Ch5: Process costing and operation costing Flashcards
What is hybrid costing?
repetitive production processes but produce a narrow range of products that may differ in a significant way. eg. different material inputs, different combinations of specific production processes.
What are characteristics of hybrid costing?
Characteristics: large batches, some individual inputs, some repetitive processes, some unique features, some common features
What is operation costing?
Is a hybrid costing system. Used in a batch manufacturing environment.
- uses initially different product materials, and is finished by common process same for a group of products or
- identical processing for a group of products, finished using specific procedures
What are the two forms of operation costing?
Different initial products -> finished common process
Identical processing -> finished with specific procedures
What are the two steps of process costing?
- estimate costs of production processes
- calculate average cost per unit, divide total costs by units produced
What happens to process costing when WIP inventory exists?
becomes more complicated with WIP inventory - need to calculate equivalent units to apportion cost between new production and current inventory.
To analyse WIP what three steps of physical unit flow should be considered?
- units started previous month and finished current month (beginning WIP)
- units started and finished current month
- units started and unfinished current month (ending WIP)
For WIP inventory what are the differences between material cost allocation and conversion cost allocation?
Materials costing - general assumed 100% of direct materials are allocated at start of production.
Conversion costs - allocated on pro rata basis, would assume conversion costs allocated uniformly across production process.
What are equivalent units?
- amount of production inputs that have been applied to physical units in production
What are the four steps of a process costing report?
- analyse physical flow of units
- calculate equivalent units
- calculate unit costs
- analyse total costs
What is the difference in assumptions of FIFO and WAM?
Fifo assumes that WIP inventory is completed before production of new units commences
WAM does not make this assumption - it does not distinguish between opening WIP inventory and inventory completed during period.
When is a FIFO method suitable?
FIFO - used when there is limited shelf life eg. food stuffs
When is a WAM method suitable?
WAM - inventories mixed together, low differentiation eg. chemicals
What are the four steps of WAM approach?
- analyse physical flow of units
- calculate equivalent units for units completed and transferred out and WIP
- calculate unit costs - cost per equivalent unit of DM is total direct material costs divided by total equivalent units of DM; cost per equivalent unit for conversion cost is the total conversion cost divided by total equivalent units of conversion. *WAM includes costs incurred for beginning WIP.
- analyse total costs - finished goods and WIP inventory
What are the four steps of FIFO approach?
- analyse physical flow of units
- equivalent units in opening WIP are subtracted from total equivalent units to give equivalent units of new production for the month.
- costs of opening inventory are not used in calculation of costs per equivalent unit
- the cost to finish beginning WIP units and the costs of units started and finished in the current month are calculated separately. cost of ending WIP separate.
