Work-in-process inventories and manufacturing costs when production performance spans more than one month


Wisma BNI 46

The Importance of Cost Control

In business accounting, revenue (sales) and expenses (purchases) are recognized when a transaction occurs, whether on an inbound basis (shipping basis) or an acceptance basis, so the profit calculated by subtracting expenses from one month's revenue is not equal to the actual balance of cash and deposits. Even if the conditions are the same, the pressure to pay for material purchases at the end of the month (cash flow) will vary because the following conditions vary from company to company.

  1. Cash and cash equivalents from sales or capital
  2. Depreciation and amortization, which was a factor in making profits look small
  3. Payment of fixed manufacturing costs other than material costs that are incurred each time during the month
  4. Selling, general and administrative expenses and non-operating expenses paid
  5. The amount of payroll payments that come in before the customer deposits

Even if sales increase by selling at a low price in terms of sales management, if the gross profit is small, SG&A and non-operating expenses will show red ink, but since it is not easy to raise the sales price per unit because it is necessary to take market prices into account, we can talk about cost reduction at the production management stage where there is room for internal efforts. Therefore, the guideline for the cost control level is whether the results can be used for production control.

  1. Financial Accounting (From Cost Control to Accounting) Convert actual results based on on-site production volume to a monetary base (manufacturing cost report) and link it to accounting (P/L).
  2. Management accounting aspects (from cost control to production control)
    Analyze productivity by comparing actual results against standard and budgeted costs.

Incurred costs, manufacturing costs and cost of sales

Materials are not recognized as an expense at the time of purchase, but rather at the time of input, and remain as work-in-process inventory until the production performance of the product rises, and are changed to manufacturing cost at the time the production performance rises, and to sales cost at the time of shipment.

  1. Cost incurred on a shipping basis
    Trichotomy: Cost of sales = Product carried forward from the beginning of the month + manufacturing costs - end-of-month product balance
    Aggregate average cost method: Cost of sales = Gross average unit price of products x shipping volume
  2. Actual production-based costs incurred
    Trichotomy: Manufacturing cost = Work in progress at the beginning of the month + Expenses incurred during the month - Work in progress at the end of the month
    Gross average method: Gross average unit price of input items x input quantity + processing cost
  3. Accrual costs based on actual input
    Threefold method: Material costs incurred = Material carry-over from the beginning of the month + current month's purchase cost - end of month material balance
    Aggregate average method: Material cost = Total average unit cost of material x input quantity

If the actual input and production records are always recorded as a set, all incurred costs should be aggregated in some kind of SKU (Stock Keeping Unit) part number, and if the stock at the beginning of the month is 0 and the incurred cost in the month is 100, then the following is true, and the actual production of the product on the receipts and payments list is the total average unit price at the time of acceptance.

Work in progress at the beginning of the month: 0 + Expenses incurred in the month: 100 - Work in progress at the end of the month: 0 = Production cost for the month: 100

There is a difference between only input results and production results

If the actual production at the end of the month is higher than the actual production in the same month, the actual production is recorded as 100, but if the actual production is carried over to the next month, the actual production is recorded as 0 and the number of work-in-process is recorded as 100, which means that the 100 that was input remains as a work-in-progress at the end of the month or is recorded in the production cost. It is a mere difference.

If the input result and the production result straddle over a month, the cost incurred is always stayed in the work-in-process at the end of the month, and if the production result is not increased at the end of the next month, the work-in-process is stayed without the cost incurred.

Work in progress at the beginning of the month 0 + 100 incurred in the month - 100 at the end of the month = 0 cost of production in the month

When you make a manufacturing cost report by item, if there is a part number in the work-in-process inventory, you can only total up the cost by item.

In standard costing, there is no work-in-progress inventory at the end of the month, but when you calculate the cost, the following two items are recorded in the balance at the end of the month (including the amount carried forward to the beginning of the month).

  1. End-of-month inventory: items in progress that have a part number
  2. Work-in-process inventories at the end of the month: only actual submissions