THE COST OF PRODUCTION REPORT

A cost of production report shows all costs chargeable to a department. It

is not only the source for summary journal entries at the end of the month but
also a most convenient way of presenting and disposing costs accumulated during
the period. It is composed basically of two parts, these are: quantity schedule and
the cost analysis.

The quantity schedule shows the total number of units for which a producing
department is accountable. The disposition as to what happened to the total
units placed in process form part of the quantity schedule. Hence, the total units
placed into process have to be accounted for in this section. Normally, the units
are accounted as finished or still in process, in some cases, there are lost units.
Information provided by the quantity schedule includes the equivalent
production, which is used to determine the cost of the ending inventory and the cost,
transferred out of the department.

The cost analysis section of the cost of production report shows the periodic
total and unit cost including departmental and cumulative total and unit costs as
well the disposition of these costs. The cost analysis section also presents how the
total cost was absorbed – it explains how much of the total cost went to finished
units and incomplete units. Lost units may have also have incurred costs.

FIFO COSTING METHOD

FIFO (First-in-First-Out) Method procedures assume that units in process at the

beginning are to be completed ahead of those that were newly started in process
in a given period. The equivalent production of such units will be the work done
on them during the period and is equal to the whole unit minus the stage of
completion of the unit at the beginning of the month.

In first-in-first-out costing, beginning work in process costs are kept separate

from the additional new costs incurred in the next period, thus giving separate
unit costs for beginning work in process units completed and for units newly
started and finished in the same period. In the first department, the cost of
completed units in process at the beginning of the period is computed first,
followed by the computation of the cost of units started and finished within the
period. Units in process at the beginning will usually have completed unit cost that is
different from the unit cost for work started and completed during the same period.
In departments subsequent to the first, the procedure is the same, except that the
cost of units transferred into these departments is shown as a separate figure,
and the unit cost determined by dividing total units received with total costs received.
The advantage of FIFO costing is that it supports a manager’s interest in
controlling costs. The weighted – average per unit cost is not suitable for
control purposes because it mixes performance of the current period with
performance in prior periods. Because the unit cost calculation under FIFO
uses (1) equivalent production that includes only current work and (2) only
the current period
production costs, managers obtain performance data related to the current
period, not to current and other periods. Additionally, a processing company using
standard costing must compute FIFO equivalent unit production to be able to
determine variances, which depend on work done in the current period.