Process Costing Flashcards
What is process costing?
A system used to determine the cost of a large number of identical product units produced in a continuous process.
Does each unit consume an identical amount of variable and fixed costs?
Yes, unlike job costing systems which trace and allocate costs to each unique job
How do the allocation work of a process costing system?
Cost incurred during a costing period are accumulated and allocated to ALL units produced during the period
How is the price of each unit produced calculated?
Unit cost = total cost / total number of units
What is conversion cost?
Where the cost of direct labour and direct and indirect overheads are combined
Can labour and machinery work in unison?
No, but it may be applied at different stages of the process.
What are the 3 statements that is supported by the calculation of the unit cost?
Equivalent production statement (MAC2601 - quantity statement).
Unit cost statement
Production cost statement
What is the statement of equivalent production used for?
To calculate the number of units produced during the period.
What is the unit cost statement used for?
To calculate the average cost of producing 1 unit
What is the production cost statement used for?
To reconcile the costs allocated to units with the cost of production
What is one of the main problems arising in a process costing system?
At the end of a costing period, some units may only be partially completed.
What is work-in-progress (WIP)?
Partially completed units at the end of a costing period.
Additional costs will be incurred in the following period to complete them.
What is equivalent full units?
This is a way to express partially completed units using the percentage of completion
What valuation methods can we work with in process costing?
Weighted average or
FIFO: First in First out
What does the weighted average method do?
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
What does the FIFO method do?
Only takes the units started into account.
It accumulates the costs incurred to complete these units.
When is the choice of valuation method relevant?
Only when there is opening WIP, as it determines the value of the units brought forward
What is normal losses?
May arise from the anticipated shrinkage or evaporation of materials or from cut-off fabric that is discarded
What is abnormal losses or gains?
Where actual losses differ from anticipated losses
How does the process costing system deal with losses?
It has to provide for normal losses by incorporating it in the normal cost of production.
Abnormal losses or gains are accounted for separately
How do we account for abnormal losses or gains?
Losses: Written off as period costs
Gains: Recorded as revenues in the costing IS
When can the short-cut method apply?
When all units in output have reached or passed wastage point.
