Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 36

Operations Costing

Organic Grounds produces two brands of coffee: Star and Bucks. The two coffees are produced in one factory using the same production process. The only difference between the two coffees is the cost of the unroasted coffee beans. The following data are available for February.

	Star	Bucks	Total
Number of pounds of coffee produced	5,000	20,000	25,000
Cost of unroasted beans and packaging per pound	$4	$6
Other costs:
Direct labor			$ 50,000
Indirect materials			15,000
Other overhead			100,000

Required

Organic Grounds uses operations costing and assigns conversion costs based on the number of pounds of coffee produced. Compute the cost unit of each brand of coffee produced in February.

Step 1 of 4

Cost accounting system

It is a system designed to report the cost of products and services. Material, labor and overhead costs are allocated to determine unit costs. Cost accounting system comprises of various types of formats, forms, procedures, reports and records. This can be maintained independently and can be part of formal accounting system also.

Cost accounting systems are used by both manufacturing and service firms to find the unit costing of their products or service. There are two types of cost accounting systems like job order costing system used for personalized products or services and process costing system used for large size of identical products. Some companies may use combination of job order costing and process costing system to fit its particular needs.

Basic cost flow model

Basic cost flow model is used as framework for recording the cost by all types of firms.

It is an inventory equation that is used to find out missing information: -

Basic cost flow model has four components like beginning balance, transfer in, transfer out and ending balance.