Question

Explain step one and step two for the production cost report

Answer 1

Explain step one and step two for the production cost report.

Preparation of production cost report involves four steps. These steps are as follows:

1. Compute the physical unit flow.
2. Compute the equivalent units of production.
3. Compute the unit production costs.
4. Prepare the cost reconciliation schedule.

1. Computation of physical unit flow:

Physical unit flow comprises of units (work in process) in the beginning plus the units started during the period. These are the total units to be accounted for, for this period.

The total of these units should be equal to the units completed and transferred to the next process plus the ending units of work in process. These are the total units accounted for.

Suppose the beginning inventory is 15 units plus 100 units started during the period, the total 115 units are to be accounted for this period. Now if 90 units are completed and transferred, then there should be 25 units as ending work in process, to make the total 115 units accounted for. When these to figures (units to be accounted for and units accounted for) are equal, then first step of preparation of production report is completed.

1. Compute the equivalent units of production

The total units accounted for is units completed and transferred to the next process plus the ending units of work in process. Units completed are 100% completed for the material and conversion costs but the ending units of work in process will be partly completed for the material and conversion costs. Therefore, physical units of ending work in process should be converted in equivalent units by multiplying the percentage of completion.

In case 25 ending units are completed 60% for material and 20% for conversion costs, the equivalent units will be 15 units (25 x 60%) for material and 5 units (25 x 20%) for conversion costs.

Taking above example from step 1, the equivalent units of production will be as follows:

                                                                                                Material               Conversion costs

Units completed and transferred                              90                                           90

Units of work in process                                                15                                           5

                Equivalent units of production                   105                                         95

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