Key Terms
Use when
Products are identical, mass-produced, and indistinguishable from each other. Costs cannot be economically traced to a s
Examples
Soft drinks, petroleum, paint, cereal, paper, rubber, steel, electronics produced in batches.
Manufacturing costs (also called product costs)
All costs required to manufacture the product. Three components: 1.
Definition
The number of units that would have been produced if production was sequential and each unit completed entirely before s
EXCEPTION
Some overhead items like plant insurance are period costs by nature but are classified as overhead and attached to the p
Formula
Overhead application rate = Estimated annual overhead / Estimated annual activity base
Example
$340,000 estimated overhead / 34,000 estimated machine hours = $10 per machine hour.
Materials are added at specific points
Beginning, middle, or end of a process. Conversion costs (labor + overhead) are incurred evenly throughout.
If materials are added at the beginning
WIP units are 100% complete for materials regardless of how far along conversion is. If materials are added at the end:
Includes ALL costs
Costs from the current period plus any costs carried over from beginning inventory. Does not separate prior-period work
Spoilage definition
Units not fit for sale due to breakage or other imperfections.
Transferred out
6,500 units Ending WIP: 1,750 units (100% materials, 40% conversion) New materials added: $2,000 New conversion costs: $
Example (shaping department)
Transferred out: 7,500 units (100% complete both) Ending WIP: 1,200 units (100% materials, 35% conversion)
Materials EUs
6,500 + (1,750 x 1.00) = 8,250 Conversion EUs: 6,500 + (1,750 x 0.40) = 6,500 + 700 = 7,200
EUs
7,500 + (1,200 x 0.35) = 7,500 + 420 = 7,920