Cost Accounting - Job, Process and Joint Costing Flashcards
What is conversion cost and how is it calculated?
Conversion cost is the sum of direct labor and manufacturing overhead costs. It is calculated by adding up the cost of all labor and overhead expenses that are required to convert raw materials into finished goods.
What is the difference between job costing and process costing?
Job costing assigns costs to individual jobs, orders, or units, while process costing assigns costs to an entire process or period of time. Job costing is used for custom-made products or services, while process costing is used for mass-produced, homogeneous products or services.
What is the weighted average method in process costing?
The weighted average method combines costs from the previous period with costs from the current period. It calculates equivalent-unit costs by dividing the sum of costs for opening work in progress and current-period work by total equivalent units of work done to date.
What is the FIFO method in process costing?
The FIFO method separates work done on opening stock before the current period from work done in the current period. It assumes that work done in the current period first completes the units in opening work in progress. The FIFO method calculates equivalent-unit costs by dividing the cost of current-period work by equivalent units of work done in the current period.
What is the materiality approach in process costing?
The materiality approach is when managers ignore partially completed units because they are immaterial relative to the whole. It is often used when production time is very short, and there are very few in-progress units at year-end, relative to total production.
Income-shifting
Benefits:
- Managers can shift income from one period to another, which can smooth out fluctuations in earnings.
- If earnings are generally increasing from period to period, income shifting can reduce the impact of the tax code.
Downsides:
- Income shifting can be seen as unethical or even illegal if done to manipulate financial statements.
- The practice can also be difficult to detect and can lead to inaccuracies in financial reporting.
Actual vs. Normal vs. Standard Costing
Actual = end of period
Actual OH / Actual allocation Base x rate by actual allocation usage
Normal = beginning of the period with some at the end
Est. OH / Est. allocation Base x rate by actual allocation usage
Instead of assigning costs based on what actually happened (actual costing) or a
combination of budgeted rates and actual usage (normal costing), lets assign costs
based on what they should be
Standard = budgeting, using standards (how much should cost) for everything, not just overhead
Est. OH / Est. allocation Base x rate by estimated allocation usage
Equivalent Units vs. Physical Units
Equivalent — An equivalent unit of production is an expression of the amount of work done by a manufacturer on units of output that are partially completed at the end of an accounting period: describe how much work has been done on a certain number of physical items.
Physical Units – An actual unit, even if only partially completed.
What do you do with partially completed units in average cost per unit?
Problem in average cost per unit is that we don’t know the number of equivalent units, since we don’t know if they are complete or not: have to estimate
Separate estimation for:
- Raw material costs (RM) added all at the beginning since do not change, fixed
- Conversion Costs (CC)
- DL and MOH (manufacturing overhead costs, direct labor) used to convert RM (raw materials) and FG (finished goods), happen throughout the period
We don’t always know the number of equivalent units, why we use estimation methods.
Equivalent Units and WIP for process costing: how many Equivalent Units of DM work done to date, CC, how many physical units did we send out of WIP
Beginning WIP + New Units Started - Ending WIP
with CC - calculate the precentages (60% of the conversion costs have been incurred for the unit) for both all units sent out and ending WIP
Weighted Average method calculation
don’t care if costs were added last period or this period. We combine them all together.
● Step 1: Summarise the flow of physical units of output, meaning summarize how many units in ending WIP
● Step 2: Compute output in terms of equivalent units.
DM and CC, should be equal to work done to date for both
● Step 3: Compute equivalent-unit costs.
all costs added / the degree of completion of the finished units
for both DM and CC, with the finished goods
● Step 4: Summarise total costs to account for.
● Step 5: Assign total costs to units completed and to units in closing work in progress.
Goods completed = finished - ending WIP, calculate DM and CC unit costs for the quantities produced
Same for ending WIP
Should equal together the work done to date.
FIFO Method
Under FIFO, we treat “Old Units” and “New Units” separately
– Don’t mix old costs and new costs
– Find out how many Equivalent Units of work done this period
– Costs from B. WIP to finish uncompleted precentage of units, that will be finished first
– Costs for the units that we start and finish
new units started - ending WIP
– Costs for the units in E. WIP
completed work
What are joint products, costs, split-off point, and separate costs
- Joint Products are products that are produced together. Producing one always gives you the other.
- Joint Costs are the shared costs of the joint products – costs that occur before the split-off point.
- Split-Off Point is the point when the products become separately identifiable.
- Separate Costs are costs that can be attributed to an individual product.
What of the joint allocation methods is market-based?
Relative Sales Value, NRV, Constant Gross Margin
Physical Measures for joint costs
- Add up the quantities or the physical units produced together
- Allocate joint costs for each
(quantity of individual / both items quantities) x allocated joint costs for both
= allocated joint costs for a product
- Individual total costs:
- allocated joint costs + solo costs
- profit = revenue - (joint + solo costs)
Useful if both have the same value, otherwise unfair.
