Q6TI - Horngren'S Financial And Managerial Accounting

Question

Describe some ways managers use production cost reports to make business decisions.

Step-by-Step Solution

Answer

Managers use production cost reports to make the business decisions in such ways:

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

Step 1: Meaning of Production Cost Report

A production cost report is prepared to show the total cost of manufacturing the products. It is prepared by the companies using the process costing system for determining the cost of the products.

Step 2: Controlling cost

The company managers prepare the production cost report to identify the ways to reduce the cost. From the production cost report, the managers may decide whether the company needs to change the supplier to reduce the cost of material or is required to change the composition of raw material. Management can use the production cost report to control the labor cost incurred.

Step 3: Evaluating performance

Managers are rewarded based on how well they meet the company’s budget. By preparing the production cost report, managers compare the actual direct material cost and the conversion cost with the expected cost.

Step 4: Pricing products

A production cost report helps in deciding the sale price of the product. It is so because the report shows the cost incurred in manufacturing the product. The sale price is high enough to cover manufacturing, selling, and administrative costs.

Step 5: Identifying the most profitable products

The sales price and the cost data may help the company’s managementto find out the most profitable product. 

Step 6: Preparing the financial statements

Management uses the production cost report to prepare the company's financial statements. It provides the inventory data for the balance sheet and the cost of goods sold for the income statement.