Chapter 21 - Process Costing

Question 1

When is a process cost system chosen over a job order cost system?

Answer 1

Companies use process cost systems to apply costs to similar products that are mass-produced in a continuous fashion.

Question 2

What are the similarities between process cost and job order costs systems?

Answer 2

1. The manufacturing cost elements. Both costing systems track three manufacturing cost elements: direct materials, direct labor, and manufacturing overhead. 2. The accumulation of the costs of materials, labor, and overhead. Both costing systems debit raw materials to Raw Materials Inventory, factory labor to Factory Labor, and manufacturing overhead costs to Manufacturing Overhead. 3. The flow of costs. As noted above, both systems accumulate all manufacturing costs by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. Both systems then assign these costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold. The methods of assigning costs, however, differ significantly.

Question 3

What are the difference between process cost and job order costs systems?

Answer 3

1. The number of work in process accounts used. A job order cost system uses only one work in process account. A process cost system uses multiple work in process accounts. 2. Documents used to track costs. A job order cost system charges costs to individual jobs and summarizes them in a job cost sheet. A process cost system summarizes costs in a production cost report for each department. 3. The point at which costs are totaled. A job order cost system totals costs when the job is completed. A process cost system totals costs at the end of a period of time. 4. Unit cost computations. In a job order cost system, the unit cost is the total cost per job divided by the units produced. In a process cost system, the unit cost is total manufacturing costs for the period divided by the equivalent units produced during the period.

Question 4

In what manufacturing situation will a job order cost system be appropriate?

Answer 4

Use a job order costing system in situations where unit costs are high, unit volume is low, and products are unique.

Question 5

In what manufacturing situation will a process cost system be appropriate?

Answer 5

Use a process costing system when there is a large volume of relatively similar and homogeneous products.

Question 6

T/F - A law firm is likely to use process costing for major lawsuits.

Answer 6

False

Question 7

T/F - A manufacturer of paintballs is likely to use process costing.

Answer 7

True

Question 8

T/F - Both job order and process costing determine product costs at the end of a period of time, rather than when a product is completed.

Answer 8

False

Question 9

T/F - Process costing does not keep track of manufacturing overhead.

Answer 9

False

Question 10

In a process cost system, explain how Material Costs are added?

Answer 10

All raw materials issued for production are a materials cost to the producing department. A process cost system may use materials requisition slips, but it generally requires fewer requisitions than in a job order cost system. The materials are used for processes rather than for specific jobs and therefore typically are for larger quantities. (mass production)

Question 11

In a process cost system, explain how Factory Labor Costs are added?

Answer 11

In a process cost system, as in a job order cost system, companies may use time tickets to determine the cost of labor assignable to production departments. Since they assign labor costs to a process rather than a job, they can obtain, from the payroll register or departmental payroll summaries, the labor cost chargeable to a process.

Question 12

In a process cost system, explain how Manufacturing Overhead Costs are added?

Answer 12

The objective in assigning overhead in a process cost system is to allocate the overhead costs to the production departments on an objective and equitable basis. That basis is the activity that “drives” or causes the costs. A primary driver of overhead costs in continuous manufacturing operations is machine time used, not direct labor. Thus, companies widely use machine hours in allocating manufacturing overhead costs using predetermined overhead rates.

Question 13

What are the journal entries for transfer to the next department?

Answer 13

Work in Process—Assembly XXXXX Work in Process—Machining XXXXX (To record transfer of units to the Assembly Department)

Question 14

What are the journal entries for transfer to Finished Goods?

Answer 14

Finished Goods Inventory XXXXX Work in Process—Assembly XXXXX (To record transfer of units to finished goods)

Question 15

What are the journal entries for transfer to Cost of Goods Sold?

Answer 15

Cost of Goods Sold XXXXX Finished Goods Inventory XXXXX (To record cost of units sold)

Question 16

How does process costing differ from job order costing?

Answer 16

In process cost accounting, keep separate work in process accounts for each process.

Question 17

Ho do we assign production costs in a process costing system?

Answer 17

When the costs are assigned to production, debit the separate work in process accounts.

Question 18

How do we transfer costs out of a process?

Answer 18

Transfer cost of completed units to the next process or to Finished Goods.

Question 19

Explain Equivalent Units?

Answer 19

Equivalent units of production measure the work done during the period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product.

Question 20

Explain Conversion Costs?

Answer 20

Conversion costs are the sum of labor costs and overhead costs.

Question 21

How do we measure work done during a period?

Answer 21

To measure the work done during the period, expressed in fully completed units, compute equivalent units of production.

Question 22

How do we calculate equivalent units of production?

Answer 22

Use the appropriate formula: Units completed and transferred out + Equivalent units of ending work in process = Equivalent units of production.

Question 23

What are the four steps for completing a production cost report?

Answer 23

1. Compute the physical unit flow. 2. Compute the equivalent units of production. 3. Compute unit production costs. 4. Prepare a cost reconciliation schedule.

Question 24

How do we compute Physical Units?

Answer 24

Physical units are the actual units to be accounted for during a period, irrespective of any work performed. To keep track of these units, add the units started (or transferred) into production during the period to the units in process at the beginning of the period. This amount is referred to as the total units to be accounted for.

