Analyzing a Production Cost Report

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  • 0:03 The Production Cost Report
  • 0:36 Inventory
  • 2:35 Costs
  • 3:15 Other Barometers
  • 3:44 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

When you first see one, a production cost report can be a rather intimidating piece of work. Luckily, this lesson shows how to analyze the information in such a report to not only track inventory and costs, but also efficiency.

The Production Cost Report

At first glance, a typical production cost report has a lot of numbers, and it's pretty easy to get lost in all the details. After all, it's an accounting form but only introduces currency halfway down the page! However, this lesson shows how to break down the production cost report so that you can get really useful data from it. The lesson starts by looking at the report step by step, first with inventory and then with cost. Afterwards, the lesson look at some themes that can be extrapolated about the overall health of a company by looking at the production cost report.

Inventory

The first two sections of the production cost report deal with the inventory of the department. In the first step, the report shows all the units that have come into the domain of that particular company or department. Some of these may be holdover units, while some may have been newly delivered. Holdover units are those units that were held over from the last accounting period, while newly delivered units are those that are new to this accounting period.

In the second step, the fate of these units is seen. This time, there are three options: First there are the units that were completed and transferred out of the department. Second are the units that have yet to be worked (note that this type is not present on every report). And finally, the company has equivalent units. Equivalent units are the units that have been started but not yet completed. These units are shown as the ratio of the entire batch that is complete.

Think about equivalent units like this. Let's say that each unit takes 100 minutes of labor to create. Now, your company doesn't just do one unit at a time; it makes several. That means that there may be some units that are not all the way finished at the end of the accounting period. Equivalent units let us figure out how many units there would be had the company just focused on one unit at a time. It's a good measure as to how far along those units are, and it lets the company know what to expect in the next accounting period.

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