What is step 4 in preparing the cost of production report?

Step 4: Assigning Costs to Completed and Partially Finished Products

In the process of preparing a cost of production report, step 4 involves assigning costs to the units produced during the period, including both completed and partially finished products. This step is essential for determining the total cost of production and the unit cost of the products.

To accurately assign costs, it is necessary to first calculate the cost per equivalent unit. This calculation involves dividing the total cost incurred for each cost category (materials, labor, and overhead) by the total equivalent units produced. The equivalent unit is a measure of the amount of production that has taken place during the period, considering both completed units and partially finished units.

Once the cost per equivalent unit is determined, it is multiplied by the equivalent units of production for each product. The equivalent units of production represent the number of units that would have been produced if all production had been completed. By multiplying the cost per equivalent unit by the equivalent units of production, the total cost of production for each product can be calculated.

Calculating the Equivalent Units of Production

To calculate the equivalent units of production, it is necessary to consider both the units completed and the units in ending work-in-process inventory. The units completed are those that have been fully processed and transferred out of production. The units in ending work-in-process inventory are those that have not yet been fully processed but have incurred some costs.

For materials, the equivalent units of production are equal to the number of units completed plus the number of units in ending work-in-process inventory, multiplied by the percentage of completion of those units. For labor and overhead, the equivalent units of production are equal to the number of hours worked or the number of machine hours used, multiplied by the percentage of completion of the units being worked on.

Importance of Assigning Costs

Assigning costs to completed and partially finished products is crucial for several reasons. It allows manufacturers to:

• Determine the total cost of production
• Calculate the unit cost of products
• Establish appropriate selling prices
• Identify areas for cost reduction
• Evaluate the efficiency of production processes

By accurately assigning costs, manufacturers can gain valuable insights into their production operations and make informed decisions to improve their profitability and competitiveness.