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Q6TI

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Horngren'S Financial And Managerial Accounting
Found in: Page 987

Short Answer

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

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.
See the step by step solution

Step by Step Solution

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.

Most popular questions for Business-studies Textbooks

Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particle board division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber’s regional controller. All of High Mountain Lumber’s plants and divisions send Green their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, “Determining the percent complete always requires judgment.

Whatever the percent complete, we’ll finish the Work-in-Process Inventory first thing next year.”

Requirements

  1. How would inflating the percentage completion of ending Work-in-Process Inventory help Pines and Lopez get their bonus?
  2. The particle board division is the largest of High Mountain Lumber’s divisions. If Green does not correct the percentage completion of this year’s ending Work-in-Process Inventory, how will the misstatement affect High Mountain Lumber’s financial statements?
  3. Evaluate Lopez’s justification, including the effect, if any, on next year’s financial statements.
  4. Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green do?
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