What are the purposes of a Production Cost Report? Why do companies bother with Equivalent Units...
- What are the purposes of a Production Cost Report?
- Why do companies bother with Equivalent Units of Production (EUP)? Why not just ignore EUP?
- List the 3 types of manufacturing companies that use process costing according to your textbook.
- How can the Production Cost Report be used to make decisions?
Homework Answers
ANSWER:
(a) following are the porposes of production cost report
1. It provised us with information about productivity of a department
2. It shows total cost and unit cost and whether they are reasonable
3. It shows whether management's goal about cost and production are met or not
(b) for the following reasons companies use Equivalent Units of Production (EUP)
1.In the case of process type of industries, it is possible to
determine the average cost per unit by dividing the total cost
incurred during a given period of time by the total number of
units
produced during the same period. But this is hardly the case in
most of the process type industries where manufacturing is a
continuous activity.
2.The reason is that the cost incurred in such industries represents the cost of work carried on opening work-in-progress, closing work-in-progress and completed units. Thus to ascertain the cost of each completed unit it is necessary to ascertain the cost of work-in-progress in the beginning and at the end of the process.
3.The valuation of work-in-progress presents a good deal of difficulty because it has units under different stages of completion from those in which work has just begun to those which are only
a step short of completion.
4.Work-in-progress can be valued on actual basis, i.e.,
materials
used on the unfinished units and the actual amount of labour
expenses involved. However, the degree of accuracy in such a case
cannot be satisfactory. An alternative method is based on
converting partly finished units into equivalent finished units,
known as Equivalent Units of Production
Equivalent units of production means converting the incomplete
production units into their equivalent
completed units.
(c)Process costing is used in following types of manufacturing companies
1.Steel companies
2.Medicine/pharmaceutical companies
3. Soap making companies
(d) Production cost report can help make the informed management decisions in the following manner
1. It helps understand how much it costs to produce each unit of a product in each department.
2. It shows which cost element is the highest i.e. material, labour or overheads
3. It reveals how many units flow through each processing department each month.
Add Answer to:
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