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Give 3 examples of industries that use process costing systems
- chemical processing,
- oil refining, pharmaceuticals, plastics, brick and tile manufacturing, semiconductor chips,
- beverages, and breakfast cereals.
In process costing why are cost divided into 2 main classifications
according to the timing of when costs are introduced into the process. Often, only two cost classifications, direct materials and conversion costs, are necessary. Direct materials are frequently added at one point in time, often the start or the end of the process. All conversion costs are added at about the same time, but in a pattern different from direct materials costs. Conversion costs are often added throughout the process, which can of any length of time, lasting from seconds to several month
Explain equivalent units and why they are neccessary in process costing
Equivalent units is a derived amount of output units that takes the quantity of each input (factor of production) in units completed or in incomplete units in work in process, and converts the quantity of input into the amount of completed output units that could be made with that quantity of input. Each equivalent unit is comprised of the physical quantities of direct materials or conversion costs inputs necessary to produce output of one fully completed unit. Equivalent unit measures are necessary since all physical units are not completed to the same extent at the same time.
What problems might arise in estimating the degree of completion of semiconductor chips
The accuracy of the estimates of completion depends on the care and skill of the estimator and the nature of the process. Semiconductor chips may differ substantially in the finishing necessary to obtain a final product. The amount of work necessary to finish a product may not always be easy to ascertain in advance.
5 steps in process costing when equivalent units are completed
- Step 1: Summarize the flow of physical units of output.
- Step 2: Compute output in terms of equivalent units.
- Step 3: Summarize total costs to account for.
- Step 4: Compute cost per equivalent unit.
- Step 5: Assign total costs to units completed and to units in ending work in process.
Three inventory methods associated with process costing are:
- • Weighted average.
- • First-in, first-out.
- • Standard costing.
Distinct characteristics of weighted average computations in assigning cost to units completed and to units completed
The weighted-average process-costing method calculates the equivalent-unit cost of all the work done to date (regardless of the accounting period in which it was done), assigns this cost to equivalent units completed and transferred out of the process, and to equivalent units in ending work-in-process inventory.
Distinct characteristics of FIFO computations in assigning cost to units completed and to units completed
- FIFO computations are distinctive because they assign the cost of the previous
- accounting period’s equivalent units in beginning work-in-process inventory to the first units
- completed and transferred out of the process and assign the cost of equivalent units worked on
- during the current period first to complete beginning inventory, next to start and complete new
- units, and finally to units in ending work-in-process inventory. In contrast, the weighted-average
- method costs units completed and transferred out and in ending work in process at the same
- average cost.
Why should FIFO method be called a modified or department FIFO Method
FIFO should be called a modified or departmental FIFO method because the goods transferred in during a given period usually bear a single average unit cost (rather than a distinct FIFO cost for each unit transferred in) as a matter of convenience.
Identify a major advantage of the FIFO method for purposes of planning and control
A major advantage of FIFO is that managers can judge the performance in the current period independently from the performance in the preceding period.
The standard costing method is is particularly applicable to process costing situations do you agree?
Standard-cost procedures are particularly appropriate to process-costing systems where there are various combinations of materials and operations used to make a wide variety of similar products as in the textiles, paints, and ceramics industries. Standard-cost procedures also avoid the intricacies involved in detailed tracking with weighted-average or FIFO methods when there are frequent price variations over time.
Identify the main difference between journal entries in process costing and job costing
The journal entries in process costing are basically similar to those made in job-costing systems. The main difference is that, in process costing, there is often more than one work-in- process account––one for each process.
Why should accountant distinguish btwn transferred in cost and additional direct costs
- (a) All direct materials may not be added at the beginning of the department process.
- (b) The control methods and responsibilities may be different for transferred-in items and materials added in the department.
Transferred in cost are those cost incurred in the proceeding accounting period do you agree?
No. Transferred-in costs or previous department costs are costs incurred in a previous department that have been charged to a subsequent department. These costs may be costs incurred in that previous department during this accounting period or a preceding accounting period.
- 1.Used for mass production of like units
- (e.g. clothes, paint, toys) [versus unique items in job costing]. Process Costing is used when the cost versus benefits do not support collecting costsfor individual items (job costing).
1.Process costing uses an average unit cost rather than the actual cost of one unit used in job costing.
Journal entries are similar to job costing except there are several WIP accounts
Standard costs in process costing
Standard cost is the cost per equivalent unit
Variances: WIP amounts are always entered at standard
can exist with any of the above methods and add one column of calculations to the problem. Costs are transferred-in from an earlier department in the manufacturing process to the current department e.g. Assembly Department costs are transferred-in to the Painting Department
a hybrid-costing method that uses some aspects of process costing and some aspects of job costing, e.g. Toyota does not need to account for each car individually as in job costing, but needs separate cost data on the Camry LX and EX models.