The cost accounting system is set up to serve the company’s needs for cost accumulation, cost measurement, and cost assignment. In general, normal costing is preferred to actual costing in determining unit production costs. In normal costing, actual prime costs are assigned to units, but overhead is applied based on a predetermined rate. Job-order costing is used for both manufacturing and service firms that produce unique or heterogeneous products. Cost is accounted for by the individual job using a subsidiary account called the job-order cost sheet.
The use of process costing is complicated by the presence of work-in-process inventories. When work-in-process inventories are present, equivalent units must be used to measure output. Also, with beginning work-in-process inventories, we must decide what to do with prior-period work and prior-period costs. Two methods are described for dealing with beginning work-in-process inventories: the FIFO method and the weighted average method. The FIFO approach is theoretically appealing because it follows the process-costing principle: a period’s unit cost is computed by dividing the costs of the period by the output of the period. To accomplish this, prior-period work and costs must be excluded. This work and its costs must be tracked separately, creating some complexity in the approach. The weighted average approach is less complicated but poses some problems when control and accuracy issues are important.
By completing this course, you will be able to apply various product and service costing approaches and their methods in real production/service environment, and describe and prepare cost flows, journal entries, and cost of production reports.
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