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  1. Milton Manufacturing Process Costing System

    QUESTION

    Discuss the Milton Manufacturing Process Costing System

 

Subject Business Pages 6 Style APA

Answer

Milton Manufacturing Process Costing System

Process Costing System-Journal Entries

Debit

Credit

a)

Cost of work in process as at May 1

 $   85,000.00

b)

Cost of goods transferred in from Department X  during May

 $ 262,000.00

c)

Manufacturing costs added in Department Y

Direct materials

 $ 210,000.00

Direct labour

 $   45,000.00

Manufacturing overhead

 $   67,000.00

d)

Cost of goods transferred to the finished goods warehouse during May

 $ 555,500.00

e)

Cost of work in process in Department Y as at May 31

 $ 113,500.00

 $ 669,000.00

 $ 669,000.00

 

  1. A brief explanation of the operation of process costing, including the way the unit costs of finished goods are determined. 

Process costing is used to determine cost of goods when a company’s manufactured goods are standardized, similar or homogenous. This costing method is mainly used in industries such as chemicals, sugar processing, oil refineries, shoes and textiles among others.  Industries which use assembly lines also find process costing the most ideal in allocating costs to units of products.  The average cost is assumed to represent the cost per unit in process costing method (Zhuang & Chang, 2017).  Industries that use process costing find that it is impossible to allocate costs to a specific product single raw materials and other inputs are share across many products. For example, a piece of cloth can be used to make many shirts and hence the most ideal way of determining the cost per shirt is to accumulate all costs within a given time frame and dividing that with the total number of shirts produced.  The average cost per shirt will therefore form the unit cost of manufacturing one shirt (Fałat, 2019).

In process costing, raw material costs, direct labour costs and direct overhead costs are added together to determine the total cost of producing a certain number of units of homogenous products.  The unit costs are allocated on a pro rata basis.  For example, in a bread manufacturing plant assume 10,000 pieces of bread were produced in one day, the raw material cost was $5000, direct labour cost was $3000 and direct overheads was $4000 (Fałat, 2019). The unit cost per piece of bread would be $12,000 divided by 10,000 pieces of bread which would give a unit cost per bread of $ 1.2.  Raw material cost per unit will be $5,000 divided by 10,000 which would be $0.5, direct labour cost would be $3,000 divided by 10,000 pieces of bread which would be $0.3 whereas direct overheads would be $4,000 divided by 10,000 pieces which would be $0.4.  The unit cost of the finished product would be $ 1.2 (Bariska, Pásztory & Koloszár, 2019).

  1. A discussion of how managers may use the information obtained from process costing

Information obtained from process costing assists managers to know the total cost of producing just one unit of a product or service. For instance, in a large manufacturing entity making sweets, by using process costing, managers will be able to know how much it costs the company to make just one sweet(Fałat, 2019). Managers will then be able to determine the selling price for their sweets to ensure they make a profit.  Information obtained from process costing may also assist managers to implement competitive strategies such as price cutting without the risk of incurring losses. The information will also assist managers to determine the most expensive departments and the least expensive.  This information is useful when cutting costs to remain competitive or create competitive advantage (Meric & Gersil, 2018).

            Process costing provides information that helps managers to control manufacturing expenses. In companies where products are processed in one department and then they move to the next and then to the third and so on before they are finished, managers can assign each department as a cost center and hence use information on cost from each department to determine which are the most expensive departments and which are the least expensive (Zhuang & Chang, 2017).  Data obtained can also help to determine inefficiencies in the supply chain which then assists in improving process to gain competitive advantage (Meric & Gersil, 2018). Process costing systems can also be used to track inventory in large corporations which would minimize lose due to fraud, negligence or malicious intentions.  This information is also used by revenue authorities to calculate taxes payable or refundable.  Process costing also helps departments to have uniformity in systems and policies which enhances efficiency and improves customer service (Meric & Gersil, 2018).

 

 

References

Bariska, M., Pásztory, Z., & Koloszár, L. (2019). The efficiency based costing method – using a

sawmill as example. European Research Studies, 22(2), 229-243. Retrieved from https://search.proquest.com/docview/2214889385?accountid=45049

Fałat, K. (2019). Changes in the product costing process driven by

Implementation of an integrated information system in a production company. E-Finanse, 15(4), 25-33. Retrieved from https://search.proquest.com/docview/2387074106?accountid=45049

Meric, E., & Gersil, M. (2018). Usability of time driven activity based costing methods in the

budgeting process of SMEs *. Business and Economics Research Journal, 9(4), 961. Doi: http://dx.doi.org/10.20409/berj.2018.134

Zhuang, Z., & Chang, S. (2017). Deciding product mix based on time-driven activity-based costing by mixed integer programming. Journal of Intelligent Manufacturing, 28(4), 959-974. Doi: http://dx.doi.org/10.1007/s10845-014-1032-2

 

 

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