Topic 2: Process costing (FINAL)

Question 1

What is process costing, and where is it used?

Answer 1

Process costing is a cost system used to allocate production costs to units of product, used in industries such as food and beverage (e.g., Coca-Cola), chemical (e.g., petroleum products), textiles, energy, cement, plastics, and pharmaceuticals commonly use process costing.

Question 2

What are the key steps in determining costs using process costing?

Answer 2

Step 1: Preparation of Quantity Schedule
Step 2: Calculation of Equivalent Units
Step 3: Cost per Equivalent Unit of Production
Step 4: Cost reconciliation

Question 3

What documents are essential in a process costing system?

Answer 3

Key documents include:

1. Quantity Schedule: Shows the flow of units through the department (beginning work in progress inventory, units started into production and total units)
2. Department Production Report: Combines quantity schedule, equivalent units (EU), cost of equivalent units of production and total costs (cost reconciliation).

Question 4

What is a department production report?

Answer 4

A summary of the number of units moving through a department during a period, and it also provides a computation of unit costs. In addition, it shows what costs were charged to the department and what disposition was made of these costs.

Question 5

What are the three primary cost components in process costing?

Answer 5

1. Direct materials
2. Direct labor
3. Manufacturing overhead​

Question 6

What components are included in conversion costs?

Answer 6

Direct labor costs and manufacturing overhead.

Question 7

What is a processing department?

Answer 7

Any location in an organization where work is performed on a product and where materials, labour or overhead costs are added to the product.
1. Activities performed uniformly
2. Output is homogeneous

Question 8

What is the purpose of tracing costs in a processing department?

Answer 8

To determine total costs for finished goods and ensure accurate cost allocation between departments​.

Question 9

What is sequential processing (related to processing department)?

Answer 9

When units flow in sequence from one department to
another.

Question 10

What is parallel processing (related to processing department)?

Answer 10

When units flow through different processing departments.

Question 11

How are materials, labor, and overhead costs tracked in a process costing system?

Answer 11

• Costs are traced to processing departments, simplifying cost accumulation.
• A separate Work in Progress (WIP) account is maintained for each processing department.
• Completed production from one processing department is transferred to the WIP account of the next department for further work.
• Once fully completed, units are transferred from the final department to the Finished Goods account.

(See exhibit 5.4)

Question 12

What are “transferred-in costs”?

Answer 12

Transferred-in costs are the costs of partially completed goods that are transferred from one processing department to another during production​.

Question 13

How are material costs handled in process costing?

Answer 13

Materials are drawn from the storeroom using a materials requisition form, similar to job-order costing.

Materials can be added at any processing department, but it’s common to add most materials in the first department. Subsequent departments typically add only labor and overhead costs as partially completed units move toward completion.

Question 14

How are labor costs applied and recorded in a process costing system?

Answer 14

Since costs do not need to be identified with specific jobs, a time clock is generally used to accumulate labor costs and apply them to the appropriate processing department.

Question 15

How are overhead costs applied to products in a process costing system?

Answer 15

Two scenarios:
1. If production levels are stable and overhead costs are incurred uniformly, actual overhead costs can be charged to products.
2. When production levels fluctuate or overhead costs are not uniform, predetermined overhead rates are used to avoid variations in unit product costs.

Each processing department has its own separate predetermined overhead rate.

Question 16

How are costs transferred between departments and accounts in a process costing system?

Answer 16

Transfer between departments:
When processing is completed in one department, the costs of partially completed units are transferred to the next department. Remember that each department has a WIP account!

Transfer to Finished Goods:
After processing is completed in the final department, the costs of completed units are transferred to the Finished Goods inventory account.

Recording Cost of Goods Sold:
When the completed units are sold, the cost is transferred from Finished Goods to Cost of Goods Sold.

Question 17

What are equivalent units (EU)?

Answer 17

Equivalent units = Number of partially completed units × Percentage completion

The equivalent units is the number of complete units that could have been obtained from the materials and effort that went into the partially complete units.

Question 18

Why are equivalent units important?

Answer 18

They allow managers to track costs for partially completed units during the production process.

Question 19

What is the weighted-average method of process costing?

Answer 19

Computing units by blending together units and costs from the current period with units and costs from the prior period.

Question 20

What is included in the calculation of costs per equivalent unit under the weighted-average method?

Answer 20

Equivalent units of production = Units transferred to the next department or to finished goods + Equivalent units in ending work in progress inventory

NB! A separate calculation is made for each cost category in each processing
department

Question 21

How is a production report prepared when the weighted average method is used to compute equivalent units and unit costs?

Answer 21

Step 1: prepare a quantity schedule (shows flow of units through departments) and compute the equivalent units.
Equivalent units of production = units transferred to the next department or to finished goods + equivalent units in ending work in progress inventory.

Step 2: compute costs per equivalent unit.
Cost per equivalent unit = (Cost of beginning work in progress inventory + cost added during the period) / Equivalent units of production.

Step 3: prepare a cost reconciliation. Cost consists of (and is called “cost to be accounted for):
- Cost in beginning WIP inventory
- Material, labour and overhead costs added during the period
- Cost (if any) transferred from previous departments.

The above costs is reconciled with the sum of the cost transferred out during the period plus the cost in the ending work in progress inventory.

Question 22

What is the primary difference in the FIFO method compared to the weighted-average method?

Answer 22

The weighted-average method blends prior and current period work and costs, whereas the FIFO includes only the costs incurred during the current period, separating beginning inventory from new production.

(See Exhibit 5.12)

Question 23

How is a production report prepared when the FIFO method is used to compute equivalent units and unit costs?

Answer 23

Step 1: prepare a quantity schedule (shows flow of units through departments) and compute the equivalent units.
Equivalent units of production = equivalent units to complete beginning inventory + units stated and completed during the period + equivalent units in ending work in progress inventory

Step 2: compute costs per equivalent unit.
Cost per equivalent unit = cost added during the period / equivalent unit of production

Step 3: prepare a cost reconciliation. Cost consists of:
- Cost carried over from previous priod.
- Cost needed to complete these units.

The costs for units started and completed: Multiply the number of units started and completed by the total cost per equivalent unit.

Costs for ending inventory: Multiply equivalent units for ending inventory by costs per equivalent unit for materials and conversion.

Question 24

What is the difference in units transferred out between the two methods?

Answer 24

Weighted-average:
All units treated the same.

FIFO:
Divided into two:
1. Units in beginning inventory.
2. Units started and completed during the period.

Question 25

What is the standard costing method?

Answer 25

Personnel set quantity and price standards for each major input such as raw materials and labour time. These are quantity standards.

The actual costs of actual inputs are compared to actual quantity of output at standard costs.

Question 26

What are quantity standards?

Answer 26

These indicate how much of an input should be used in manufacturing a unit of product.

They should account for normal (uncontrollable) and abnormal losses (occur because of mistakes).

Only normal losses should be included to determine efficiency.

Question 27

What are cost (price) standards?

Answer 27

These indicate what the cost of the input should be.

Assess efficiency of actual production against expectation.

Question 28

What is operation costing?

Answer 28

A costing system is a hybrid costing method on the continuum with job-order costing in one end and process costing in the other.

Question 29

When is operation costing used?

Answer 29

In situations where products have some common characteristics and also some individual characteristics, like shoes.

Here operation costing is used to determine product costs.

Material: Charged to each batch (job-order costing).
Labour and overhead: Charged to each department (process costing).