Question 25

How do we account for Physical Units?

Answer 25

Physical Units Units to be accounted for Work in process, June 1 100,000 Started (transferred) into production 800,000 Total units 900,000 Units accounted for Completed and transferred out 700,000 Work in process, June 30 200,000 Total units 900,000

Question 26

What gets ignored when computing Equivalent Units of Production?

Answer 26

Remember that we ignore the beginning work in process in the computation when computing Equivalent Units of Production.

Question 27

What do we do when equivalent units of production are different for materials and conversion costs?

Answer 27

Unit production costs are costs expressed in terms of equivalent units of production. When equivalent units of production are different for materials and conversion costs, we compute three unit costs: (1) materials, (2) conversion, and (3) total manufacturing.

Question 28

What does the Cost Reconcialliation Schedule Look Like?

Answer 28

Question 29

What does the Production Cost Report Look Like?

Answer 29

Question 30

What is the Primary Objective of Just In Time Processing?

Answer 30

A primary objective of JIT is to eliminate all manufacturing inventories.

Inventories have an adverse effect on net income because they tie up funds and storage space that could be put to more productive uses.

JIT strives to eliminate inventories by using a “pull approach” in manufacturing.

Question 31

What are the benefits of Just In Time Processing?

Answer 31

The major benefits of implementing JIT processing are as follows.

1. Significant reduction or elimination of manufacturing inventories.
2. Enhanced product quality.
3. Reduction or elimination of rework costs and inventory storage costs.
4. Production cost savings from the improved flow of goods through the processes.

Question 32

Explain Activity Based Costing?

Answer 32

Activity-based costing (ABC) focuses on the activities required to produce a product or perform a service. An ABC system is similar to conventional costing systems in accounting for direct materials and direct labor, but it differs in regard to manufacturing overhead.

Question 33

What can influence Activity Based Costing?

Answer 33

Question 34

What two important assumptions must be met in order to obtain accurate productcosts under ABC?

Answer 34

1. All overhead costs related to the activity must be driven by the cost driver used
   to assign costs to products.
2. All overhead costs related to the activity should respond proportionally to
   changes in the activity level of the cost driver.

Question 35

T/F -

1. Continuous process manufacturing often results in a reduction of inventory.

Answer 35

False

Question 36

T/F -

Companies that use just-in-time processing complete and store finished goods all the time to meet rush orders from customers.

Answer 36

False

Question 37

T/F -

3. A major benefit of just-in-time processing is production cost savings from the improved flow of goods through the processes.

Answer 37

True

Question 38

T/F -

An ABC system is similar to traditional costing systems in accounting for manufacturing costs but differs in regard to period costs.

Answer 38

False

Question 39

T/F

The primary benefit of ABC is more accurate and meaningful costs.

Answer 39

True

Question 40

T/F

In recent years, the amount of direct labor used in many industries has greatly increased and total overhead costs have significantly decreased.

Answer 40

False

Question 41

Explain JIT?

Answer 41

JIT manufacturing is dedicated to having the right amounts of materials, parts, or products just as they
are needed.

Question 42

Explain ABC

Answer 42

Activity Based Ccosting focuses on the activities performed in producing a product. It recognizes that to have accurate and meaningful cost data, more than one basis of allocating costs to products is needed.

Question 43

What are the Benefits of Activity Based Costing?

Answer 43

The primary benefit of ABC is more accurate product costing. Here’s why:
1. ABC leads to more cost pools being used to assign overhead costs to products. Instead of one plantwide pool (or even departmental pools) and a singlecost driver, companies use numerous activity cost pools with more relevant cost drivers. Costs are assigned more directly on the basis of the cost driversused to produce each product.

2. ABC leads to enhanced control over overhead costs. Under ABC, companies can trace many overhead costs directly to activities—allowing some indirect costs to be identified as direct costs. Thus, managers have become more aware of their responsibility to control the activities that generate those costs.
3. ABC leads to better management decisions. More accurate product costing should contribute to setting selling prices that can help achieve desired product profitability levels. In addition, more accurate cost data could be helpful in deciding whether to make or buy a product part or component, and sometimes even whether to eliminate a product.

Activity-based costing does not change the amount of overhead costs. What it does do is allocate those overhead costs in a more accurate manner.

Furthermore, if the scorekeeping is more realistic and more accurate, managers should be able to better understand cost behavior and overall profitability.

Question 44

What are the Limitations of Activity Based Costing

Answer 44

Although ABC systems often provide better product cost data than traditional volume-based systems, there are limitations:
1. ABC can be expensive to use. The increased cost of identifying multiple activities and applying numerous cost drivers discourages many companies from using ABC. Activity-based costing systems are more complex than traditional costing systems—sometimes significantly more complex. So companies must ask, is the cost of implementation greater than the benefit of greater accuracy? Sometimes it may be.

For some companies, there may be no need to consider ABC at all because their existing system is sufficient. If the costs of ABC outweigh the benefits, then the company should not implement ABC.

2. Some arbitrary allocations continue. Even though more overhead costs can be assigned directly to products through ABC’s multiple activity cost pools,
   certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours.