Production Costs Case Study Essay
Order ID:89JHGSJE83839 Style:APA/MLA/Harvard/Chicago Pages:5-10
Production Costs Case Study Essay
Running head: PRODUCTION COSTS 1
PRODUCTION COSTS 2
To: Davis Skaros
From: Senior Accountant
Subject: Production Costs
The purpose of this memo is to provide you with a clarification to why the numbers that were provided in the production cost reports are accurate and to show you how those numbers were configured by the accountant assigned to count your inventory. First, you will need to understand that the inventory that is not shown is the equivalent units of production which will always be less than the actual inventory in stock. Remember that equivalent units “measure the work done during the period, expressed in fully completed units” (Kimmel, Weygandt, & Kieso, 2016).
In the following paragraphs we will look at the purpose of inventory management and how production costs show in the report. “It is not only the source for summary journal entries at the end of the month but also a most convenient vehicle for presenting and disposing of costs accumulated during the month. A production cost report shows total unit costs transferred to it from a preceding department, materials, labor, and factory overhead added by the department, unit cost added by the department, total and unit costs accumulated to the end of operations in the department, the cost of the beginning and ending work in process inventories, and cost transferred to a succeeding department or to a finished goods storeroom” (Rehman, 2018, para 1-2).
In the report you will see that the accountant took in whether the units were reasonable and whether your production costs were met. “A production cost report is the key document that management uses to understand the activities in a department; it shows the production quantity and cost data related to that department” (Kimmel, Weygandt, & Kieso, 2016 page 798). The overall units then are interpreted by the amount produced in the period. The output consists of units shifted out during the period and any units in development at the end of the period.
To get the full understanding of how the units were computed to get and equivalent of 2,000 there were steps that were performed to complete the report to show productions costs. The first step was to compute the physical unit flow where the units are to be kept tracked of by adding “the units started (or transferred) into production during the period to the units in process at the beginning of the period. This amount is referred to as the total units to be accounted for” (Kimmel, Weygandt, & Kieso, 2016, page 799). The second step is to compute the equivalent units of production where the units are “completed and transferred out plus equivalent unit if ending work in process equal to equivalent units of production” (Kimmel, Weygandt, & Kieso, 2016, page 800). The third step in this process is how we compute unit production costs by computing “the material, conversion and total manufacturing” (Kimmel, Weygandt, & Kieso, 2016, page 800) where the material is divided by equivalent units of the materials that are equal to the unit material cost we then use the total conversion cost and divide equivalent unit materials to unit conversion cost. Manufacturing is to take unit material cost and divide it by unit conversion cost, which will equal total manufacture cost per unit. The final step is to prepare a cost reconciliation schedule where the evidence in this schedule is corrected for equivalent productions to establish the unit costs added by the section that shows units transferred out and the ending work in process.
“In essence inventory control enables the business to have what it needs, when it needs it to do business” (Johnson, 2018 para, 1). When figuring the equal units remember that one unit is 100% completed and half of a unit is only 50% completed, so the information only accounted for the equivalent that amount to 2,000 in finished units in your inventory where the work prepared on the physical units are expressed in stipulations of fully completed units. Hence, if your ending stock contains 4,000 units which are only 50% complete, that is equivalent to having 2,000 finalized units at month end. Concluding in the report inventory could be conveyed as holding 4,000 physical units or 2,000 equivalent units. If you have any further questions, feel free to reach out to me at any time.
Johnson, A. (2018). The Main Function of Inventory. Retrieved from http://smallbusiness.chron.com/main-function-inventory-16156.html
Kimmel, P.D., Weygandt, J.J. & Kieso, D.E. (2016). Accounting Tools for Business Decision Making (6th ed.). Hoboken, NJ: John Wiley & Sons.
Rehman, A. (2018). Cost of Production Report (CPR). Retrieved from http://www.accountingdetails.com/cost_of_production_report.htm