Process Costing Procedures

Number of products

equivalent

Number of completed products

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city in the period

Equivalent number of SPDD at the end of the period

(2.4)

According to the first-in, first-out method, it is assumed that the output of products produced first will be completed first, so the equivalent quantity of products needs to be converted for both the beginning and ending SPDD.

Equivalent number of products =

Equivalent number of SP of +

Beginning of period SPDD

Starting and Finished Quantity +

city in the period

Equivalent number of SPDD at the end of the period

(2.5)

Step 3: Calculate equivalent unit cost according to the formula:

Equivalent unit cost of product

Previous period's expenses carried over + expenses incurred this period

Equivalent number of products

(2.6)

Step 4: Allocate costs to finished products and unfinished products at the end of the period.

The sequence of cost accounting according to the production process is summarized in diagram 2.7:

Material cost, Research cost, Production cost

Work in progress PX1

PX 1 Production Report

Work in progress PX2

PX 2 Production Report

Finished product

Diagram 2.7: Sequence of cost accounting process according to production process

For non-production costs, the scope of production cost aggregation is often determined by the space where costs arise, which are departments, divisions, etc. Therefore, sales cost and business management cost accounts will be opened for departments to aggregate costs.

2.2.2.3. Determining costs for cost-bearing objects using traditional methods

Currently, accounting for production costs and product prices according to traditional methods often applies one of three methods of accounting for production costs.

The proposed methods to determine the cost of cost objects are the actual cost method, the actual cost method combined with estimated costs and the standard cost method [5,21].

 The actual cost method is based on the information of direct material costs, direct labor costs, and actual general production costs incurred during the production process, which are reflected in the Work in Progress Cost Account. Using this method, the difficulty that enterprises encounter is measuring general production costs. Usually, when the product is finished or even consumed, it can only be determined because the actual total general production costs can only be determined when the enterprise receives invoices and documents of that period. Therefore, the timeliness of information for management decision making cannot be achieved.

 The actual cost method combined with estimated cost determines the cost of manufactured products based on combining actual cost information (for direct material costs and direct labor costs) and estimated cost information (for general manufacturing costs) to quickly estimate the cost of production during the period, then adjusts to actual at the end of the period to promptly resolve the cost of manufactured products.

Manufacturing overhead is allocated to cost objects by developing an estimated allocation unit cost for each cost object.

Estimated unit price for allocating manufacturing overhead costs

Estimated manufacturing overhead costs

Estimated total of allocation criteria

(2.7)



Based on the actual activity level of the allocation criteria:

Estimated manufacturing overhead costs

= Estimated unit price for allocating production costs

Actual activity level of the allocation criterion

(2.8)

To apply this method, the enterprise needs to build a general production cost estimate for each department, organization (workshop, production department) and estimate the total allocation criteria of that department right from the beginning of the year. At the end of the fiscal year, after collecting actual general production costs, the difference is processed.

 The standard cost method determines the cost of manufactured products based on cost standards for all three designed cost items.

GT unit rate

= CP NVL

norm

+ CPNCTT

norm

+ Variable production costs

norm

+ Fixed production costs

norm

(2.9)

Total product cost according to standard cost

= Number of completed products

wall

GT unit rate

(2.10)



Unfinished CPSX at the end of the period

= Number of SPDD at the end of the period

Completion rate

GT unit rate

(2.11)



Applying the standard method, at the end of the period, the enterprise needs to summarize actual costs, determine the difference between actual costs and standard costs and take measures to handle it.

In the three methods above, we can see that the actual cost method combining estimated costs and the standard cost method is superior due to its ability to provide information on the cost of manufactured products quickly and promptly for decision making. However, when using these two methods, the difference between estimated costs, standard costs and actual costs must be aggregated and transferred to three accounts: Cost of Goods Sold, Finished Goods, and Work in Progress accounts according to the balance ratio of those accounts before the closing entries at the end of the period.

2.2.2.4. Organizing cost determination for cost-bearing objects according to modern cost management model

Activity Based Costing Method

Traditional cost accounting methods only focus on allocating indirect production costs (CPC costs) to products and only use allocation criteria based on production output such as machine hours, direct labor costs, etc. Meanwhile, in general production costs, there are many components unrelated to production output such as workshop operating costs, operating costs, so if applying allocation criteria based on production output, it will not be accurate, especially since the 1980s, when general production costs have increasingly increased.

accounting for a high proportion of total production costs. In addition, cost-generating activities in the value chain are not only the production department but also many other activities such as design, marketing, etc. Therefore, the method of determining cost by activity (Activity-Based Costing - ABC) has been built and developed by modern management accounting researchers to provide more complete and accurate information for management decisions.

According to the ABC method, first collect the general production costs for the business's activities, then allocate the costs of each activity to the cost object based on the cause-and-effect relationship between the activity and the cost object. To apply this method, it is necessary to specifically determine how many main activities and resources are used to create products and services (cost objects). Therefore, do not calculate the cost of resources into the cost object when this object does not use that resource.

The process of organizing and applying the ABC method is carried out through the following 4 steps:

Step 1: Identify the main components in the system including cost objects, main activities, consumed resources, and cost allocation criteria.

Step 2: Determine the cause-effect relationship between the cost object and activities and resources.

Step 3: Collect relevant data related to costs and cost paths.

Step 4: Allocate the costs of activities to cost objects.

To apply the ABC method effectively, it is necessary to first build a system of reasonable cost allocation criteria based on the activities taking place in the production and business process. Determine the allocation level for each activity in each period, and finally determine the cost allocation for each product.

