Chapter 17: Process Costing Flashcards

Questions and Answers

What is process costing?

Used for services only

Applicable only to custom-made products

Calculates cost per equivalent unit of all work done to date

Appropriate when products are identical (correct)

What are the assumptions in process costing?

Direct materials are added at the beginning of the process, and conversion costs are added equally throughout production.

Define equivalent units in process costing.

The number of complete units that could have been produced given the total amount of effort expended during the period.

What distinguishes job costing from process costing?

Job costing deals with distinct units while process costing deals with identical units Signup and view all the answers

The 5-Step Process Costing Allocation includes summarizing the flow of physical units of output, computing output in terms of equivalent units, summarizing total costs to account for, computing cost per equivalent unit, and assigning total costs to units completed and to units in ending ______.

work in process Signup and view all the answers

What is the weighted-average process costing method?

It calculates the cost per equivalent unit of all work done to date, regardless of the accounting period. Signup and view all the answers

Describe the FIFO process costing method.

FIFO assigns costs from the previous period's equivalent units to the first units completed in the current period and allocates current costs accordingly. Signup and view all the answers

What are transferred-in costs?

Costs incurred in previous departments that are carried forward as the product's cost in subsequent processes. Signup and view all the answers

What is a hybrid costing system?

A system that blends characteristics from both job-costing and process-costing systems. Signup and view all the answers

Name three industries that commonly use process costing systems.

Chemical processing, oil refining, pharmaceuticals. Signup and view all the answers

Why are costs often divided into two main classifications in process costing?

To categorize costs according to the timing of their introduction into the process, usually as direct materials and conversion costs. Signup and view all the answers

Why are equivalent units necessary in process costing?

They represent a derived amount of output units that converts the quantity of input into the amount of completed output units. Signup and view all the answers

Identify a major advantage of the FIFO method.

Managers can judge the performance in the current period independently from the performance in the preceding period. Signup and view all the answers

What is the main difference between journal entries in process costing and job costing?

In process costing, there is often more than one WIP account, one for each process. Signup and view all the answers

Study Notes

Process Costing Overview

Process costing is used for identical products where units share similar costs.
Unit costs are calculated by dividing the total costs incurred by the total output units.

Key Assumptions

Direct materials (DM) are usually added at the start of the production process.
Conversion costs are distributed evenly throughout the production.

Equivalent Units

Equivalent units represent the total complete units producible based on the effort expended during a specific period.
Relevant only when there are Work In Progress (WIP) inventories.

Job Costing vs. Process Costing

Job costing addresses distinct, identifiable units (e.g., custom machinery).
Process costing deals with homogenous mass production (e.g., chemicals, food).

Steps for Process Costing Allocation

Summarize physical units of output.
Calculate output in equivalent units.
Total the costs that need accounting.
Compute costs per equivalent unit.
Allocate total costs to completed units and WIP units.

Costing Methods

Weighted-average process costing determines cost per equivalent unit for all work done to date, irrespective of the accounting period.
FIFO (First-In, First-Out) process costing assigns costs based on the order of production, managing previous period costs distinctly.

Transferred-in Costs

Costs from prior departments carry over and become part of the product's cost in subsequent processes.

Hybrid Costing Systems

Hybrid systems combine job-costing and process-costing characteristics.

Industries Utilizing Process Costing

Common in sectors like chemical processing, oil refining, pharmaceuticals, and food manufacturing.

Cost Classifications in Process Costing

Costs are categorized based on timing, typically into direct materials and conversion costs.
Direct materials are often added at one specific point, while conversion costs have a different timing pattern.

Importance of Equivalent Units

Equivalent units provide a measure of output accounting for incomplete units in WIP.
They quantify how much input can yield fully completed units, essential for accurate cost assignment.

Inventory Methods in Process Costing

Common inventory methods include weighted average, FIFO, and standard costing.

FIFO Advantages

FIFO allows managers to evaluate current period performance without bias from previous periods.

Journal Entries in Process Costing

Journal entries are similar in process and job costing.
The main distinction involves having multiple WIP accounts for each distinct process in process costing.

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Test your knowledge with these flashcards on process costing concepts. This quiz covers important definitions and assumptions related to process costing in manufacturing. Perfect for revision or a quick study session!