Ch 6 Summary.docx

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University of Waterloo
Accounting & Financial Management
AFM 481
Grant Russell

Chapter 6 – Process Costing Accounting for the cost of Mass-Produced Goods - Process costing – assign product costs to mass-produced products - Purpose: assign costs to each unit of good/service - Production costs are traced to cost pools that reflect the production process (departments) and allocated to individual units in a two-stage process - Costs assigned to each dept, then allocated to all units that pass through the dept Assigning DM and Conversion Costs - First assign costs to depts - Then allocated from depts. To individual products - Conversion cost = DL + production overhead costs - DM and conversion costs are allocated separately – incurred at diff points in the production process - Indirect materials and indirect labour are traced to depts through material and payroll records - Shared costs (rent, insurance) are allocated to departments WIP and Equiv. Units - Use % of completion to calculate the cost allocation of partially completed units - Equivalent units – the resources used in partially completed units relative to the resources needed to complete the units o The # of units that could have been completed if all resources had gone to complete whole units instead of to partially complete units Process Costing Methods - First in, first out (FIFO) method – allocate the current period’s cost only to units that had work performed this period o Cost per unit = cost / equiv units for total work performed - Weighted average method – use the average of costs from beginning WIP and current period costs; then allocate to units completed o Cost per unit = (beginning WIP + Costs) / equiv units for total work No WIP - When no WIP is involved, the equivalent unit cost is the average cost per unit for the period - Costs under FIFO and weighted average is the same when there are no beginning or ending inventory - If we have ending WIP, then we use equivalent units instead of actual units to calculate the per- unit costs Ending WIP - Weighted average and FIFO calcs are the same since no beginning WIP - For equiv. units, multiply the % complete for DM
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