From a management perspective, applying the ABC method helps managers have detailed information about costs for each activity. This method not only provides more accurate information about product costs but also provides information about the costs of activities. Based on this cost information, managers can make decisions.

Management will make decisions to cut costs of each activity effectively and in accordance with each business goal.

However, the complexity of this method is very high due to the need to identify activities, group activities and allocate costs according to many different criteria. Nowadays, the development of information technology has contributed to making the establishment and operation of the ABC system easier, so the possibility of enterprises using this method is higher. However, the superiority of the ABC method is only shown in enterprises with a high proportion of indirect costs, over 50% of total product costs [22,75].

Product Life Cycle Costing Method

The product life cycle is the period of time that a product exists, including 4 stages: Research, testing - Deployment - Saturation - Decline. Traditional costing methods are only suitable when production has stabilized (saturation, decline stage). At this time, businesses can build standard costs for a repetitive production process. However, in the early stages of the product life cycle, when the price, quality and requirements for product features are determined by customers, businesses are in the process of outlining, testing and planning the production process, the author believes that the most reasonable costing method for businesses at this stage is the target costing method .

The target costing method begins with estimating the selling price of the product. Market research allows the business to determine the expected selling price of the product, prepare production conditions (equipment, raw materials and labor recruitment). Based on the acceptable selling price, the business plans the target profit of manufacturing the product. At the same time, based on the expected selling price and target profit, the business determines the maximum target cost of each product. (Illustration in Diagram 2.8)

Costs may be acceptable

Estimated revenue

Desired profit

- =

Stage

Value analysis

Set target cost

Estimated costs based on production conditions

market research, production testing

Target Costing Method

Mass production stage

Kaizen Costing Method

Implement target costing and establish standard costs

Standard cost

Figure 2.8 : Target costing and product life cycle

Each stage of product development will be evaluated to achieve the defined cost target. This evaluation is based on value analysis to evaluate product design and identify opportunities to improve product value. Target cost is considered the cost limit to achieve the expected production efficiency. After establishing the target cost, the enterprise must organize cost management according to each stage of the production process - from the stage of designing the production process to the stage of production, from planning to implementation, so that the actual cost cannot exceed the target cost. To do this, the enterprise must regularly improve the production process and product design. The enterprise must regularly set the goal of reducing costs by measures such as improving the operating capacity of machinery and equipment, eliminating ineffective activities in the production process. In other words, the most reasonable cost method applied at this stage is the Kaizen costing method. This method focuses all the efforts of the enterprise to reduce costs to the minimum possible level. This requires the administrator to organize production and manage costs strictly at all stages of the production process, constantly detecting

costs that are not useful or not commensurate with the importance of the product, to cut costs.

2.2.2.5. Organizing the cost reporting system

Providing information about actual costs to department managers and higher level managers are various types of cost reports.

 For the order cost management system, the cost report is the Order Cost Record Form. Each order will have a separate record form including the order code, number of completed product units, start and end time. The content of the Order Cost Record Form is to list all costs incurred according to main material costs, labor costs, and production costs for order implementation (Appendix 06).

 For the process cost management system, the cost report is the Workshop Production Report. The Workshop Production Report is a summary of all activities related to the work in progress cost account of the workshop during the period. The content of the Workshop Production Report includes 2 parts: Part 1 is information on product output to determine equivalent output by item. Part 2 is information on costs ( Appendix 07, 08)

 In addition to the report on costs incurred in the production process, the Summary Report on Sales Costs and Business Administration Costs by Element and by Cost Behavior is the basis for analyzing the structure of consumption costs, evaluating the fluctuations of costs by each element and their impact on business results. In addition, this report is also an important source of data for businesses to analyze sales costs and business administration costs by cost behavior. This is important information to help determine the causes of cost increases and decreases, support cost control and make appropriate management decisions.

 To provide detailed information on revenue and costs of each department and each activity in the enterprise, cost management accounting establishes a Department Report ( Appendix 20,21 ). Cost information on the department report is divided into variable costs and fixed costs. To have accurate assessments of the performance of each department

In the Segment Report, fixed costs are classified into direct fixed costs and general fixed costs. Segment reports are especially useful when the enterprise is organized according to a decentralized model, with operations controlled through responsibility centers. Segment reports help division managers evaluate the performance of their divisions.

2.2.3. Organizing cost control information system and cost analysis for decision making

2.2.3.1. Organizing information systems to control costs

Database system organization

The database system for cost control includes data collected from the enterprise's cost estimation system and cost implementation reports. Cost management compares the cost implementation process with the established estimate to determine information on cost differences. This information is reflected in reports reflecting cost differences such as Production cost variation report; Production cost variation cause analysis report; Business plan analysis report; Investment project analysis report.

System of methods for cost analysis

Differential cost analysis method

One of the methods used by managers to control costs is the method of analyzing cost variances. Cost variances are the costs that differ between the proposed plan (cost estimates and cost estimates) and the current situation (implementation costs). Cost items that are not affected by the proposed plan are not cost variances and can be ignored. Information on cost variances will be considered by managers in many aspects: (1) At the stage of building standards and developing plans, if they may not be suitable, the standards need to be adjusted. (2) At the stage of implementation: combine with cost reports by responsibility center to assign individual responsibility, find the cause at the place where the costs arise. (3) Determine the responsibility of the departments: which responsibility center controls the cost variances.

Managers are always concerned with cost control before, during and after

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