Process Cost Systems LO 4 – Using the Cost of Production Report for Decision Making

Using the Cost of Production Report LO 4 Using the Cost of Production Report The cost of production report for the Mixing Department (Exhibit 7) shows that the 5,000 units in the beginning inventory cost $6,225. This inventory cost of $6,225 consists of the following costs: Information for the Mixing Department.

Using the Cost of Production Report LO 4 Using the Cost of Production Report June costs per equivalent unit of materials and conversion costs can be determined as follows: Direct Materials Cost per Equivalent Unit Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials = Direct Materials Cost per Equivalent Unit $5,000 5,000 gallons = The cost of production report is often used by managers for decisions involving control and improvement of operations. Using Frozen Delight’s cost of production report, the cost per equivalent unit for June can be determined from the beginning inventory information for July. Then June data can be compared to July data. The direct materials cost per equivalent unit for June amounted to $1.00 per gallon. $1.00 per gallon Direct Materials Cost per Equivalent Unit = (continued)

Using the Cost of Production Report LO 4 Using the Cost of Production Report Conversion Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs = $1,225 (5,000 x 70%) gallons = Conversion Cost per Equivalent Unit Conversion Cost per Equivalent Unit $0.35 per gallon = Likewise, the conversion cost per equivalent unit for June equals $.35 per gallon. When compared to the equivalent unit costs for July, reported in step 3 of the cost of production report for July, direct materials equivalent cost per unit rose from $1.00 per gallon in June to $1.10 per gallon in July. Cost per equivalent unit for conversion costs decreased from $.35 per gallon in June to $.30 per gallon in July.

Using the Cost of Production Report LO 4 Using the Cost of Production Report Assume that the Blending Department of Holland Beverage Company prepared cost of production reports for April and May. Assume that the Blending Department had no beginning and ending work in process inventory either month. The cost of production reports for April and May in the Blending Department are shown in the next slide. A cost of production report may be prepared in more detail than what has been presented in previous examples. The increase in details can help isolate problems and seek opportunities for improvement. This presentation reviews the Blending Department’s cost of production report for April and May. There were no beginning or ending work in process inventories for either month.

Holland Beverage Company LO 4 Holland Beverage Company The cost per unit for the month of April in the Blending Department was $.50 per unit. This is computed by dividing the total April costs of $50,000 by 100,000 completed units. The cost per unit for the month of May in the Blending Department was $.53 per unit. This is computed by dividing the total May costs of $106,000 by 200,000 completed units.

Using the Cost of Production Report LO 4 Using the Cost of Production Report Did you note in the previous slide that the report provided more cost detail than simply reporting direct materials and conversion costs? Also, you should have noted that the cost per unit increased $0.03 in the month of May. The cost of production report broke down total cost into the individual cost of direct materials, direct labor, and factory overhead costs for April and May. The total unit cost increased $.03 from April to May.

Using the Cost of Production Report LO 4 Using the Cost of Production Report To determine the possible causes for this increase, the cost of production report may be restated in per-unit terms, as shown in the next slide. To investigate the possible causes for this increase, slide 8 computes per-unit cost for each component of total cost.

Holland Beverage Company LO 4 Holland Beverage Company A per-unit cost is calculated for each of the individual cost items in the blending department. From this more detailed data, the reason behind the 6% increase in total cost can be analyzed. By examining the increases and decreases in the individual cost elements, the reasons behind the per-unit increase can be determined.

Holland Beverage Company LO 4 Holland Beverage Company The data indicates that both the energy and tank cleaning costs have increased dramatically. What costs have changed dramatically that might explain the $0.03 per unit increase in per unit cost?

Using the Cost of Production Report LO 4 Using the Cost of Production Report Management should investigate the causes for these increases and formulate a plan to decrease future costs. For example, the tank cleaning might be undertaken with less expensive labor, or replacing the tanks might (in the long run) be the solution to reducing per-unit cost. The next step is for Holland Beverage Company to investigate the reasons for these increases. Once the reasons for the increases are determined, the business can formulate a plan to decrease these costs in the future.

Quantity of Material Output Quantity of Material Input Yield In addition to unit costs, managers of process manufacturers are also concerned about yield trends. The yield is computed as follows: Yield = Quantity of Material Output Quantity of Material Input Another item to look into is the yield trend. Yield is the ratio of materials output quantity to the input quantity.

Quantity of Material Output Quantity of Material Input Yield Assume that 1,000 pounds of sugar enter the Packaging Department, and 980 pounds of sugar were packed. The yield is 98% as computed below. Yield = Quantity of Material Output Quantity of Material Input A yield less than 1 occurs when the output quantity is less than the input quantity due to material losses during production. Changes in yield trends may be part of the reason for changes in unit costs. The evaluation of changes in yield trends is important for controlling costs. Yield = 980 pounds 1,000 pounds = 98%