Cost accounting

Author: Xiao Xu (Compiler)
Publisher:
Publish Date: 2004-08-01
Features: [Excerpt:]
1. Characteristics of Batch Costing
Batch costing is a method of calculating product costs based on product batches. This method is generally applicable to small-batch, single-piece, multi-step production, such as the manufacturing of heavy machinery, ships, precision instruments, special tools, molds, and specialized equipment, as well as large and medium-sized repairs of machinery and equipment and the trial production of new products. In certain single-step production scenarios where production is organized in small batches or single pieces and management requires batch-based cost calculation, such as the melting and casting of certain special or precision castings, batch costing can also be adopted to calculate the costs of these castings separately.
In small-batch, single-piece production, the variety of products and the batch size of each batch are often determined based on the orders of the users. Therefore, calculating product costs by batch often means calculating them according to orders. As a result, batch costing of product costs is also known as order costing. If a single order specifies multiple products, to assess and analyze the completion of cost plans for various products and facilitate production management, production should be organized and costs calculated by product variety.
If a single order specifies only one product but the quantity is large, making it inconvenient to produce in one go or if the user requires delivery in batches, the production can be divided into multiple batches for cost calculation. If a single order specifies only one product but it is a large and complex product with high value and a long production cycle (e.g., the manufacturing of large ships), it can also be organized into batches based on the product's components for cost calculation. If multiple orders during the same period specify the production of the same product, to organize production more economically and reasonably, the same products can be combined into a single batch for cost calculation.
When organizing production by product batch, the production planning department issues a production notice to the workshop and notifies the accounting department. The production notice assigns a number to the production task, known as the product batch number or production order number. The accounting department should open a production cost ledger based on the product batch number issued by the production planning department, which is the same as the product batch. The opening and closing of the production cost ledger should be closely coordinated with the issuance and completion of the production notice to ensure the accuracy of cost calculation for each batch of products.
For single-piece production, the production costs recorded in the production cost ledger before product completion are considered work-in-progress costs. When the product is completed, the production costs recorded in the ledger become the cost of finished goods. Therefore, there is no need to allocate costs between finished goods and work-in-progress when calculating costs at the end of the month.
For small-batch production, products within a batch are generally completed simultaneously. At the end of the month, either all products are completed or none are, so there is no need to allocate costs between finished goods and work-in-progress. However, if products within a batch are completed across different months, when calculating costs at the end of the month, some products are completed while others are still in progress. In this case, costs must be allocated between finished goods and work-in-progress to calculate the cost of finished goods and the cost of work-in-progress at the end of the month.
Since the batch size in small-batch production is not large, and the situation where products within a batch are completed across different months is rare, a simple allocation method can be used. This involves calculating the cost of finished goods based on the planned unit cost, standard unit cost, or the actual unit cost of the same product in the previous period. After transferring the cost of finished goods from the production cost ledger, the remaining balance is the cost of work-in-progress.
To accurately assess and analyze the completion of the cost plan for the batch, the actual total cost and actual unit cost of the batch should be calculated when all products in the batch are completed. However, no adjustments should be made to the transferred cost of finished goods in the ledger.
If the situation where products within a batch are completed across different months is frequent, and the proportion of completed products within the batch to the total batch size is significant at the end of the month, appropriate allocation methods should be adopted based on specific conditions to allocate production costs between finished goods and work-in-progress at the end of the month to ensure the accuracy of cost calculation.
To reduce the work of allocating costs between finished goods and work-in-progress, improve the accuracy and timeliness of cost calculation, and under the premise of reasonable production organization, the batch size of products can be appropriately reduced. Products can be produced in smaller batches or by components (parts or components) to ensure that the same batch of products or components can be completed simultaneously, avoiding the situation where products are completed across different months. However, reducing the batch size or producing by components should be limited. If the batch size is too small or the components are divided too finely, it may lead to inefficient production organization, excessive production cost ledgers, and increased accounting workload. In the case of calculating costs based on components, the costs of various components in the same batch must be summarized and added to assembly costs to calculate the total cost of the batch, which will also increase accounting workload.
[Example] A factory produces certain products in small batches according to the requirements of the users and adopts batch costing to calculate product costs. In August, the factory started production of 100 pieces of Product A with batch number 801, which were all completed in September. In September, the factory started production of 130 pieces of Product B with batch number 901, 100 of which were completed and delivered in the same month, while 30 remained unfinished. The production cost ledger for Product A is shown in Table 5—34, and the production cost ledger for Product B is shown in Table 5—35. Since the proportion of completed products in Product B to the total batch size is significant, to improve the accuracy of cost calculation, production costs are allocated between finished goods and work-in-progress. Direct materials are allocated based on the actual quantity of finished goods and work-in-progress, with raw materials being input once at the beginning of production. Other costs are allocated based on the output of finished goods and the estimated equivalent output of work-in-progress.
The standard cost method is a cost calculation method adopted to promptly reflect and monitor the differences between production costs and standard costs, strengthen standard cost management, and control costs. Under the standard cost method, costs that meet the standard and those that deviate from the standard are recorded separately at the time of cost occurrence. The actual cost of products is calculated by adding or subtracting various differences from the standard cost of products.
2. Formulation and Revision of Standard Costs
Standard costs differ from planned costs. Planned costs are calculated based on the average consumption standards during the planned period, while standard costs are calculated based on current consumption standards. Formulating and strictly implementing standard costs play an important role in ensuring the completion of planned costs. Under the standard cost method, standard costs are even the basis for accounting for production costs and calculating actual product costs.
Adopting the standard cost method requires first formulating consumption standards for raw materials, power, labor hours, etc., and then calculating the standard costs of various production costs and the unit standard cost of products based on these standards, as well as the planned price of raw materials, planned wage rate (i.e., hourly wage), or piece-rate wage, and planned manufacturing overhead. Standard costs include standard costs for components and finished products, which are usually formulated jointly by the planning and accounting departments.
In cases with fewer components, the standard cost of parts is formulated first, and then the standard costs of subassemblies and finished products are calculated. The standard cost of components can serve as the basis for valuing work-in-progress and scrapped components. If the number of components is large, to simplify calculations, the standard cost of parts may not be calculated. Instead, the standard cost of subassemblies can be calculated based on part standard cost cards listing raw material consumption standards, process plans, and labor hour consumption standards, as well as the planned price of raw materials, planned wage rate, and overhead rate. Then, the standard cost of finished products is calculated by summarizing these costs. Alternatively, the standard cost of finished products can be calculated directly based on part standard cost cards.
In the absence of component standard costs, the valuation of work-in-progress and scrapped components must be calculated temporarily based on component standard cost cards and the planned price of raw materials, planned wage rate, and overhead rate. The cost items and calculation methods included in standard costs should be consistent with those in planned costs and actual costs to facilitate cost assessment and analysis. Examples of the format for part standard cost cards and the standard cost calculation table for subassemblies are shown in Tables 8—8 and 8—9, respectively. The format for the standard cost calculation table for finished products is similar to that for subassemblies and is not illustrated separately.