361. Before going through a detailed example of process costing, it will be helpful to see how, in a general way, manufacturing costs flow through a process costing system.362. In the Formulating Department, ingredients are checked for quality and then mixed and injected with carbon dioxide to create bulk cream soda.363. In the Bottling Department, bottles are checked for defects, filled with cream soda, capped, visually inspected again for defects, and then packed for shipping.364. Manufacturing overhead cost is applied according to the amount of the allocation base that is incurred in the department.365. To simplify things, companies often consolidate these three cost categories into two groups by combining labor and overhead costs into a category called conversion costs (or conversion for short).366. Roughly speaking, the equivalent units is the number of complete units that could have been obtained from the materials and effort that went into the partially complete units.367. In a situation such as this, where products have some common characteristics but also must be processed individually, operation costing may be used to determine product costs.368. Under the weighted-average method, the cost per equivalent unit for a specific cost category is computed by combining the cost of beginning work in process inventory and the cost added during the period and then dividing this sum by the equivalent units of production.369. Nevertheless, from the standpoint of cost control, the FIFO method is better than the weighted-average method.370. Thus, under the weighted-average method, the manager’s apparent performance in the current period is influenced by what happened in the prior period.371. This problem does not arise under the FIFO method because the FIFO method makes a clear distinction between costs of prior periods and costs incurred during the current period.372. On the other hand, the weighted-average method is simpler to apply than the FIFO method, but computers can handle the additional calculations with ease once they have been appropriately programmed.373. Allocating service department costs to the operating departments that directly serve patients or perform laboratory tests provides a more comprehensive understanding of the hospital’s various unit costs.374. Rather, the direct method allocates all service department costs directly to the operating departments, bypassing the other service departments.375. Cost-Volume-Profit (CVP) analysis helps important decisions such as what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain.376. The contribution income statement emphasizes the behavior of costs and therefore is extremely helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.377. Notice the sequence here—contribution margin is used first to cover the fixed expenses, and then whatever remains goes toward profits.378. Once the break-even point has been reached, net operating income will increase by the amount of the unit contribution margin for each additional unit sold.379. To estimate the profit at any sales volume above the break-even point, multiply the number of units sold in excess of the break-even point by the unit contribution margin.380. Once the break-even point has been reached, each additional unit sold increases the company’s profit by the amount of the unit contribution margin.
