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Completed Production Method

See Also:
Accounting Principles
Accounting Concepts
Point of Sale (POS) Method
Installment Sales Method
Percentage Completion (POC) Method

Completed Production Method Definition

Completed production method accounting includes recognizing revenue as the products roll off the assembly line or are available for transportation and sale. This means that the production process is considered to be the final revenue generating activity. This occurs normally if a company convinces its customers to assume the transportation of the goods.

Completed Production Method Meaning

The use of the completed production method usually requires a contract with a customer to assume the responsibility of transportation of goods. The contract also needs to specify that the customer intends to buy the goods for a specified period of time. One normally uses production accounting services in raw material providers. Production accounting oil and gas is the largest industry that commonly uses the method. Other industries that use complete production services include lumber, coal, and steel.

Completed Production Method Example

For example, Tim is an accountant for an oil and gas production company called Texon Energy Inc. The company is responsible for several wells onshore. In addition, the company recently entered into a 5 year contract with Sea Shell Inc. Sea Shell will pay $65/barrel to Texon for 100,000 barrels each year. As a result, Tim uses the completed production method of accounting for all Texon transactions because it gives a more meaningful revenue count than the point of sale method.

Suppose that the company produced 120,000 barrels. If the company had used a Point of Sale (POS) Method, then the company would only be allowed to recognize $6.5 million. However, this is not reflective of the total output and would actually yield a higher Cost of Goods Sold (COGS). Under the completed production method, revenue would be recognized in the amount of $7.8 million. Notice: this is more meaningful to the company because it gauges output of the company. Unless the customer is leaning towards bankruptcy, the pay is guaranteed per the contract.

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Average Cost

See Also:
Fixed Costs
Inventoriable Costs
Marginal Costs
Replacement Costs
Process Costing

Average Cost Definition

Average cost per unit of production is equal to total cost of production divided by the number of units produced. It is also known as the unit cost. Especially over the long-term, average cost normalizes the cost per unit of production. It also smooths out fluctuations caused by seasonal demand changes or differing levels of production efficiency.

Average Cost Per Unit Formula

Use the following formula to calculate average cost per unit:

Average Cost Per Unit = Total Production Cost / Number of Units Produced

Minimization

A company producing goods wants to minimize the average cost of production. The company also wants to determine the cost-minimizing mix and the minimum efficient scale. Companies with a lower average cost per unit of production are better able to defend against aggressive price-cutting among industry competitors than companies with a higher average cost per unit of production.

The cost-minimizing mix is the lowest cost input-output production mix, or the point at which a company can produce the most output for the least cost. This mix occurs at the point of tangency between the isoquant and isocost lines. In economics terminology, the isoquant line is the line that represents all different combinations of production inputs that produce the same quantity of output. In addition, the isocost line represents all possible combinations of production variables that add up to the same level of cost. The point of intersection between the isoquant and isocost lines is the point of cost minimization.

The minimum efficient scale is scale of production at which average cost of production reaches its minimum point. Up to a certain point, more production volume reduces the cost per unit of production. This is economies of scale. The more output that is produced, the more thinly spread the fixed costs of production across the units of output are. This ends up lowering the cost per unit. Furthermore, production economies of scale can lower the threat of new entrants (competitors) into the industry.

Accounting

In accounting, to find the average cost, divide the sum of variable costs and fixed costs by the quantity of units produced. It is also a method for valuing inventory. In this sense, compute it as cost of goods available for sale divided by the number of units available for sale. This will give you the average per-unit value of the inventory of goods available for sale.

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