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As of January 1, 2021, total state taxes and fees on gasoline averaged 30.06 cents per gallon. Sales taxes along with taxes applied by local and municipal governments can have a significant impact on the price of gasoline in some locations. In the first stage of production, Coca-Cola mixes direct materials—water, refined sugar, and secret ingredients—to make the liquid for its beverages. The second stage includes filling cleaned and sanitized bottles before placing a cap on each bottle.
Exploration and reserves, storage, imports and exports, production, prices, sales. Managers can add complexity to the model by simply adding new elements to the time equations, which places less strain on Hunter’s accounting system than incorporating new activities would. Let’s say that if the chemical is already packaged in a way that meets standard requirements, it should take 0.5 minutes to prepare it for shipment. If the item requires a new package, however, the manager estimates, either from experience or from making several observations, that an additional 6.5 minutes will be required to supply the new packaging. And if the item is to be shipped by air, he or she knows that it will take about 2 minutes to put the package in an air-worthy container.
Process costing is an important accounting method for manufacturers that make large volumes of identical items, such as companies in the food processing, oil and chemicals industries. For these companies, it can be difficult or impossible to directly allocate costs to each item as it moves through the manufacturing process. Process costing enables companies to estimate item costs by adding up the expenses of each step in the manufacturing process, then dividing by the number of items. To ensure accuracy, companies need to include only product-related costs from each department involved in the process and correctly allocate cost to work-in-progress at each stage. Financial management software, particularly platforms integrated into a larger ERP tool, can help track costs by department, as well as generate overview reports and store historical data to monitor trends over time. Process costing assigns expenses to different departments in your business, and it accounts for various cost areas including materials and payroll. Those costs are then rolled up to determine an overall dollar figure and used to find the price-per-unit.
Taxes Add To The Price Of Gasoline
Process costing can be time consuming, and it can be difficult to accurately assign product costs to each manufacturing stage and to work-in-progress items. Hunter can reconcile the total process time—that is, the total absolute time spent on all the activities tracked in a given period—to other measures of resources supplied, such as head count. If the total process time is lower than the time implied by the head count, for example, managers know that some of their unit time estimates are too low or that people are not working to capacity. This validation is difficult with traditional ABC, which is based on estimated proportions of time spent and rarely incorporates idle or unused capacity time. The cost-driver rates can now be calculated by multiplying the two input variables we have just estimated. For our customer service department, we obtain cost-driver rates of $6.40 (8 multiplied by $0.80) for processing customer orders, $35.20 (44 by $0.80) for handling inquiries, and $40 (50 by $0.80) for performing credit checks. Once you have calculated these standard rates, you can apply them in real time to assign costs to individual customers as transactions occur.
- Most have reported substantial improvements in profitability that they attribute to the information generated by the new approach.
- So far, we have relied on an important simplifying assumption that all orders or transactions of a particular type are the same and require the same amount of time to process.
- The cost-driver rates can now be calculated by multiplying the two input variables we have just estimated.
- These costs include wages and salaries, benefits, equipment, lease or rent payments, insurance, overhead, and state and local fees.
Hunter’s time-driven ABC model requires only two people working two days per month to load, calculate, validate, and report findings, compared with the ten-person team and three weeks that were necessary to maintain the previous model. Employees now spend time generating profits from the information rather than just updating and maintaining it.
In the case of our example, let’s suppose that managers determine that it takes 8 minutes to process an order, 44 minutes to handle an inquiry, and 50 minutes to perform a credit check. The second factor that can cause a change in the activity cost-driver rate is a shift in the efficiency of the activity. Quality programs, continuous improvement efforts, reengineering, or the introduction of new technology can enable the same activity to be done in less time or with fewer resources. When permanent, sustainable improvements in a process have been made, the ABC analyst recalculates the unit time estimates to reflect the process improvements. For example, if the customer service department gets a new database system, the reps may be able to perform a standard credit check in 20 minutes rather than 50 minutes. To accommodate the improvement, just change the unit time estimate to 20 minutes, and the new cost-driver rate automatically becomes $16 per credit check (down from $40). Of course, you then have to add back in the cost impact of purchasing the new database system by updating the cost per time unit estimate, so the final figure may be somewhat higher than $16.
