Question
Process costing becomes more complicated when beginning and ending Work in Process (WIP) inventories exist. All units, whether complete or in process, are converted to
Process costing becomes more complicated when beginning and ending Work in Process (WIP) inventories exist. All units, whether complete or in process, are converted to equivalent units based on the amount of work performed on them by the end of the period. The equivalent unit calculation combines partially and fully completed units to express the amount of work done during a period in terms of fully completed units of output. Once the equivalent units have been computed, the company is able to calculate the cost per equivalent unit for both direct materials and conversion costs. These average costs are then used to value the units that were completed as well as those that are still in process at the end of the period.
The differences between absorption and variable costing are also discussed in the week. Under absorption costing, all manufacturing related costs, regardless of cost behavior, are treated as product costs. Variable costing treats only variable manufacturing costs as product costs. Absorption costing is required for external reporting and for tax purposes; however, variable costing is used for internal management purposes because it clearly shows managers the additional cost of making one more unit of product.
Our Discussion Questions are:
Scenario 1. : BIG Manufacturing Products has been using FIFO process costing for tracking the costs of its manufacturing activities. However, in recent months, the system has become somewhat bogged down with details. It seems that, when the company purchased Brown Electronics last year, its product lines increased six-fold. This has caused both the accountants and the suppliers of the information, the line managers, great difficulty in keeping the costs of each product line separate. Likewise, the estimation of the completion of ending work-in-process inventories and the associated costs has become very cumbersome. The chief financial officer of the company is looking for ways to improve the reporting system of product costs. Question: What can you recommend to improve the situation?
Scenario 2. : Roger Moon has just purchased the film studio of a movie company that specializes in comedies. He found that the company did not try to estimate the cost of making a movie. Instead, it just gave the producer a budget and told him/her to make a movie within budget. Mr. Moon does not like the former movie-budget concept and desires to establish a formal cost estimation system. Question: What are some of the potential problems that may be encountered in changing from a budget to a cost estimation movie making system?
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