Process Costing

Question 1

Describe the difference between “Process Costing” and “Job Order Costing”.

Answer 1

Process costing typically accumulates production costs across a large number of mass-produced units that are often homogeneous, small, and inexpensive.
Job Order Costing accumulates costs often associated with large, relatively expensive, heterogeneous (custom-ordered) items.

Question 2

What are the three major steps involved with process costing?

Answer 2

1. Determine equivalent units
2. Determine cost per equivalent unit
3. Determine (a) cost of goods transferred out of WIP and (b) Ending WIP inventory

Question 3

What kind of process costing problems include “transfers-in”?

Answer 3

Organizations that have more than one sequential WIP account.

Question 4

Equivalent units are equivalent in what sense?

Answer 4

They are equivalent in terms of “cost”.

Question 5

Define “transferred-in costs”.

Answer 5

Costs transferred from one department (process) to the next.

Question 6

How should you think about transferred-in costs in process costing?

Answer 6

Transferred-in costs are viewed by the transferring department as “cost of goods transferred out”, while there receiving department should treat those costs in a manner similar to an additional category of direct materials used.

Question 7

Define “equivalent units”.

Answer 7

In process costing, the number of whole units represented by the partially complete units in terms of cost; for example, 100 units that are 50% complete (in terms of cost) equal 50 equivalent units.