Module 4

Question 1

What types of cost systems are there?

Answer 1

Job-order costing and process costing

Question 2

What is process costing?

Answer 2

• Used when companies produce uniform (similar) products continuously.
• Often used when raw materials are converted into standardized products, such as aluminum, flour, or oil.
• The cost is associated to the department.

Question 3

What are the steps in process costing?

Answer 3

. Accumulate Costs by Process

• Determine Equivalent Units
• Allocate Costs
• Compute Cost Per Unit
• Prepare a process costing report

Question 4

What types of industries use Process costing?

Answer 4

• Beverage
• Chemical
• Textile
• Energy
• Cement
• Plastic

Question 5

What are some similarities between job-order costing and process costing?

Answer 5

• Same Purpose: Both systems aim to assign material, labor, and overhead costs to products, and help calculate unit costs.
• Same Accounts: Both systems use the same basic manufacturing accounts like Manufacturing Overhead, Raw Materials, Work in Progress, and Finished Goods.
• Same Cost Flow: The way costs move through the manufacturing accounts is essentially the same in both systems.

Question 6

What are some differences between job-order costing and process costing?

Answer 6

• Type of Products:
  Process Costing: Used for products that are made in a continuous flow and are identical, like frozen juice, paper, aluminum, or chemicals.
  Job-Order Costing: Used for unique, different jobs with specific production needs, like large construction projects, aircraft, or custom products.
• Cost Assignment:
  Process Costing: Costs (materials, labor, overhead) are not linked to specific customer orders. Instead, costs are collected by department and spread evenly across all units produced.
  Job-Order Costing: Costs are tracked and assigned to specific jobs or orders.
• Tracking Costs:
  Process Costing: Instead of job cost sheets, a production report is created for each department. This report tracks units produced, calculates unit costs, and shows how costs are handled within the department.
  Job-Order Costing: Uses job cost sheets to track the costs for individual jobs.

Question 7

What are some key features in process costing?

Answer 7

• Continuous production: it is applied when products are manufactured in a continuous flow
• Homogeneous products: all units produced are identical or very similar
• Cost accumulation by process: costs are accumulated for each process or department, and then averaged over all units produced during a period
• Unit cost determination: total costs are divided by the number of units produced to determine the cost per unit

Question 8

What is process cost flow used for?

Answer 8

It is used to trace the flow of cost associated with a product, you need to identify all processing department associated with the product

Question 9

What is a processing department

Answer 9

These are areas in a company where work is done on a product and materials, labor, or overhead costs are added.

Question 10

What is sequential processing?

Answer 10

In some factories, like brick or potato chip plants, departments are organized in sequence, meaning products move from one department to the next in a specific order.

Question 11

What is parallel processing?

Answer 11

This is a different processing pattern used when, after an initial stage, some units of a product go through different departments for further processing.

Question 12

What is Equivalent Unit (EU)?

Answer 12

Equivalent Units are a way to express partially completed products as if they were fully completed. This helps in understanding the actual work done during a specific period.

Here we make estimates, because the products are still in WIP and here the manager wants to keep an eye on the costs

When we have partially completed items, we need to estimate how many fully finished items these WIP units would turn into if they were completed.

Question 13

How is EU calculated?

Answer 13

Equivalent units=Number of partially completed units (WIP)*Percentage completion

Question 14

What is EU of production and how is it calculated?

Answer 14

It is where we consider the partially completed items (equivalent units) but also includes the fully finished units produced in the period.

EU of production=units transferres to the next department or to finished goods+EU ín ending WIP inventory

Question 15

What types of process costing are there?

Answer 15

Weighted average and FIFO method

Question 16

Explain the weighted average method

Answer 16

• Combines costs from the current period and previous periods and average them over total equivalent units.
• Here we make separate calculation for each cost category in each department.
• So, the EU of production is calculated for the estimated units of WIP produced inn one unit and the EU of the departments WIP at the end of a period.

Question 17

What steps are there for preparing a production report using the weighted average metho?

Answer 17

• Prepare a quantity schedule and compute the equivalent units
• Calculate cost per EU:
  Cost per EU=(cost of beginning WIP inventory+cost added during the period)/(EU of production)
• Cost reconciliation

Question 18

Explain the FIFO method

Answer 18

Only includes the costs incurred in the current period when calculating cost per unit and assumes the oldest unit s are completed first.

Question 19

What steps are there for preparing a production report using the FIFO method?

Answer 19

Prepare a quantity schedule and compute the equivalent units

• Calculate cost per EU:
  Cost per EU=(cost added during the period)/(EU of production)
• Cost reconciliation

Question 20

What is operating cost?

Answer 20

Operation costing is a hybrid costing system that combines elements of both job-order costing and process costing. It’s used for products that share some common features but also have unique characteristics