with units that were only partially made during this month. In this case, the numerator would only include the cost incurred on those units during this month, and the denominator would include only the work done on those units during this month. When calculating average costs, we divide the units that passed through Work In
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This note was uploaded on 01/13/2012 for the course ACCT 201 taught by Professor John during the Fall '08 term at CSU Long Beach.

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n04 - Chapter 4 Notes Page 1 Process Costing and Control...

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