Purpose Of Assignment And Materials Covered This Week

Purpose of Assignment The materials covered this week distinguish between the different costing methods and provides needed tools for decision making

The scenario involves Davis Skaros, a newly promoted production manager who received a production cost report indicating only 2,000 equivalent units in ending inventory, which conflicts with his understanding of having at least twice that amount. The assignment requires the preparation of a maximum 700-word informal memo explaining to Mr. Skaros why the report shows only 2,000 equivalent units, using a professional tone and clearly justifying the report’s accuracy based on appropriate costing principles.

Paper For Above instruction

In managerial accounting, understanding the intricacies of inventory valuation, particularly the concept of equivalent units, is crucial for accurate reporting and decision-making. Davis Skaros, as the production manager, needs clarity on why the production cost report indicates only 2,000 equivalent units in ending inventory, especially when he believes he has on hand at least twice that amount. To address his concerns, it is essential to explain the meaning of equivalent units, the methods used for inventory weighting, and why these methods might differ from his perception of physical inventory levels.

Equivalent units are a measure used to convert partially completed units into an estimate of fully completed units, based on the degree of completion. For example, if 1,000 units are 50% complete, they are considered equivalent to 500 finished units. This concept is central to process costing systems, where products move through multiple stages, and costs are accumulated at each stage. The calculation of ending inventory in terms of equivalent units relies on the degree of completion and the chosen costing method—either weighted-average or FIFO—each influencing the reported figures differently.

In Skaros’ case, the production cost report likely used the weighted-average method, which aggregates costs and equivalent units from beginning inventory and current period production. Under this method, the ending inventory is expressed in terms of equivalent units based solely on the level of work done during the period. Even if physical inventory on hand appears to be higher, the equivalent units reflect only the units that are partially or fully completed during the reporting period. In this context, the number of equivalent units accounts for the work done, not only the physical count of units present.

Furthermore, the accounting principles, specifically GAAP, ensure that inventory valuation accurately reflects production costs associated with the current period. This involves calculating costs based on the units that have been processed and their completion stages. If, for example, a batch of units is only 30% complete, they contribute fewer equivalent units than fully completed units, even if the physical count of units in inventory is substantial. Thus, the 2,000 equivalent units represent a summarized and standardized measure of work performed, not just the physical count of goods.

The key distinction is that physical inventory count may include units at various stages of completion, but the equivalent units focus solely on the portion of work completed during the reporting period. Consequently, if Mr. Skaros' department has many partially completed units, these will be included in the physical count but only proportionally in the equivalent units calculation. The report's accuracy is based on these standardized measures, adhering to accepted costing methods to provide a clear view of production efficiency and cost allocation.

Additionally, this approach allows managers to analyze production performance and costs more effectively. By focusing on equivalent units, the company can better allocate costs to completed and in-process units, supporting accurate profit margins and cost control. While the physical inventory might seem larger, the equivalent units offer a more precise measure of work carried out during the period, which is essential for correct financial reporting and decision-making.

In conclusion, the production cost report’s figure of 2,000 equivalent units is accurate and adheres to accepted accounting procedures. It reflects the proportion of work completed during the period, not merely the physical inventory on hand. Understanding the distinction between physical units and equivalent units is vital for interpreting such reports correctly. Therefore, Mr. Skaros can trust that the report provides a true and fair account of the production activities in his department, based on standardized and reliable accounting principles.

References

• Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2019). Cost Management: A Strategic Emphasis (8th ed.). Cengage Learning.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial & Managerial Accounting (10th ed.). Wiley.
• Gibson, C. H. (2020). Financial Reporting & Analysis (13th ed.). Cengage Learning.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business Press.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
• Chen, C. G., & Roberts, W. (2018). Understanding and Implementing Process Costing. Journal of Accounting Research.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis (13th ed.). Wiley.
• Simons, R. (1995). Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal. Harvard Business Review Press.