Chapter 18 Flashcards
Job Costing
Vs
Process Costing
Jc= A system where costs are assigned to a distinct unit (Use when units are specified) Unit cost= accumulated cost for job/number of unit per job [Like houses]
Pc= A system where costs are assigned to masses of similar units (used when many similar products made, same amount of dm and dl, and mo.) Unit cost=total assigned cost/number of units produced [like food]
Process costing assumptions:
- Dm are assumed to be applied at discrete points in the production process
- Conversion costs(everything other than dm like, llabour, indirect material, other indirict costs)are added equally along the production process
Process costing descison steps:
- Identify the Problem (Design a cost system that best matches the cost of physical production)
- Gather Relevant Information
Costing process goal: Efficiently reflect timing and accumulation of physical conversion costs.
Key assumptions:
–DM quantity and timing are observable and reportable.
—Conversion (DL & MOH) occurs jointly during production.
—Completed units’ output is measurable.
—Input quantities and costs (DM & conversion) are reliably measurable monthly.
3- Forecast future outcomes
Challenge in process costing:
–Determining work done during a period due to continuous production and incomplete units (WIP).
—- Direct materials: Treated as 100% added at once—simple to measure (e.g., 400 units = 400 EUs).
—Conversion costs: Added evenly over time—partially complete units are counted as equivalent units (EUs).
——Equivalent units: Represent partially completed units in terms of fully completed output.
- Make a decision among alternatives
—Costing alternatives: Weighted-average, FIFO, Standard costing.
—Key considerations:
——–Accurate reflection of period-specific costs.
———Efficient inventory management minimizes WIP and maximizes profit. - Implement the descision, evalute performance, and learn
Step in Process Costing:
- Summarize the flow of physical unit output
- Compute output cost allocation base in equivalent units
- Summarize total cost to account for
- Compute Cost per equivalent unit
- Assign total costs to:
A) Units Completed
B) Units in ending WIP
5.5)
Journal entry: Records the cost of completed units transferred from WIP to Finished Goods.
Ending WIP balance: Reported as an asset on the balance sheet
Equivalent Units:
-Takes the quantity of each input in units completed and in unfinished units of work in process and
-Converts the quantity of input into the amount of completed output units that could be produced with that quantity of input
600,000 units at 75% complete = 450,000 EU
125,000 units at 25% complete = 31,250 EU
Equivalent units are calculated separately for each input (DM and conversion costs)
3 Process Costing Methods:
- Weighted-Average
(Assigns the equivalent-unit cost of work done to date to EU completed and transferred out of the process and to EU in ending WIP inventory) - First-in, first-out (FIFO)
Assigns the costs of prior accounting period’s EU that is in the beginning WIP inventory to the first EUs completed and transferred out in the current accounting period - Standard
Assigns a pre-determined average cost
Bonus statement:
If any of the following conditions are present then there is no material difference between weighted-average and FIFO methods
Small (or non-existent) amounts of WIP inventories
The amounts of WIP are constant from period to period
Do all the weighted average exercise
1-2-3 please
FIFO
FIFO method: Separates prior period work from current period work.
Assigns beginning WIP costs (from prior period) to the first units completed.
Current period costs are assigned in this order:
Complete beginning inventory
Start and complete new units
Ending WIP inventory
Do FIFO Exercise
Please and thank you
Compare weighted Average and fifo methods
Unit costs can differ materially between the two methods when:
Direct materials or conversion costs per unit vary from period to period
Physical inventory levels of WIP are large in relation to total number of units transferred out
Standard Costing:
Standard costing: Uses standard (not actual) costs in equivalent unit calculations for simplicity.
Benefits: Eases record-keeping, especially in complex production environments.
Variance: Arises from differences between standard and actual costs.
Weakness: Standards must be updated with significant process, quantity, or cost changes.
Do the standard costing exercise
Please and thank you
Transferred in cost:
Transferred-in costs: Costs from prior departments carried forward with units into the next process.
Move with units and are treated like a separate direct material added at the start.
Journal entries track movement between departments.
Weighted-average: Transferred-in costs are 100% complete.
FIFO: Each department is treated separately; transferred-in = prior department’s transferred-out.