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The cost of crude oil is the largest component of the retail price of gasoline, and the cost of crude oil as a share of the retail gasoline price varies over time and across regions of the country. Many factors affect crude oil prices; learn about seven major factors that influence crude oil prices in What Drives Crude Oil Prices? Increases in U.S. oil production in the past several years have helped reduce upward pressure on oil and gasoline prices. Returning to our example, let’s assume that the customer service department employs 28 reps to do the frontline work and that each puts in eight hours per day.
The key insight is that although transactions can easily become complicated, managers can usually identify what makes them complicated. The variables that affect most such activities can often be precisely specified and are typically already recorded in a company’s information systems. To take an example, let’s assume a manager is looking at the process of packaging a chemical for shipment. In this situation, complexity arises from the potential need for special packaging and the additional demands of air as opposed to ground transportation. Some retail outlets are owned and operated by refiners, while others are independent businesses that purchase gasoline from refiners and marketers for resale to the public. The price at the pump also reflects local market conditions and factors, such as the fueling location and the marketing strategy of the owner. Gasoline with a higher octane level is less prone to pre-ignition and detonation, also known as engine knocking.
The costs of the completed products are then transferred from work‐in‐process inventory‐packaging to finished goods inventory. Process costing involves tracking the number of units passing through the production process during a given period, collecting cost information for each stage and then using the collected information to calculate per-unit cost. Having accurate per-unit-costing helps with pricing products appropriately, which can lead to improved revenue and better profit margins.
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Process costing is particularly important in the oil, chemical, lumber, textile and food processing industries. Getting a handle on production costs enables these companies to set the right prices for their products and determine whether costs are tracking in line with projections. They can use process costing to analyze the costs of each step of the production and distribution process and use the information to identify areas where they can reduce costs. A process costing system accumulates costs when a large number of identical units are being produced. In this situation, it is most efficient to accumulate costs at an aggregate level for a large batch of products and then allocate them to the individual units produced.
When using process costing, companies determine item cost by tracking the cost of each stage in the production process, then divide the total cost by the number of items produced. The system is comprised of a set of forms, processes, controls, and reports that are designed to aggregate and report to management about revenues, costs, and profitability. The areas reported upon can be any part of a company, including its customers, departments, facilities, processes, products and services, research and development, and sales regions. They produce all of the components of a single product (e.g. coffee tables) in one batch. They would then produce the components of another product (e.g. dining room sets) in a new batch. (Some university food service companies prepare meals this way.) Companies such as these use job costing methods to accumulate the cost of each batch.
Direct costs are those directly incurred for production, such as raw materials and machine operators’ wages. Overhead often includes indirect costs such as equipment maintenance and facility rent, as well as the wages of administrative staff who aren’t directly involved in making the products. The cost of doing business by individual gasoline retailers can vary greatly depending on where a gasoline fueling station is located. These costs include wages and salaries, benefits, equipment, lease or rent payments, insurance, overhead, and state and local fees. Even retail stations close to each other can have different traffic patterns, rent, and sources of supply that affect their prices. During production, the materials processed by workers and machines become partially manufactured products.
Also In Units And Calculators Explained
The standard cost rates can also be used in discussions with customers about the pricing of new business. Having calculated the cost per time unit of supplying resources to the business’s activities, managers next determine the time it takes to carry out one unit of each kind of activity.
