Question

In: Accounting

Explain the methods with which the cost per unit will be calculated for companies using process...

Explain the methods with which the cost per unit will be calculated for companies using process costing system?

Solutions

Expert Solution

Ans:

Process Cost System

Some companies have homogeneous or very similar products that are not made to order and are produced in large volumes. They continually process their product, moving it from one function to the next until it is completed. In these companies, the manufacturing costs incurred are allocated to the proper functions or departments within the factory process rather than to specific products. Examples of products that companies produce continuously are cereal, bread, candy, steel, automotive parts, chips, and computers. Companies that refine oil or bottle drinks and companies that provide services such as mail sorting and catalog order are also examples of continuous, homogeneous processing.

The cost per unit is commonly derived when a company produces a large number of identical products. This information is then compared to budgeted or standard cost information to see if the organization is producing goods in a cost-effective manner.

The cost per unit is derived from the variable costs and fixed costs incurred by a production process, divided by the number of units produced. Variable costs, such as direct materials, vary roughly in proportion to the number of units produced, though this cost should decline somewhat as unit volumes increase, due to greater volume discounts. Fixed costs, such as building rent, should remain unchanged no matter how many units are produced, though they can increase as the result of additional capacity being needed (known as a step cost, where the cost suddenly steps up to a higher level once a specific unit volume is reached). Examples of step costs are adding a new production facility or production equipment, adding a forklift, or adding a second or third shift. When a step cost is incurred, the total fixed cost will now incorporate the new step cost, which will increase the cost per unit. Depending on the size of the step cost increase, a manager may want to leave capacity where it is and instead outsource additional production, thereby avoiding the additional fixed cost. This is a prudent choice when the need for increased capacity is not clear.

Within these restrictions, then, the cost per unit calculation is:

(Total fixed costs + Total variable costs) ÷ Total units produced

The cost per unit should decline as the number of units produced increases, primarily because the total fixed costs will be spread over a larger number of units (subject to the step costing issue noted above). Thus, the cost per unit is not constant.

For example, ABC Company has total variable costs of $50,000 and total fixed costs of $30,000 in May, which it incurred while producing 10,000 widgets. The cost per unit is:

($30,000 Fixed costs + $50,000 variable costs) ÷ 10,000 units = $8 cost per unit

In the following month, ABC produces 5,000 units at a variable cost of $25,000 and the same fixed cost of $30,000. The cost per unit is:

($30,000 Fixed costs + $25,000 variable costs) ÷ 5,000 units = $11/unit


Related Solutions

Which of the following is a mixed cost? a) a cost that is $32.00 per unit...
Which of the following is a mixed cost? a) a cost that is $32.00 per unit when production is 80,000 and $40.00 per unit when production is 128,000. b) a cost that is $64.00 per unit when production is 80,000 and $64.00 per unit when production is 128,000. c) a cost that is $32.00 per unit when production is 80,000 and $32,000 per unit when production is 128,000. d) a cost that is $32.00 per unit when prodcution is 80,000...
The standard cost for material and labour in a manufacturing process is provided per unit as:...
The standard cost for material and labour in a manufacturing process is provided per unit as: Material cost 5kgs                         shs.50 Labour cost 20hours                     shs.10 Material consumed in producing 500 units was Shs.25,650 against 2,700kgs of material. Wages paid was Sh6,050 for 11,600 hours, including 20 hours which was idle time due to machine breakdown. Required: Material cost variance Material price variance Material usage variance Labour cost variance Labour rate variance
Calculate the cost per equivalent unit of material and conversion cost for January - using the...
Calculate the cost per equivalent unit of material and conversion cost for January - using the Weighted Average Approach Units Materials Conversion Work in process January 1 2,500 50% 35% Work in process January 31 45% 25% Materials cost in work in process January 1 $25,000 Conversion costs in work in process January 1 $10,000 Units started in production 12,000 Units transferred to the next department 8,000 Materials cost added during January $20,000 Conversion costs added during January $7,500 Complete...
Kerchoo! Flag Company has a per unit variable cost of $10.00 per unit, which is 60%...
Kerchoo! Flag Company has a per unit variable cost of $10.00 per unit, which is 60% of the selling price. Fixed costs are $100,000. Calculate break even in sales $ and units using the contribution margin and contribution margin approach and the contribution margin income statement table. No equation approach, that is, do not copy formulas/equations from the text and then substitute in values. There is enough of that in MyLab. Use the table. Total Amount (Contribution Margin Income Statement)...
Cost of Production and Cost per Unit
A business produces one product which requires the following inputs:Direct Materials 6 kg at $ 4,80 per kgDirect labour 4 hour at $7 per hourBuilding cost $18.000 per periodLeased machine $600 for every 600 units (each machine has a capacity of 600 units)Store Cost $3.000 per period plus $3 per unita. What is the total cost of production and the cost per unit at each of the followingproduction levels?-1000 units-2000 unitsb. Explain why the cost per unit is different at...
Cost of Production and Cost per Unit
A business produces one product which requires the following inputs:Direct Materials 6 kg at $ 4,80 per kgDirect labour 4 hour at $7 per hourBuilding cost $18.000 per periodLeased machine $600 for every 600 units (each machine has a capacity of 600 units)Store Cost $3.000 per period plus $3 per unita. What is the total cost of production and the cost per unit at each of the followingproduction levels?-1000 units-2000 unitsb. Explain why the cost per unit is different at...
elow is selected information from Chipset's cost of production report: Cost per equivalent unit in process...
elow is selected information from Chipset's cost of production report: Cost per equivalent unit in process $10 Units completed 15,000 Total costs in process $332,000 Equivalent units of materials in ending inventory 2,000 Cost per equivalent unit of materials $6 The ending inventory of work-in-process is complete as to materials. The cost of conversion in the ending inventory is:
Explain how the the annual cost per kWh is calculated for alternative power sources including wind,...
Explain how the the annual cost per kWh is calculated for alternative power sources including wind, fossil fuels, and nuclear. As part of your discussion, explain why it is important to make comparisons this way.   This question is from Chapter 24: Wind Energy Power Company, Inc: Analyzing a Wind Energy Investment. Hint: See Appendix 24.3. 2.Refer to Exhibit 24.5, Panel A. Which type of energy had the lowest cost per kWh to produce electricity in July 2008? This question is...
Cost of Units Transferred Out and Ending Work in Process The costs per equivalent unit of...
Cost of Units Transferred Out and Ending Work in Process The costs per equivalent unit of direct materials and conversion in the Rolling Department of Oak Ridge Steel Company are $0.80 and $0.45, respectively. The equivalent units to be assigned costs are as follows: Equivalent Units Direct Materials Conversion Inventory in process, July 1 0 4,900 Started and completed during July 61,000 61,000 Transferred out of Rolling (completed) 61,000 65,900 Inventory in process, July 31 4,000 2,400 Total units to...
Cost of Units Transferred Out and Ending Work in Process The costs per equivalent unit of...
Cost of Units Transferred Out and Ending Work in Process The costs per equivalent unit of direct materials and conversion in the Rolling Department of Kraus Steel Company are $1.80 and $2.70, respectively. The equivalent units to be assigned costs are as follows: Equivalent Units Direct MaterialsConversion Inventory in process, October 10 2,900 Started and completed during October48,000 48,000 Transferred out of Rolling (completed)48,000 50,900 Inventory in process, October 316,000 3,600 Total units to be assigned costs54,000 54,500 The beginning...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT