Question

Gary is uncertain about the steps used to prepare a production cost report. Describe the procedures that are required, and order them in the sequence in which they are performed. Include what is meant by the term "equivalent units", and how are equivalent units of production computed. Why is such a calculation necessary? Is such a calculation an exact science? Is there potential for income manipulation because of using equivalent units? Gary is also unclear as to why the production cost report is prepared. Explain the purpose of the report. Is the production cost report included in financial statements for external users? If not, who uses this report?

Answer 1

Solution:

There are four step process followed to prepared 'A cost of production report': the steps are following:

Step 1. Determine the units to be assigned costs.

Step 2. Compute equivalent units of production.

Step 3. Determine the cost per equivalent unit.

Step 4. Allocate costs to units transferred out and partially completed units.

Meaning of Equivalent units of production: These are the part of whole production units that are complete with respect to either materials or conversion costs. Equivalent units for materials and conversion costs are usually determined separately. This is because materials and conversion costs normally enter production at different point of time and at different rates.

The direct materials and conversion costs per equivalent unit are computed as follows:

Total Direct Materials Cost for the Period Direct Materials Cost per Equivalent Unit Total Equivalent Units of Direct Materials

The report summarizes the following production quantity and cost data:

1. The units for which the department is accountable and the disposition of those units

2. The production costs incurred by the department and the allocation of those costs between completed (transferred out) and partially completed units.

Purpose of a production cost report: It allows for a company to keep record of expenditures and materials, as they go in and out of a given department, its better to understand the concept like this. Chances are you have a rather expansive budget that indicates how money moves in and out of your company. A production cost report does this on a departmental level. What's more, a production cost report also keeps track of any goods.

Production cost report is not included in financial statements as its of no use for the external stakeholders. it is only use by the managers for the objective as stated above.