Process Costing Flashcards
What is Job Costing?
Assigns costs to each unit of output as each unit consumes different quantities of resources.
What is Process Costing?
Doesn’t assign costs to each unit of output as each unit is identical.
Computes average cost units.
What is Working in Progress?
Units partially complete from previous period.
Convert WIP into finished equivalents based on degree of completion (%).
What is the Weighted Average Method for Opening WIP?
Assumes all units worked on at same time, no difference between WIP units & “new” units.
As new inventory is purchased, AC per unit changes.
Only one Estimate of Completion (EAC).
What is the First in First out (FIFO) Method?
Assumes partially complete units are finished before more units started.
Different EAC for WIP (“old”) and new units. TC of both added before units become to finished goods.
Difference Between WA and FIFO Methods:
Results similar, but dependant on:
* Pattern of cost incurrence (part of process they are incurred)
* Costs changed period to period?
* Type of products being made
Why FIFO > WA?
- Accurately reflects flow of units through production process (food items which are perishable).
- More detailed cost info incurred in current period and those b/f.
- Compliance with accounting standard – generally encourage FIFO if there are going to be significant differences. Aligns with the matching principles in financial accounting.
What is Joint Product Costing?
Costs cannot be traced to individual products, not individually identifiable until split-off point.
Methods of Allocating Joint Costs:
Up to split-off point.
Method:
* Physical measures (weight)
* Sales Value at Split-Off Point
* Net Realisable Value
* Constant Gross profit %:
What is the Physical Measurement Method? What are the +/-?
Allocate the joint cost in proportion to volume.
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* Common unit of measurement = simple to operate.
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* Distort profit reporting and inventory valuation.
* Difficult to find common unit of measurement.
What is the Sales Value at Split-Off Point Method? What are the +/-?
Allocate joint cost in proportion to the estimated sales value.
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* More realistic inventory valuations.
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* Assumes you are able to determine sales value to then find prior costs.
What is the Net Realisable Value Method? What are the +/-?
Allocate joint cost in proportion with NRV.
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* Considers further processing costs.
* Simple to apply if there’s only one split-off point.
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* Difficult to calculate for a complex process with many split-off points.
What is the Constant Gross Profit % Method? What are the +/-?
Allocate joint cost so overall gross profit % is identical.
- Appropriate only if constant gross profit for each joint product is a logical assumption and makes sense.
What are the Steps to Find the Ending Inventory Costs Using the Weighted Average?
Weighted Average (WA) Cost = Total No. units / Total Cost of Units.
Cost of Goods Sold = WA Cost x No. of Units Sold.
Ending Inventory Balance = WA Cost x Ending Units in Stock
