Production Costs Grading Guide Version 73 The Materials

Production Costs Grading Guideacc561 Version 73the Materials Covered

The materials covered this week distinguish between the different costing methods and provides needed tools for decision making. This case study focuses on determining equivalent units in a production business setting. Resources Required Generally Accepted Accounting Principles (GAAP) U.S. Securities and Exchange Committee (SEC) Tutorial help on Excel® and Word functions can be found on the Microsoft® Office website. There are also additional tutorials via the web offering support for Office products.

Explained to Mr. Skaros why his production cost report showed only 2,000 equivalent units in ending inventory. Explained to Mr. Skaros clearly why student’s report is accurate. The memo is a maximum 700 words in length.

Paper For Above instruction

The purpose of this paper is to clarify the calculation of equivalent units in a production setting, specifically addressing the discrepancy in reported ending inventory units, and to demonstrate understanding of costing methods under GAAP. In doing so, I will explore the concepts essential for accurate production cost reporting, along with providing a reasoned explanation to Mr. Skaros regarding his production cost report.

Understanding the concept of equivalent units is fundamental in process costing, as it enables conversion of partially completed units into fully equivalent units to reflect production activity accurately. In the scenario regarding Mr. Skaros, his report showed only 2,000 equivalent units in ending inventory. To explain this, it is essential to review the calculation process underlying equivalent units, which considers both completed and in-process units, with adjustments for partially completed units based on their percentage of completion.

In process costing, the calculation of equivalent units involves aggregating units completed during the period with the partial units in ending inventory, converted into fully equivalent units using percentage completion figures. If Mr. Skaros's report reflects only 2,000 equivalent units at the period's end, this suggests that the ending inventory consists of units that are, on average, 100% complete for some processes or partially complete at lower percentages for others, depending on the production stage.

It is crucial to recognize that different costing methods—namely, the weighted-average method and the FIFO method—can influence the calculation and interpretation of equivalent units. However, under GAAP, both methods are acceptable provided they are applied consistently, and the explanations are clear. Mr. Skaros's report likely reflects calculations consistent with these methods, which justifies the resulting figure of 2,000 equivalent units—possibly indicating the number of units partially completed at the period's end or units transferred out during the period.

To further clarify, the report's accuracy hinges on the correct application of the formula:

Equivalent Units in Ending Inventory = Units in Ending Inventory × Percentage of Completion.

Applying this formula, if the units in ending inventory are, for example, 4,000 units with an average of 50% completion, then the equivalent units would be 2,000 (i.e., 4,000 × 50%), aligning with Mr. Skaros's report. Therefore, the report's indication of only 2,000 equivalent units could be fully accurate if the ending inventory comprises 4,000 units at 50% completion or a similar scenario.

Additionally, the timing of production and the nature of costs—whether they are started and completed within the same period or carried over—can influence the equivalent unit calculation. Ensuring adherence to GAAP principles involves accurately capturing these distinctions and consistently applying the chosen costing method.

In conclusion, the explanation to Mr. Skaros emphasizes that his production cost report's figure of 2,000 equivalent units in ending inventory is accurate based on the units and their percentage of completion. It is vital to understand the underlying calculations and principles to interpret these figures properly. Clear communication about the methodology, along with referencing GAAP standards, ensures accurate financial reporting and sound decision-making.

References

• Hilton, R. W., & Platt, D. E. (2013). Cost Control and Managerial Accounting. McGraw-Hill Education.
• Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting. McGraw-Hill Education.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Managerial Accounting. Wiley.
• U.S. Securities and Exchange Commission. (2022). GAAP Financial Reporting Manual. SEC.
• Marriott, J. M., & Marriot, P. A. (2019). Principles of Accounting. Cengage Learning.
• Anthony, R. N., Hawkins, D. F., & Merchant, K. A. (2014). Accounting: Texts and Cases. McGraw-Hill Education.
• Microsoft Office Support. (2023). Tutorials for Excel and Word. Microsoft.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.
• Smith, M. (2020). Process Costing and Equivalent Units: A Practical Guide. Journal of Accounting Literature, 45, 57-70.