Video - Process Costing

Question 1

process costing

Answer 1

used to accumulate costs of mass-produced, continuous, homogeneous items that are often small and inexpensive

Question 2

process accounting problem

Answer 2

necessary to allocate manufacturing costs to ending WIP and COGS out of WIP

Question 3

3 steps in processing costing

Answer 3

1 determine equivalent units (EU)

2 compute cost per EU

3 determine (a) cost of goods transferred out of WIP and (b) ending WIP inventory

Question 4

equivalent units

Answer 4

applies only to equivalence of whole completed unit in terms of COST

Question 5

equivalent units assumptions

Answer 5

assume conversion costs are incurred evenly throughout production and direct materials costs are not incurred evenly

Question 6

cost per equivalent unit

Answer 6

divide cost for direct materials and conversion costs by the equivalent units

this provides cost per equivalent unit for both DM and conversion costs

Question 7

In process 2, material G is added when a batch is 60% complete. Ending work in process units, which are 50% complete, would be included in the computation of equivalent units for

Conversion Costs Y/N
Material G Y/N

Answer 7

Conversion Costs Y
Material G N

Conversion costs include labor and OH and are therefore incurred continuously. The ending inventory would be 50% complete with respect to conversion costs.

Material is added at the 60% point and the inventory is only 50% complete. Therefore no materials would be present in the ending inventory for this process.

These units would be the same as zero units with respect to material, for the purpose of costing ending inventory.

Question 8

he following information pertains to Lap Co.’s Palo Division for the month of April:
Number of units Cost of materials
Beginning work in process 15,000 $5,500
Started in April 40,000 18,000
Units completed 42,500
Ending work in process 12,500
All materials are added at the beginning of the process. Using the weighted average method, the cost per equivalent unit for materials is

A.  $0.59.
B.  $0.55.
    C.  $0.45.
    D.  $0.43

Answer 8

Ans. D. $0.43

Under the weighted average method, the cost per equivalent unit includes all the work done through the end of the current period, including the work performed on beginning inventory during the previous period. This is why the method is called the weighted average method. In this situation, material is added at the beginning of the process. Therefore, all units are considered complete with respect to materials. The costs associated with this effort form the numerator of the calculation.
The sum of units completed plus units in ending inventory equals 55,000 (42,500 + 12,500). The total cost incurred on material equals $23,500 ($5,500 + $18,000). Thus, the cost per equivalent unit for materials is $.43 ($23,500/55,000).

Question 9

The forming department is the first of a two-stage production process. Spoilage is identified when the units have completed the forming process.
The costs of spoiled units are assigned to units completed and transferred to the second department in the period when spoilage is identified.

The following information concerns forming’s conversion costs in May Year 1:

Units Conversion costs
Beginning work-in-process (50% complete) 2,000 $10,000
Units started in May 8,000 75,500
Spoilage-normal 500
Units completed and transferred 7,000
Ending work-in-process (80% complete) 2,500
Using the weighted average method, what was forming’s conversion cost transferred to the second production department?

A.  $59,850.
B.  $64,125.
C.  $67,500.
    D.  $71,250

Answer 9

Ans. C. $67,500

The weighted average method counts all work done, including the beginning inventory, in the computation of the cost per equivalent unit. The method, thus, produces costs per equivalent unit that are averages of the work done in two different periods. Normal spoilage is detected at completion.
Thus, the spoiled units receive a full complement of conversion (and material) cost. Equivalent units for conversion cost under the weighted average method:

Units completed and transferred out, including normal spoilage 7,500
Ending inventory (.80)2,500 2,000
Equals total equivalent units of work for conversion cost through the end of the current period 9,500
Total conversion cost/equivalent unit for conversion cost = ($10,000 + $75,500)/9,500 = $9.

Conversion cost of goods transferred out: $9(7,500) = $67,500.

Question 10

In computing the current period’s manufacturing cost per equivalent unit, the FIFO method of process costing considers current period costs
A. Only.
B. Plus cost of beginning work in process inventory.
C. Less cost of beginning work in process inventory.
D. Plus the cost of ending work in process inventory.

Answer 10

A. Only

FIFO considers only the current period cost and effort in computing cost per equivalent unit. The cost of the work performed during the previous period, embodied in beginning inventory work in process, is assumed to be the first transferred out (first-in, first-out).
Goods transferred out will reflect the earlier cost and effort applied to beginning inventory at the cost per equivalent unit in the previous period. But it will also reflect the remaining work to complete the inventory during this period, at the cost per equivalent unit for the current period.

This also means that the goods started and completed during the period, and the ending inventory work in process, will reflect only the current period costs. The FIFO assumption does not mix the costs and effort of two periods when computing cost per equivalent unit.