Accounting for Managers: Interpreting accounting information for decision-making

124 ACCOUNTING FOR MANAGERS

INPUTS CONVERSION PROCESS OUTPUTS

Custom

Batch

Continuous

Raw materials Work-in-progress Finished goods

+

Labour

Equipment, facilities, space etc.

Bill of materials

Components and quantities

Labour routing

Processing steps and times

which are priced to become

Standard costs

+

Figure 9.2 The manufacturing process and its relationship to accounting

Materials (paper, ink etc.) £12,000

Labour for printing £20,000

Overhead allocated £10,000

Total job cost £42,000

Cost per textbook (£42,000/5,000 copies) £8.40

For continuous manufacture aprocess costingsystem is used, under which costs
are collected over a period of time, together with a measure of the volume of
production. At the end of the accounting period, the total costs are divided
by the volume produced to give a cost per unit of volume. For example, if
the cost of producing a chemical in the month of November is £1,200,000 and
400,000 litres have been produced in the same period, the cost per litre is £3.00
(£1,200,000/400,000 litres). Again, there will be a comparison between the standard
cost per unit and the actual cost per unit.
The distinction between custom and batch is not always clear. Some products
are produced on an assembly line as a batch of similar units but with some
customization, since technology allows each unit to be unique. For example, motor
vehicles are assembled as ‘batches of one’, since technology facilitates the sequenc-
ing of different specifications for each vehicle along a common production line.
Within the same model, different colours, transmissions (manual or automatic),
steering (right-hand or left-hand drive) etc. can all be accommodated.
Any manufacturing operation involves a number of sequential activities that
need to be scheduled so that materials arrive at the appropriate time at the correct