Questions and Answers
What is process costing?
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?
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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 ______.
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What is the weighted-average process costing method?
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Describe the FIFO process costing method.
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What are transferred-in costs?
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What is a hybrid costing system?
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Name three industries that commonly use process costing systems.
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Why are costs often divided into two main classifications in process costing?
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Why are equivalent units necessary in process costing?
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Identify a major advantage of the FIFO method.
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What is the main difference between journal entries in process costing and job costing?
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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!