Process costing can be easier to use than other costing methods, and it can help companies zero in on areas for potential cost cutting. Retail pump prices reflect these components and the profits of refiners, marketers, distributors, and retail station owners. Forms EIA uses to collect energy data including descriptions, links to survey instructions, and additional information. Tools to customize searches, view specific data sets, study detailed documentation, and access time-series data. Comprehensive data summaries, comparisons, analysis, and projections integrated across all energy sources. (See the exhibit “Profitable Decisions at Banta Foods.”) Its performance has led to the distinction of being named “Innovator of the Year” by the industry journal, Institutional Distributor. The balance in the factory labor account should be zero at the end of each period.
To calculate total cost per unit, the materials cost per unit is added to the conversion cost per unit. As the factory labor payroll is prepared and recorded, the payroll costs are split between those employees who work in specific functions and those involved in the general functions of the factory. The specific function costs are called direct labor and are assigned to work‐in‐process inventory.
Once the physical units have been identified and the equivalent units calculated, the per unit cost is calculated and the cost summary is prepared for each function. Product costs are allocated to the departments or processes each item passes through over a set period, instead of tracing costs to individual items produced. The total process cost is divided by the total number of items, resulting in an average cost for each item. In general, companies match the flow of costs to the physical flow of products through the production process. They place materials received from suppliers in the materials storeroom and record the cost of those materials when purchasing them to raw materials inventory. As they are needed for production, the materials move from the materials storeroom to the production departments with their cost as shown below. Over the past 15 years, activity-based costing has enabled managers to see that not all revenue is good revenue and not all customers are profitable customers.
Refiners charge more for higher octane fuel, and premium-grade gasoline is the most expensive. From 1995 through 2006, the price difference among grades of gasoline was typically about 10 cents per gallon. In 2020, the national annual average price of midgrade gasoline was about 42 cents per gallon more than regular-grade gasoline, and the average price for premium-grade gasoline was about 67 cents per gallon more than regular grade. Monthly and yearly energy forecasts, analysis of energy topics, financial analysis, congressional reports.
Process Costing Summary
When a company has units that are started and completed during a period and has an ending inventory of units in process, most often the weighted average method is used to calculate equivalent units. If needed, based on the company’s production processes, separate calculations of equivalent units for materials and conversion costs are made. Assume a company has two functions in its production process called Department 1 and Department 2. For the month of January, Department 1 completed and transferred out 2,000 units to Department 2 and had 800 units in process at month end that were 80% completed as to materials, labor, and overhead. Using the weighted average method, equivalent units for Department 1 for January are 2,640 [(2,000 × 100%) + (800 × 80%)]. The beginning units and those started and completed are not separately identified in the calculation of equivalent units. When calculating the per unit cost using the weighted average method, the beginning work‐in‐process costs for the function are added to those costs incurred during the period and then divided by the equivalent units.
This calculation assumes that the materials, labor, and overhead are all added evenly throughout the time the units are in process in the function. In many companies, the materials are all added at the beginning of the process while the labor and overhead costs are incurred throughout the process. Labor and overhead are also called conversion costsbecause they “convert” the materials into a product. If materials, labor, and overhead are added at different times in the production process, two separate calculations of equivalent units are necessary, one for the materials and one for conversion costs.
Job costing, in contrast, tracks all direct and indirect costs for each item or project. This is more commonly used by companies that offer custom products or services and price each one individually. For example, a construction company that makes custom homes needs to know exactly how much it costs to build each house so it can charge an appropriate amount and track whether each home-building project is profitable. Labor is accumulated by units throughout the production process, so it is more difficult to account for than direct materials.
In these companies, the manufacturing costs incurred are allocated to the proper functions or departments within the factory process rather than to specific products. Examples of products that companies produce continuously are cereal, bread, candy, steel, automotive parts, chips, and computers. Companies that refine oil or bottle drinks and companies that provide services such as mail sorting and catalog order are also examples of continuous, homogeneous processing. A process costing system is a method typically used within certain sectors of the manufacturing industry to determine the total production cost for each unit of product. It accumulates cost from each process or department and allocates them to the individual products produced.
