Week 4 - Process Costing

Question 1

What is process costing?

Answer 1

When identical or similar units of products/services are mass produced, process costing is used to calculate an average production cost for all units produced.

Question 2

Since production continues across multiple accounting periods, what is the challenge?

Answer 2

To determine the unit cost for that period. This is complicated because some units might be partially completed at the beginning/end of the period.

Question 3

Process-costing systems separate costs into cost categories according to when costs are introduced. What are the two cost classifications?

Answer 3

• Direct materials

* Conversions costs (direct labour and variable overheads)

Question 4

What is an equivalent unit?

Answer 4

A measure which converts the partially completed boards to a measure of completed boards (e.g. if 10 boards were 20% completed it would be equivalent to 2 fully completed boards, 10 x 0.20 = 2)

Question 5

What are the five steps of process costing? (also the same 5 steps for the weighted average method)

Answer 5

1. Summarise the flow of physical units (of output) (e.g. from shaping department to art department)
2. Calculate output in terms of equivalent units
3. Summarise total costs to account for
4. Calculate cost per equivalent unit
5. Assign total costs to units completed and to units in ending work in process

Question 6

What is the production cost worksheet?

Answer 6

Shows steps 3, 4 and 5. Summarises total costs to account for, calculates cost per equivalent unit and assigns total costs to units completed and to units in ending work in process.

Question 7

What is the weighted-average process-costing method?

Answer 7

Calculates cost per equivalent unit of all work done TO DATE (regardless of the accounting period in which it was done) and assigns this cost to equivalent units completed and transferred out and to equivalent units in ending work-in-process inventory.

Question 8

What is the weighted average cost?

Answer 8

Total of all costs entering the work in process account whether they are from beginning work in process or from work started during the current period. These costs are divided by the equivalent units that have been transferred out and those that remain in work in process. Note: the percentage complete for beginning work in process is ignored in weighted average method.

Question 9

What are transferred-in costs (aka previous-department costs)?

Answer 9

Costs incurred in previous departments that are carried forward as the product’s cost when it moves to a subsequent process in the production cycle.

Question 10

A hybrid costing system does what?

Answer 10

Blends characteristics from both job-costing and process costing systems. Many production systems are a hybrid: they have some features of custom-order manufacturing and other features of mass-production manufacturing.

Question 11

Does the information about the stage of opening WIP (e.g. 1/4 way through) affect the calculation of equivalent units when using the weight-average method?

Answer 11

Nope

Question 12

Why include the opening WIP if it does not affect the calculation of equivalent units?

Answer 12

Opening inventory this period was closing inventory last period, and it would have affected the calculation of equivalent units in the previous period.

Question 13

Are there any circumstances when a firm would need to know the info about the stage of opening WIP?

Answer 13

If the firm used FIFO costing.

Question 14

What is the purpose of the Cost of Production Report?

Answer 14

To keep track of the costs associated with creating a large amount of the same product