Chapter 4 - Process-costing systems Flashcards
4.2 In process costing, why are costs often divided into two main classifications?
Process-costing systems separate costs into cost categories according to the timing of when costs are introduced into the process, conversion costs and direct costs.
4.4 Describe the distinctive characteristic of weighted-average computations in assigning costs to units completed and closing work in progress.
Calculates the equivalent unit cost of all the work done to date and assigns this cost to equivalent units completed and transferred out of the process, and to equivalent units in ending work-in-process inventory.
4.5 Describe the distinctive characteristic of FIFO computations in assigning costs to units completed and closing work in progress.
Assigns the cost of the previous accounting period’s equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process and assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to started and completed new units, and finally to units in ending work-in-process inventory
4.6 Identify a major advantage of the FIFO method for purposes of planning and control.
Major advantage of FIFO - provides managers with information about changes in the costs per unit from one period to the next. By focusing on work done and the costs of work done during the current period, the FIFO method provides useful information for planning and control purposes
4.7 Identify the main difference between journal entries in process costing and those in job costing.
Journal entries in a process-costing system are similar to entries in a job-costing system. The main difference is that in a process-costing system, there is a separate WIP account for each department.
4.8 Why should the accountant distinguish between transferred-in costs and additional direct material costs for a particular department?
Transferred-in costs are treated as if they are a separate type of direct material added at the opening of the process, in a series of interdepartmental transfers, each department is regarded as being separate and distinct for accounting purposes
All costs transferred in during a given accounting period are carried at one unit-cost figure, as described when discussing modified FIFO, regardless of whether previous departments used the weighted-average method or the FIFO method
Unit costs may fluctuate between periods, thus, transferred units may contain batches accumulated at different unit costs and units may be measured in different terms in different departments
Recognise when process-costing systems are appropriate
The principal difference between process costing and job costing is the extent of averaging used to compute unit costs of products or services.
In a job-costing system, individual jobs use different quantities of production resources. Thus, it would be incorrect to cost each job at the same average production cost.
Process-costing: In contrast, when similar or identical units of products or services are mass produced, and not processed as individual jobs, process costing averages production costs over all units produced.
Describe key steps in process costing
Calculating costs using the five following steps:
- Summarise the flow of physical units of output
- Compute output in terms of equivalent units
- Compute equivalent unit costs
- Summarise total costs to account for
- Assign total costs to units completed and to units in closing work in progress
Explain equivalent units
Equivalent units is a calculated amount of output units that takes the quantity of units completed and WIP and converts it into the amount of completed output units that could be made with that quantity of input. Calculations of equivalent units are used when not all units are completed during the period.
Explain how standard costs simplify process costing
The standard-costing method simplifies process costing because standard costs serve as the cost per equivalent unit when assigning costs to units completed and to units in closing work-in-progress stock
Apply process-costing methods to cases with transferred-in costs
The weighted-average process-costing method computes transferred-in costs per unit by focusing on total transferred-in costs and total equivalent transferred-in units completed to date and assigns this average cost to units completed and to units in closing WIP stock.
The FIFO process-costing method assigns transferred- in costs in opening WIP to units completed, and the costs transferred in during the current period first to complete opening WIP to units, then to start and complete new units and finally to units in closing WIP stock.
Define standard costing
Setting standards for quantities of inputs needed to produce output in companies that use process costing is often relatively straightforward.
Standard costs per input unit may then be assigned to these physical standards to develop standard costs per output unit.
