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Keys to a good cost system:
is to provide information about costs relevant
for decision making.
Fundamental Themes Underlyingthe Design of Cost Systems
Basic Cost Flow Model
How costs and units move through inventories:
What are the costs at the end of the period?
$1,000,000 was added to work-in-process and then transferred out to finished goods.
Since Baxter produced 100,000 gallons of paint, then the cost per gallon of paint is $10.
This is true for the following accounts:
– Raw Materials (RM)
– Work-in-Process (WIP)
– Finished Goods (FG)
How do we cost Baxter’s 20,000 gallons of paint that are only half finished?
20,000 gallons half finished is equivalent to 10,000 gallons finished.
$990,000/100,000 gallons = $9.90 per gallon
90,000 gallons transferred out plus 10,000 equivalent gallons of finished paint equals 100,000 equivalent gallons of paint.
90,000 gallons × $9.90/gallon = $891,000