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Chapter 5 Cost Behavior Analysis and Use

The document discusses process costing, which is a product costing system used by firms producing homogeneous products continuously. It accumulates costs in production departments and allocates them to completed and partially completed units. The key document is a production cost report that summarizes physical and equivalent units, costs incurred, and costs assigned to completed goods and work-in-process inventories.

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Qurat Saboor
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89 views2 pages

Chapter 5 Cost Behavior Analysis and Use

The document discusses process costing, which is a product costing system used by firms producing homogeneous products continuously. It accumulates costs in production departments and allocates them to completed and partially completed units. The key document is a production cost report that summarizes physical and equivalent units, costs incurred, and costs assigned to completed goods and work-in-process inventories.

Uploaded by

Qurat Saboor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lesson Plan

Lecturer’s name: Qurat ul Ain Saboor Date: 30th April 2020

Course: Cost Accounting Duration: 3 hours


Topic: Chapter 5: Cost Behavior: Analysis and Use
Lesson objectives: Students will be able to…
 Understand how fixed and variable costs behave and how to use them to
predict costs.
 Use a scatter graph plot to diagnose cost behavior.
 Analyze a mixed cost using the high‐low method.
 Prepare an income statement using the contribution format.

Summary of Lesson

Process costing is a product cost system that accumulates costs in processing


departments and allocates them to all units processed during the period, including
both completed and partially completed units. It is used by firms producing
homogeneous products on a continuous basis to assign manufacturing costs to units
in production during the period. Firms that use process costing include paint,
chemical, oil-refining, and food-processing companies.

Process costing systems provide information so managers can make strategic


decisions regarding products and customers, manufacturing methods, pricing options,
overhead allocation methods, and other long-term issues.

Equivalent units are the number of the same or similar completed units that could
have been produced given the amount of work actually performed on both complete
and partially completed units.

The key document in a typical process costing system is the production cost report
that summarizes the physical units and equivalent units of a production department,
the costs incurred during the period, and the costs assigned to goods both completed
and transferred out as well as to ending work-in-process inventories. The preparation
of a production cost report includes five steps: (1) analyze physical units, (2)
calculate equivalent units, (3) determine total costs to account for, (4) compute unit
costs, and (5) assign total manufacturing costs.

The two methods of preparing the departmental production cost report in process
costing are the weighted-average method and first-in, first-out (FIFO) method. The
weighted-average method includes costs incurred in both current and prior periods
that are shown as the beginning work-in-process inventory of this period. The FIFO
method includes only costs incurred during the current period in calculating unit cost.

Most manufacturing firms have several departments or use processes that require
several steps. As the product passes from one department to another, the costs from
the prior department are transferred-in costs or prior department costs. Process
costing with multiple departments should include the transferred-in cost as the fourth
cost element in addition to direct materials, direct labor, and factory overhead costs.

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