Q21RQ - Horngren'S Financial And Managerial Accounting

Question

Describe ways the production cost report can be used by management.

Step-by-Step Solution

Answer

The production cost report used by the management in the following ways:

1. Controlling costs
2. Evaluating performance
3. Pricing products
4. Identifying the most profitable products
5. Preparing the financial statements

Step-by-Step Solution: Step 1: Production Cost Report

The cost accountants prepare the production cost report to represent the total cost incurred in manufacturing the products. It is a summary report which shows the complete flow of cost.

Step 2: Controlling costs

By using the production cost report data, the company manager may reduce the cost of direct materials by changing the supplier,  Or the manager may change the raw material used in the production.

Step 3: Evaluating performance

The production cost report is compared with the budgeted data to evaluate the company’s manufacturing department’s performance.

Step 4: Pricing product

The production cost report determines the total cost incurred in manufacturing the product for deciding the selling price of the product. The selling price of the product is the total of all the manufacturing costs and the profit margin.

Step 5: Identifying the most profitable product

Sale price and the cost data help the company’s management  in identifying the most profitable product manufactured by the company.

Step 6: Preparing the financial statements

The production cost report provides the amount of finished goods inventory and the WIP inventory, which is included in the company’s financial statements.