Process Costing Flashcards
What is process costing used for?
It is used for production processes where units are homogeneous and indistinguishable, such as manufacturing identical products.
What is the primary purpose of process costing?
To assign costs to ending WIP inventory, finished goods (FG) inventory, and cost of goods manufactured (COGM).
How does process costing differ from job costing?
Process costing accumulates costs by process (e.g., WIP-Assembly, WIP-Packaging), while job costing accumulates costs by specific jobs or orders.
What are the two methods of process costing?
First-in, First-out (FIFO) Method
Weighted-Average Method
What are equivalent units in process costing?
They represent the number of fully completed units that could have been made with the resources used, calculated separately for direct materials and conversion costs.
What are conversion costs?
The sum of direct labor and manufacturing overhead used to convert direct materials into finished goods.
What is the role of transferred-in costs in process costing?
They represent costs incurred in a prior department that are transferred into the current department for further processing.
What are the steps in process costing?
Verify physical units and degree of completion.
Determine equivalent units of production (EU).
Account for costs.
Calculate cost per equivalent unit.
Assign costs to WIP inventory and COGM.
How does FIFO differ from the weighted-average method in process costing?
FIFO accounts for beginning WIP separately and focuses on the costs added this period, while weighted-average blends costs from the current and prior periods.
Why is it important to calculate equivalent units separately for direct materials (DM) and conversion costs?
Because they are often added at different stages in the production process and require separate tracking for accuracy.
What happens if inventory costs are improperly stated in process costing?
Overstating inventory leads to understating COGS and overstating net income.
Understating inventory leads to overstating COGS and understating net income.
Why do companies perform process costing calculations at the end of each reporting period?
To accurately value WIP inventory, FG inventory, and COGS for financial reporting and managerial decision-making.
When are equivalent units for transferred-in costs considered 100% complete?
Always, as these units have already been fully processed in the previous department.
What are the main costs calculated in process costing?
Costs of units completed and transferred out of WIP and costs of units in ending WIP inventory.
Why is the concept of degree of completion critical in process costing?
It ensures accurate cost allocation to partially completed units at the end of the period.
