Chapter 4 Reading Flashcards
what is a process-costing system used to determine?
the cost of a product or service when masses of identical or similar units are produced
how are unit costs computed?
divide total costs by total number of units
total costs/number of units
which industries typically use a process-costing system?
food, textiles, oil refining
what are the 5 key steps in a process-costing system?
- 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
equivalent units = ?
a derived amount of output units that takes the quantity of each input in units completed or in work in progress, and converts it into the amount of completed output units that could be made with that quantity of input
when are equivalent-unit calculations necessary?
when all physical units of output aren’t uniformly completed during an accounting period
journal entries in a process-costing system in comparison to journal entries in a job-costing system?
they are similar
the main difference is that in a process-costing system, there is a separate work-in-progress account for each department
what is the weighted-average method of process costing?
computes unit costs by focusing on the total costs and the total equivalent units completed to date and assigns this average cost to units completed and to units in closing work-in-progress stock
what is the FIFO method of process costing?
assigns the costs of the opening work-in-progress stock to the first units completed, and assigns the costs of the equivalent units worked on during the current period first to complete beginning stock
then to start and complete new units, and finally to units in closing work in progress stock
the standard costing method = ?
simplifies process costing because standard costs serve as the costs per equivalent unit when assigning costs to units completed and to units in closing work-in-progress stock
what’s the principal difference between job costing and process costing?
the extent of averaging used to calculate unit costs of product/services
what does process costing do with manufacturing costs?
as the goods being manufactured are similar, the costs are averaged out across all units produced
what’s the importance of knowing what product cost is?
helps consider stock valuation, pricing decisions & product profitability analysis
also measures how well they’re managing/reducing costs
process costing system = ?
costing system in which the cost of a product or service is obtained by using broad averages to assign costs to masses of similar units
how are unit costs treated in a manufacturing process-costing system?
direct materials, direct manufacturing labour costs and indirect manufacturing costs are the same for each unit
how are unit costs calculated?
total costs / number of units
conversion costs = ?
all direct costs except direct materials costs
includes manufacturing labour, indirect materials, energy, plant depreciation etc
what do assembly costs normally consist of?
direct material costs + conversion costs
how can conversion costs be calculated when there’s closing work-in-progress stock?
a completion percentage is applied as an estimate to the amount of effort put towards the cost object
what 5 steps does a company use to calculate fully/partially assembled unit costs?
- 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
why are equivalent units used when calculating costs for closing work in progress?
because not all units are completed, output must be computed in equivalent units, not physical units
equivalent units = ?
if there are incomplete physical units, they’re measured in terms of their equivalent if they were completed
e.g., 50 units completed 70% is equivalent to 35 units completed 100%
with the process costing system, when calculating product costs, what are steps 3, 4 & 5 called?
the production cost worksheet
how are equivalent unit costs calculated?
direct materials & conversion costs / quantity of equivalent units
when are physical/equivalent units used in a process-costing system?
physical units = when jobs are completed and there’s no closing work in progress
equivalent units = when jobs aren’t completed and there’s closing work in progress
when must a stock cost-flow method be used?
when there’s both opening and closing work-in-progress stock
what are the two stock cost-flow methods used in process costing?
weighted-average method
first in, first out method (FIFO)
weighted-average process costing method = ?
calculates the equivalent-unit cost of the work done to date
then, assigns this cost to equivalent units completed and to equivalent units in closing work-in-progress stock
total of all costs entered into the work in progress / total equivalent units of work done to date
which two costs can enter the work in progress account?
- opening work in progress (work in progress brought forward from the previous period)
- work started during the period
Equivalent units in opening work in progress + equivalent units of work done in current period =
Equivalent units completed and transferred out in current period + equivalent units in closing work in progress
What is the equivalent unit calculation in weighted average method concerned with?
Work done to date regardless of
- whether the work was done during the previous period
- whether it was done during the current period
What does weighted average method do with units in opening stock and units of work done during the period?
Merges the equivalent units together to create an average cost
Is the stage of completion for units in the current period opening stock relevant in weighted average method?
No
Equivalent unit cost is used
Weighted average method merges equivalent units in opening stock with equivalent units of work done in the period
How is weighted average cost per unit calculated?
(Opening work in progress + work done in the period) / total equivalent units of work done to date
First in first out process costing method = ?
Assigns the cost of the previous period’s equivalent units in opening work in progress stock 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 stock
Then to start and complete new units,
and finally to units in closing work in progress stock
What does the FIFO process costing method assume?
Assumes that the earliest equivalent units in the work in progress account are completed first
What is a distinctive feature of the FIFO process costing method?
Work done on opening stock before the current period is kept separate from work done in the current period
Why is FIFO useful opposed to weighted average process costing method?
FIFO makes it easier to gauge period-to-period comparisons
Why is weighted average method more useful than FIFO?
It’s computational simplicity
Reports a more representative average unit cost
What is the standard costing method of process costing?
Uses standard costs for direct materials and conversion costs and applies them during cost assignments
Why do variances arise under the standard-costing method?
Because the standard costs assigned to products in the basis of work done in the current period don’t equal the actual costs incurred in the period
Transferred-in costs = ?
AKA previous department costs
Costs incurred in a previous department that are carried forward as part of the product’s cost as it moves to a subsequent department for processing
Points to remember when accounting for transferred-in costs?
- Remember to include transferred in costs from previous departments in your calculations
- don’t forget opening work in progress brought forward from the previous period
- unit costs may fluctuate between periods
Hybrid costing system = ?
Blends characteristics from both job costing and process costing systems
