Process Costing Flashcards
What is Job Costing?
Assigns costs to each individual 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?
WIP is used when unit cost can’t be computed by TC / output.
Must convert WIP into finished equivalents based on % degree of completion.
Assumptions of WIP:
Opening Tip inextricably merged with units introduced in current period. Weight Average Method.
Opening WIP is 1st group of units to be processed and completed.
What is the Weighted Average Method for Opening WIP?
Assumes all units worked on at same time, no difference between WIP units & “new” units.
Add opening inventory to Total AC per unit at end of process.
Only one EAC.
What is the First in First out (FIFO) Method?
Assumes partially complete unites are finished before more units started.
“Old” units have different Estimate of Completion (EAC) than “new” units.
Different EAC for WIP and new units. TC of both added before units termed 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.
What are By-Products?
Units that emerge incidental from production of major products, with relatively minor sales value.
Methods of Allocating Joint Costs:
Up to split-off point.
Method based on:
* Physical measures (weight)
* Allocating joint costs relative to the market values of the products
Positive & Negatives of Method: Physical Measurement
+
* Common unit of measurement = simple to operate.
-
* Distort profit reporting and inventory valuation.
* Difficult to find common unit of measurement.
Positive & Negatives of Method: Sales Value at Split-Off
+
* More realistic inventory valuations.
-
* Assumes sales value to determines prior costs.
* Assumes sales value at split-off point can be determined.
Positive & Negatives of Method: Net Realisable Value
+
* Takes further processing costs into account.
* Simple to apply if there’s only one split-off point.
-
* Difficult to calculate for a complex process with many split-off points.
Positive & Negatives of Method: Constant Gross Profit %
- Appropriate only if constant gross profit for each joint product is a logical assumption.
- Only appropriate if a constant gross profit for each product makes sense.
