Chapter 3: Process Costing Flashcards Preview

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Process Cost System

  • Large Volume of SIMILAR and MASS PRODUCED PRODUCTS are manufactured 
  • Costs are accumlated for a TIME PERIOD (week or month) 
  • Costs are assigned to DEPARTMENTS or Processes for a specified period of time 


Vergleich: Job Order Cost System

  • Cost are assigned to each job or batch 
  • Measures costs for each job completed - not for a set of time !!! 


Job Order Cost System vs. Process Cost Flow 

  1. Number of Work in Process accounts
  2. Documents used 
  3. Determination of total manufacturing cost
  4. Unit-Cost Computations 


Manufacturing Overhead Costs 

in Process Cost System

  • Objective of assigning overhead is to allocate overhead to production departmens on objective and equitable basis 
  • Use the activity that "DRIVES" or CAUSES THE COST 


Weighted-Average Method 

Basic Method

  • Weighted Average Method considers the degree of completion of 
    • units completed and transferred out 
    • and units in ending work in process 
  • Beginning-WiP NOT part of the calculation of equivalent units 
  • Most widely used method 


Conversion Cost 

Labor Cost + Overhead Cost 


Refiinements Weighted-Average Method


Production Cost Report 

  • Key Document used to UNDERSTAND activities 
  • Prepared for EACH DEPARTMENT 
  • Shows Production Quantity and Cost data 
  • Four Steps in Preparation:
    • Step 1: Compute Physical unit flow
    • Step 2: Compute equivalent units of prod
    • Step 3: Compute unit production costs 
    • Step 4: Prepare a cost reconciliation schedule 


Step 1: Compute the Physical Unit Flow 

Physcial Units: 

  • actual Units to be accounted for during a period 
  • regardless of work performed

Total units TO BE accounted for: 

  WiP 01/01          

 + Started into Production

=Total Units to Be Accounted for

  • units started (or transferred) into production during the period + unit in production at the beginning of period

Total units accounted for: 

   Units Transferred out                                                          

+ WiP 31/12                                                                            

= Total Units accounted for

  • Units transferred out during the period + units in process at the end of period 


Step 3: Compute Unit Production Costs

  • Cost expressed in terms of equivalent units of production 
  • Three Unit costs are computed (when equivalent units of production are different for materials and for conversion costs)
  1. Materials 
  2. Conversion 
  3. Total Manufacturing 


Step 4: Prepare a Cost Reconciliation Schedule


Equivalent Units Under FIFO

What is an equivalent unit?

We assume that the "beginning WiP" is completed BEFORE new work is started


Sum of the work performed to:

  1. Finish the unit of beginning WiP inventory
  2. Complete the units started into production during the period ("units started and completed") 
  3. The units in ending WiP inventory (-> started but only partially finished)


FIFO and Weighted Average 


Similarities and Differences Between 

Job Order Cost  and 

Process Cost System