Chapter 4 Reading

Question 1

what is a process-costing system used to determine?

Answer 1

the cost of a product or service when masses of identical or similar units are produced

Question 2

how are unit costs computed?

Answer 2

divide total costs by total number of units

total costs/number of units

Question 3

which industries typically use a process-costing system?

Answer 3

food, textiles, oil refining

Question 4

what are the 5 key steps in a process-costing system?

Answer 4

• 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

Question 5

equivalent units = ?

Answer 5

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

Question 6

when are equivalent-unit calculations necessary?

Answer 6

when all physical units of output aren’t uniformly completed during an accounting period

Question 7

journal entries in a process-costing system in comparison to journal entries in a job-costing system?

Answer 7

they are similar

the main difference is that in a process-costing system, there is a separate work-in-progress account for each department

Question 8

what is the weighted-average method of process costing?

Answer 8

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

Question 9

what is the FIFO method of process costing?

Answer 9

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

Question 10

the standard costing method = ?

Answer 10

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

Question 11

what’s the principal difference between job costing and process costing?

Answer 11

the extent of averaging used to calculate unit costs of product/services

Question 12

what does process costing do with manufacturing costs?

Answer 12

as the goods being manufactured are similar, the costs are averaged out across all units produced

Question 13

what’s the importance of knowing what product cost is?

Answer 13

helps consider stock valuation, pricing decisions & product profitability analysis

also measures how well they’re managing/reducing costs

Question 14

process costing system = ?

Answer 14

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

Question 15

how are unit costs treated in a manufacturing process-costing system?

Answer 15

direct materials, direct manufacturing labour costs and indirect manufacturing costs are the same for each unit

Question 16

how are unit costs calculated?

Answer 16

total costs / number of units

Question 17

conversion costs = ?

Answer 17

all direct costs except direct materials costs

includes manufacturing labour, indirect materials, energy, plant depreciation etc

Question 18

what do assembly costs normally consist of?

Answer 18

direct material costs + conversion costs

Question 19

how can conversion costs be calculated when there’s closing work-in-progress stock?

Answer 19

a completion percentage is applied as an estimate to the amount of effort put towards the cost object

Question 20

what 5 steps does a company use to calculate fully/partially assembled unit costs?

Answer 20

1. summarise the flow of physical units of output
2. compute output in terms of equivalent units
3. compute equivalent unit costs
4. summarise total costs to account for
5. assign total costs to units completed and to units in closing work in progress

Question 21

why are equivalent units used when calculating costs for closing work in progress?

Answer 21

because not all units are completed, output must be computed in equivalent units, not physical units

Question 22

equivalent units = ?

Answer 22

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%

Question 23

with the process costing system, when calculating product costs, what are steps 3, 4 & 5 called?

Answer 23

the production cost worksheet

Question 24

how are equivalent unit costs calculated?

Answer 24

direct materials & conversion costs / quantity of equivalent units

Question 25

when are physical/equivalent units used in a process-costing system?

Answer 25

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

Question 26

when must a stock cost-flow method be used?

Answer 26

when there’s both opening and closing work-in-progress stock

Question 27

what are the two stock cost-flow methods used in process costing?

Answer 27

weighted-average method
first in, first out method (FIFO)

Question 28

weighted-average process costing method = ?

Answer 28

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

Question 29

which two costs can enter the work in progress account?

Answer 29

• opening work in progress (work in progress brought forward from the previous period)
• work started during the period

Question 30

Equivalent units in opening work in progress + equivalent units of work done in current period =

Answer 30

Equivalent units completed and transferred out in current period + equivalent units in closing work in progress

Question 31

What is the equivalent unit calculation in weighted average method concerned with?

Answer 31

Work done to date regardless of
- whether the work was done during the previous period
- whether it was done during the current period

Question 32

What does weighted average method do with units in opening stock and units of work done during the period?

Answer 32

Merges the equivalent units together to create an average cost

Question 33

Is the stage of completion for units in the current period opening stock relevant in weighted average method?

Answer 33

No

Equivalent unit cost is used

Weighted average method merges equivalent units in opening stock with equivalent units of work done in the period

Question 34

How is weighted average cost per unit calculated?

Answer 34

(Opening work in progress + work done in the period) / total equivalent units of work done to date

Question 35

First in first out process costing method = ?

Answer 35

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

Question 36

What does the FIFO process costing method assume?

Answer 36

Assumes that the earliest equivalent units in the work in progress account are completed first

Question 37

What is a distinctive feature of the FIFO process costing method?

Answer 37

Work done on opening stock before the current period is kept separate from work done in the current period

Question 38

Why is FIFO useful opposed to weighted average process costing method?

Answer 38

FIFO makes it easier to gauge period-to-period comparisons

Question 39

Why is weighted average method more useful than FIFO?

Answer 39

It’s computational simplicity

Reports a more representative average unit cost

Question 40

What is the standard costing method of process costing?

Answer 40

Uses standard costs for direct materials and conversion costs and applies them during cost assignments

Question 41

Why do variances arise under the standard-costing method?

Answer 41

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

Question 42

Transferred-in costs = ?

Answer 42

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

Question 43

Points to remember when accounting for transferred-in costs?

Answer 43

• 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

Question 44

Hybrid costing system = ?

Answer 44

Blends characteristics from both job costing and process costing systems