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Chapter 4 - Process CostingProcess Costing Vs. Job Costing● used when a single product is produced on a continuing basis or for a long period of time● accumulated costs by department● compute unit costs by department● for products similar and produced continuously● assign material, labor,and overhead costs toproducts● provide a mechanism for computing unit product costs● use same manufacturing accounts (manufacturing overhead, raw materials, work in process, finished goods)● flow of costs through manufacturing accounts is basically the same● used when many different jobs having different production requirements are worked on each period● accumulated costs by individual jobs● compute unit costs by job on the job cost sheetProcessing departments: any unit in an organization where materials, labor, or overhead are added to the product● all activities are performed uniformly on all units of production● output must be homogeneous● products flow in a sequence from one department to anotherI. Record the flow of materials, labor, and overhead through a process costing system● In job-order: WIP costs are traced and applied to individual jobs● In process costing: WIP costs are traced and applied to departments in a process cost systemA. T-Account and journal entry viewsB. Equivalent Units of Production-the product of the number of partially completed units and the percentage completion of those unitsex. 10,000 units 70% complete=7000 complete units-these partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to that outputII. Compute the equivalent units of production using the weighted-average method● weighted average method1. makes no distinction between work done in prior or current periods2. blends together units and costs from prior and current periods3. determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending work in process inventory**NEVER USE BEGINNING PERCENT**● since direct labor costs may be small compared to other product costs, manufacturing overhead and direct labor are combined to conversion costs● ex. ● completed/transferred out = Beg + add/started - endWIP● equiv units of production=units completed/transferred+equiv units remaining in WIPIII. Compute the cost per equivalent unit using the weighted-average methodCost per equivalent unit = cost of beginning WIP inventory + cost added during the period equivalent units of productionIV. Assign costs to units using the weighted-average methodMultiply equivalent units and cost per equivalent units=cost of ending WIP inventoryMultiply units transferred and cost per equivalent units=cost of units transferred outV. Prepare a cost reconciliation reportfor 1 department, equiv # units finished & partially finished, finding costs, where to allocateChapter 5 - Cost-Volume-Profit RelationshipsI. Explain how changes in activity affect contribution margin and net operating income● Contribution Margin Income Statement○ helpful to managers in judging the impact on profits of changes in selling price, cost, or volume○ emphasis on cost behavior○ profit = (sales-variable) - fixed expenses○ profit = (unit CM x quantity) - fixed expenses● Contribution margin (CM): the amount remaining from sales revenue after variable expenses have been deducted○ used to cover fixed expenses first○ any remaining contributes to net operating income● The contribution approach: to estimate net operating income○ =units above BE x contribution margin per unitII.Prepare and interpret a cost-volume-profit (CVP) graph and a profit graphVolume = x, $ = yIII. Use the contribution margin ratio (CM ratio) to compute changes in contribution margin and net operating income resulting from changes in sales volumeProfit = (CM Ratio x sales) - Fixed Expenses ← Incremental AnalysisIV. Show the effect on net operating income of changes in variable costs, fixed costs, selling price, and volumeWork problemsV. Determine the level of sales needed to achieve a desired target profitEquation and formula - do not need to know differenceProfit = (Unit CM x Q) - Fixed expensesunit sales to attain target profit = target profit + fixed expensesCM per unitVI. Determine the break-even pointWork problemsVII. Compute the margin of safety and explain its significancemargin of safety $ = total sales - break-even salescan be expressed in % (margin of safety/sales) and in units (margin of safety/selling price)cost structure: the relative proportion of fixed and variable costs in an organization-managers often have some latitude in determining cost structure-high fixed cost: income will be higher in good years, income is lower in bad years-low fixed cost: more stability in income across good/bad yearsVIII. Compute the degree of operating leverage at a particular level of sales and explain how it can be used to predict changes in net operating incomeoperating leverage: measure of how sensitive net operating income is to percentage changes in salesat any given level of sales, how a percentage change in sales volume will affect profitsmultiply percent increase in sales x degree of op. leverageStructuring Sales Commissions: commissions based on sales dollars can lead to lower profits ina company, should be based on contribution marginIX. Compute the break-even point for a multiproduct company and explain the effects of shifts in the sales mix on contribution margin and the break-even pointConcept of Sales Mix● sales mix is the relative porportion in which a company’s products are sold● different products have different selling prices, cost structures, and contribution margins● when a company sells more than one product, break-even analysis becomes more complex as the following example illustratesKey Assumptions of CVP Analysis1. Selling price is constant2. Costs are linear and can be accurately divided into variable (constant per unit) and fixed (constant in total) elements3. In multiproduct companies, the sales mix is constant4. In manufacturing companies, inventories do not change (units produced=units sold)Chapter 6 - Absorption CostingI. Explain how variable costing differs from absorption costing and compute unit productcosts under each methodFor Variable: product costs include direct


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CSU ACT 220 - Chapter 4 - Process Costing

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