Process Costing; Wrigley Canada Case Study

Research on Process Costing; Wrigley Canada

Introduction

By definition, process costing is an accounting method whereby costs of processing or operations are charged and put as an average over the produced units. The method is deployed essentially in situations where the final product is a culmination of a process that is continuous (Hansen, Mowen, & Guan, 2007). The products which are commonly in large batches and may include a months’ production are assigned costs. Each unit of the product should eventually be allocated a cost, process costing method therefore allocates costs on average costs to each of the units. The concept of costing remains an important aspect in the business and it facilitates tracking of how monetary resources are being used in the processes of production and distribution.

Issued/Problem Identification

The study focuses on Wrigley Canada, the company is highly recognized and operates in the production and selling a wide range of confections products that include gum, hard and chewy candies, mint, chocolates, and lollipops (Business English Materials, 2018). One of the potential and major challenges by this company is identifying the cost involved in each process of the production of its product. Since the sales are happening, the company could find difficulties in attempting to transfer the actual cost of a product from goods that are finished to the cost of sold goods. In establishing a proper comparison between product cost and the associated sales revenue, the company requires the accounting of the cost of a product for each unit to be appropriate and accurate. The implementation of process costing could come in handy in helping the company solve this challenge since it would facilitate assigning costs to production units. The method is ideal for Wrigley Canada given that its production of the homogeneous products happens in large scales and the production process is in a continuous flow.

Analysis (i.e. description of chosen cost accounting concepts and explanations of how they could be applied to resolve the issue)

The process costing concept refers to an operations costing branch applied in determining a product’s cost in every process involved during its production. This accounting method is suitable for an organization where products are standardized and identical. Further, the product undergoes several processes before the final product is achieved. Process costing is appropriate in companies where different products undergo concurrent production across one or several processes, the production may have or not have any by-product (Hansen, Mowen, & Guan, 2007) as illustrated below.

In applying this process costing method, the company will first require to open process accounts in the accounts books. Entries must be made for every process with all the resultant expenses involved during the period entered respectively in the process account. In instances where units for a process are finished, the cost of manufacturing is transferred from the accounts of one production department to the other. The final process involves transferring the cost to the goods already finished (Hansen, Mowen, & Guan, 2007). The cost per unit is calculated by dividing the total cost by the number of all outputs produced throughout the period. The method applies either the First in First Out Method (FIFO) or Weighted average Method in calculating the cost per unit.

First-in, First-out Cost Flow Assumption

In applying the FIFO method, the assumption is that the foods bought will be the first to sell irrespective of the actual flow (Onyekwelu, and Ugwuanyi, 2014). The inventory that closed the previous months is brought forwards to become the opening inventory for the current month. When using this method, it is important to note that two pools of costs will be involved. The costs charged to beginning inventory of the present month at the close of the previous month must be separated from costs added in the present month (Onoja, & Abdullahi, 2015). Unlike, in the weighted average method, the costs must not be summed up together with the ones for the present month. Calculations of the unit cost are established by the use of the second pool of costs which contains the costs added during the present month.

Weighted average method

If the company results in applying the weighted average method. The valuation of the inventory is established by obtaining the total cost of the entire inventory and calculating the average cost. According to Hansen, Mowen, and Guan, 2007), the value for the opening inventory is summed together with the present month’s costs and the average representing the cost per unit is achieved.  Notably, the method does not differentiate unit cost during opening the month and that which are added over the period. The image below illustrates the weighted average method process.

The weighted average method is largely applied when items in the inventory are highly interconnected that assigning a specific cost to a particular unit is difficult. The situation is common when the inventory items are highly identical. Additionally, this method assumes that all inventories in a store are sold concurrently. Calculations in this method involve dividing the cost assigned to goods available for sale with the total number of units. The calculation provides the cost per unit on the weighted average, this figure can be applied in assigning ending inventory and goods sold a cost (Onyekwelu, and Ugwuanyi, 2014). In costing the products, the method follows several key steps as outlined below.

