Process Costing

Question 1

What is process costing?

Answer 1

A system used to determine the cost of a large number of identical product units produced in a continuous process.

Question 2

Does each unit consume an identical amount of variable and fixed costs?

Answer 2

Yes, unlike job costing systems which trace and allocate costs to each unique job

Question 3

How do the allocation work of a process costing system?

Answer 3

Cost incurred during a costing period are accumulated and allocated to ALL units produced during the period

Question 4

How is the price of each unit produced calculated?

Answer 4

Unit cost = total cost / total number of units

Question 5

What is conversion cost?

Answer 5

Where the cost of direct labour and direct and indirect overheads are combined

Question 6

Can labour and machinery work in unison?

Answer 6

No, but it may be applied at different stages of the process.

Question 7

What are the 3 statements that is supported by the calculation of the unit cost?

Answer 7

Equivalent production statement (MAC2601 - quantity statement).
Unit cost statement
Production cost statement

Question 8

What is the statement of equivalent production used for?

Answer 8

To calculate the number of units produced during the period.

Question 9

What is the unit cost statement used for?

Answer 9

To calculate the average cost of producing 1 unit

Question 10

What is the production cost statement used for?

Answer 10

To reconcile the costs allocated to units with the cost of production

Question 11

What is one of the main problems arising in a process costing system?

Answer 11

At the end of a costing period, some units may only be partially completed.

Question 12

What is work-in-progress (WIP)?

Answer 12

Partially completed units at the end of a costing period.

Additional costs will be incurred in the following period to complete them.

Question 13

What is equivalent full units?

Answer 13

This is a way to express partially completed units using the percentage of completion

Question 14

What valuation methods can we work with in process costing?

Answer 14

Weighted average or

FIFO: First in First out

Question 15

What does the weighted average method do?

Answer 15

It merges opening WIP units and costs with new units started and costs in order to calculate the unit cost and cost of production.

Opening WIP equivalent units + units started
Cost brought forward + costs incurred
Unit cost = Total costs above / total units above

Question 16

What does the FIFO method do?

Answer 16

Only takes the units started into account.

It accumulates the costs incurred to complete these units.

Question 17

When is the choice of valuation method relevant?

Answer 17

Only when there is opening WIP, as it determines the value of the units brought forward

Question 18

What is normal losses?

Answer 18

May arise from the anticipated shrinkage or evaporation of materials or from cut-off fabric that is discarded

Question 19

What is abnormal losses or gains?

Answer 19

Where actual losses differ from anticipated losses

Question 20

How does the process costing system deal with losses?

Answer 20

It has to provide for normal losses by incorporating it in the normal cost of production.
Abnormal losses or gains are accounted for separately

Question 21

How do we account for abnormal losses or gains?

Answer 21

Losses: Written off as period costs
Gains: Recorded as revenues in the costing IS

Question 22

When can the short-cut method apply?

Answer 22

When all units in output have reached or passed wastage point.