Companies move to Activity -Based Costing to better understand the true costs of goods and services. The activities that go into them Resources consumed by these activities ABC contrasts with traditional costing cost accountingwhich sometimes assigns costs using somewhat arbitrary allocation percentages for overhead or the so-called indirect costs. As a result, ABC and traditional cost accounting can estimate the cost of goods sold and gross margin very differently for individual products.
Using equivalents unit is a way to mathematically convert partially completed units of product into an equivalent number of fully completed units. We convert them into equivalent units as follows: Remember, this is accounting; we are recording and reporting on costs, and trying to have the costs parallel the actual flow of production through the manufacturing process.
They are producing a batch of wooden chairs. The wood is cut and shaped into component parts. The parts are sanded and assembled.
Next paint or varnish is applied, and decorations and hardware are added. Under these circumstances, a batch of chairs could be at any stage of the production process at the end of a month. Using equivalent units would be appropriate in this example.
They mix a batch of dough, bake the cookies, and package them all on the same day. There is no carry over of partially completed cookies from one day to the next. This company would not need to calculate equivalent units of production.
Unit Costs A manufacturing company can make thousands of units of product in a given time periods. Some make millions of units per year. Ultimately those products have to be sold, and they are sold one at a time. So it is important for companies to know the unit cost of the products.
This unit cost should include all costs when setting a selling price. We can also analyze our production efficiency by looking at how unit costs change from month to month.
We can break unit costs down into component parts as well, such as labor, material and overhead. This gives managers even more control over the manufacturing process. We will study standard costs and budgets in a later lesson.
Unit costs are very important in both of these areas.
By comparing standard and actual costs per unit we can reduce waste, increase productivity, and manager resources more carefully. Costs are pooled by type or activity, and allocated to production using different cost drivers.
It is important to identify relevant and reliable cost drivers for different types of costs. For instance, square footage of floor space might be used to allocate heating and air conditioning costs.
Costs usually go through a series of steps in the allocation process. Just In Time Inventory Management Just in time JIT inventory management systems have been widely used in the automotive manufacturing and assembly industry, as well as others.
The idea is to have parts arrive at the assembly plant just in time to go into the production line when they are needed.
The company does not keep an inventory of parts in storage. Very few extras are ordered, further eliminating waste. JIT systems help companies in several ways. They reduce costs and risks associated with inventory.
There is no need to warehouse parts, eliminating building, personnel and insurance costs.PROCESS COSTING Job Costing Job costing is the process of tracking the expenses incurred on a job against the revenue produced by that job Job costing is an important tool for those who are pairing a relatively high dollar volume per customer with a relatively low number of customers.
For example, building contractors, subcontractors, architects and consultants often use job costing. 1 | Activity based costing in China: a case study of Xu Ji Electric Co. Ltd Executive summary This project investigated the implementation of activity-based costing (ABC) at .
Process costing is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes. Examples of this include the manufacture of erasers, chemicals or processed. Process costing is a term used in cost accounting to describe one method for collecting and assigning manufacturing costs to the units produced.
Processing cost is used when nearly identical units are mass produced. (Job costing or job order costing is a method used when the units manufactured v. Under activity-based costing, an activity pool is the set of all activities required to complete a task, such as (a) process purchase orders, or (2) perform machine setups.
To "cost" activity pools, ABC identifies activity units that are cost drivers for each pool. Cost accumulation procedures used by manufacturing concerns are classified as either job order costing or process costing.