Flow of Units

Process costing depends largely on a very distinctive flow of units in the production system of an organization. Generally, the production of homogenous goods sees them flow together through several different processes. In each process, there is a specific cost accrued in the production of a product. The cost is incurred from buying the raw materials, labor cost and overheads in the manufacturing process. These costs are referred to as the direct cost associated with the production of goods. Production of goods might involve various processes, Wrigley engages six stages consecutively (Heisinger, & Hoyle, 2012).

  1. Melting. The stage involves melting and purifying small rounded gum baseballs.
  2. Mixing. Here flavors and sweeteners are added to the melted base by a mixer.
  3.  Rolling. Involves reducing gum to the desired size by being by rollers.
  4. Scoring. Here the gum is shaped by cutting to pellets or sticks.
  5.  Conditioning. Involve cooling the gum and “conditioning” for the right consistency before packing.
  6.  Packaging. The stage involves actual packing of the gum in readiness for deliveries.

Calculate Equivalent Units

Equivalent units refer to the number of units each production stage completes. Hansen, Mowen, and Guan, (2007) observe that since some items will inevitably be uncomplete as the accounting period comes to a close, the equivalent units act as a measuring stick. Incomplete units are calculated based on the percentage of completion and must be factored in (Kim, Ko, & Bang, 2015). Since Wrigley products undergo six production processes, this can be approximated to represent 80% of the complete equivalent. The balance, which is not complete represents Work-In-Process (WIP) in the process costing (Hansen, Mowen, and Guan, 2007), WIP must be reflected on the company’s internal financial records as the well as the balance sheet. The official figure of the equivalent units is found in the balance sheet.

Compute Unit Costs

The computation is done by taking work-in-process and adding to the costs accrued during the month and then divided by the number of equivalent units. There is a need for the company to always break down the costs of direct material and costs incurred during conversion. The conversion costs are inclusive of labor and overheads for manufacturing across each process of production. Since there could be WIP, the company should be keen to only assign a full cost to fully complete equivalent units.

Cost Analysis

Cost analysis represents the last stage of process costing. The stage concerns all the information regarding activity cost added following the action of buying and not making (Hansen, Mowen, and Guan, (2007). The company must find it necessary to often undertake a review of every production process in ensuring that every cost is appropriately assigned for each of the equivalent units. The analysis incorporates reviewing the account of work-in-process representing beginning inventories of the period of accounting. The number of processed units and the cost incurred should be included in ensuring that no leftover costs are remaining in every production.

Recommendation

Given the nature of Wrigley Canada, the application of process costing is highly recommendable. Unlike other cost allocation methods, process costing is more appropriate when an organization is dealing with the production of homogenous goods. Further, the method is easy to use, the company will be allocating costs accordingly depending on the number of the processes a good move through during its production. Every production process utilizes direct material, manufacturing overheads and labor giving the total process cost. The management accountants will only need the number of goods leaving the production process and use it to divide the total process cost. Further, process costing is highly flexible. It would be recommendable to Wrigley Canada since it could help the company achieve profitability by eliminating processes that are redundant or adding an extra process thereby improving the quality of a product or even produce slightly different goods. Process costing would, therefore, ensure that the company reduces the cost of production. Finally, processing costs would help the company to use the most competitive costs in the economic marketplace since the management accountants can easily review the number of materials and labor incurred for every process. That helps to identify possibilities of saving by cutting costs. Also, they may review the number of materials and labor used in each process to determine if any costing savings opportunities are available.

Conclusion

Process costing is employed in determining a product’s cost in every process involved during its production. The method is appropriate for companies producing bulk and homogeneous good with the production process in a continuous flow like Wrigley Canada. The production process by the company follows six consecutive processes. The company could be facing a huge challenge in identifying the cost involved in each process of the production of its product. The process costing applies either the First in First Out Method (FIFO) or Weighted average Method in calculating the cost per unit. The method applies four key steps namely; the flow of units, compute equivalent units, compute unit costs and cost analysis. The weighted average method is more appropriate given that it is easy to use and is highly flexible allowing adding or removing processes.

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