Ch 6 - Process Costing

Question 1

Process costing

Answer 1

a product costing system that accumulates costs according to processes or departments and assigns them to a large number of nearly identical products.

Typically used in places that make a large amount of homogeneous products (aka factories).

Question 2

How is process costing beneficial to companies?

Answer 2

The process costing system supports the strategy of process intensive organizations by providing the department-focused cost information that supports strategy development, decision making, and performance evaluations.

Question 3

Equivalent units

Answer 3

How much work we’ve done stated in number of units. Simply quantify work done in a number of completed units, even if some are only partially complete (ie 2,500 units touched, but they are all only 25% complete = 625 equivalent units). So even though ALL the units are actually only 25% complete, we’re going to say that we’ve done the work of completing 625 units).

Aka The number of units that could have been produced given the amount of work actually performed and quantity of other production inputs used for both complete and partially complete units; used in conjunction with process costing.

Question 4

What are conversion costs?

Answer 4

Overhead and direct labor costs combined, used for the purpose of computing equivalent units. Overhead and direct labor can be combined because typically, factories have very little.

Question 5

What is the key document in a typical process costing system?

Answer 5

The production cost report

Question 6

Production cost report

Answer 6

A report that summarizes the physical units and equivalent units of a department, the costs incurred during the period, and the costs assigned to units completed and to units in ending Work-in-Process Inventories.

Question 7

What are the five steps in process costing procedure?

Answer 7

1. Analyze the physical flow of production units
2. Calculate equivalent units for each manufacturing cost element (direct materials, direct labor, and overhead or direct materials and conversion costs)
3. Determine total costs for each manufacturing cost element from step 2
4. Compute cost per equivalent unit for each manufacturing cost element from step 2
5. Assign total manufacturing costs to units completed and ending Work-in-Process

Question 8

What is the objective of the production cost report?

Answer 8

To assign total manufacturing costs to the units completed during the period and the units that are still in process at the end of the period.

Question 9

What are the two methods used to prepare departmental production cost reports?

Answer 9

The weighted average method and FIFO

Question 10

Weighted average method

Answer 10

A method for calculating unit cost under process costing that includes all costs, both those incurred during the current period and those incurred in the prior period that are shown as the beginning Work-in-Process Inventory of the current period.

Question 11

FIFO

Answer 11

A process costing method for calculating the current period’s unit cost that includes only costs incurred and work performed during the current period.

Question 12

Units to account for

Answer 12

The sum of the beginning inventory units and the number of units started during the period.

Question 13

Units accounted for

Answer 13

The sum of the units transferred out and ending inventory units.

Question 14

What is the primary purpose in the first step of the weighted-average method (analyze the physical flow of production units)?

Answer 14

To ensure that all units in production are accounted for before we compute the number of equivalent units of production for each production element.