That is, material, labor, and factory overhead will still occur and will still be allocated to work in progress. And amounts allocated to work in progress will in turn find their way into finished products. The major difference between job costing and process costing arises in the work-in-process 'units'.
But instead of seeing that work in progress is made up of many individual/separate jobs, you now start to see that it is made up of individual/separate jobs. discrete processes - melting, skimming/alloying, forming/extruding. This necessitates the use of a separate Work in Process account for each major production activity. Look at the chart at the top of the next page comparing job and process costs, paying particular attention to the difference in how costs are shifted out of work in progress.
How will costs incurred between work in process versus finished goods be allocated. As a simple example, ten units in process that are 30% complete equate to three equivalent units of output. Navarro began the month of June with 300,000 tons of iron ore in process in the Smelting Department.
The ultimate goal, of course, is to divide the total cost between the work in progress at the end of the month and the units completed and transferred during the month.
Cost of Production Report
This amount is the per unit cost of $12.3268 multiplied by the 650,000 units completed and transferred. If the total cost allocation does not equal the total cost incurred, an error has been made.
SCHEDULE QUANTITY Beginning Work in Process
- Journal Entries
- Subsequent Departments
- The Big Picture
- FIFO Process Costing
- Activity-Based Costing
- Pros of ABC
- Cons of ABC
- The Reality of ABC
- A Closer Look at ABC Concepts
- The Steps to Implement ABC
To record materials, labor and overhead for the month of June for the Smelting Department (see cost of production report). It is very important for you to note that the journal entry to be transferred out of the Smelting Department (credit) is offset by an increase in the Work in Process of the Skim/Alloy Department (debit). To record materials, labor and overheads for the month of June for the Afroom/alloys department (amounts are assumed/note that overheads may be applied on a different basis in each department!).
To record material, labor and overhead for the month of June for the Mold/Extrusion Department (amounts are assumed/note that overhead may be applied on a different basis in each department!). You've probably heard the saying "don't miss the forest for the trees." This means that the details sometimes obscure the big picture. For example, it can be argued that the cost of a finished product should include more than just direct cost.
Another advantage of ABC is that the product is billed only at the cost of capacity used. One limitation of ABC is that external reporting must be based on traditional absorption costing methods. Absorption costing requires the traditional division between product costs and period costs, with inventory absorbing all production costs and none of the period costs.
In other words, ABC is a more intensive technique and the cost to implement it may not be worth it. But for companies offering multiple products and services, the arbitrary allocation of costs can virtually “make or break” the perceived profitability of each product or service. Compare this traditional logic to ABC and you will see a reversal of the thought process.
Catalog preparation and distribution is a "business" driven by the number of customers. Thus, activities drive the need for resources and are called "resource drivers". The following graphic reveals the conceptual concept behind ABC, which is quite different and much more complex than traditional costing approaches. An interconnection diagram can be seen as a printed circuit design with multiple cost objects feeding from many common activities that then draw on different resources.
Employee involvement is critical to setting up the system correctly and ensuring that the measures it produces are accepted. Employees at all levels must believe the results of the accounting system before they can truly trust the results.
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- A Simple Analogy
- A Case Study in ABC
- Study Process and Costs
- Identify Activities
- Determine Traceable Costs and Allocation Rates
- Assign to Activities
- Determine Per-Activity Allocation Rates
- Apply Costs to Cost Objects
- What Just Happened?
- A Great Tool, But not a Panacea
IDENTIFY ACTIVITIES -- Once a business is understood, care should be taken in selecting the business activities that will be central to cost allocation. The costs for this group can easily be attributed to the machine setup activity, which will in turn be reallocated to a number of end products. Perhaps 10% of the janitor's time should be devoted to machine setup and the other 90% to general maintenance.
Someone may have decided that the entrance gate to the factory should be beautifully landscaped with seasonal flowers. If a product manager gets a bonus based on the profitability of her unit, you can be sure she doesn't want her products to absorb any of the flower costs—no matter how much she enjoys looking at the flowers. While it may be perfectly logical to leave some costs unallocated for the purpose of identifying the costs of a specific product or other cost object, it would be foolhardy to forget these costs in the overall management of the organization.
Turn up your game.” This campaign was run in each of the three main markets, with one cost per campaign. Much of the cost of robotics was directly related to the number of units produced. Of the total costs, direct material and direct labor were directly traceable to the product cost object.
The remaining costs were deemed to be attributable to one of the five activities or otherwise not allocated. It shows what percentage of each cost category could be attributed to each of the five activities – the percentages in each row must equal 100%. Note that none of the direct material and direct labor can be attributed to an activity cost pool because it is traceable to the final product.
Other costs are entirely attributable to one activity (eg, all robotics rental costs are attributable to the robotics activity). Finally, large portions of some costs could not be attributed to any of the identified activities and were simply classified as Unallocated. Each percentage should have a logical basis (eg, in-ear speakers are very cheap and passed around as indirect material; some of these in-ears were made into key chains that were given away for free as part of an advertising campaign, spending 5% indirect materials pool).
This calculation is repeated for each activity cost group and is summarized at the bottom of the schedule on the next page. But direct labor was only a small part of the whole puzzle and did not fall equally on the two products.
