types of costing systems
job costing and process costing
job order costing
work is broken into jobs; each job is tracked separately
examples of job order costing
auto mechanics, carpenters, painters, print shops, computer repair
process costing
a large quantity of identical or similar products are mass produced
examples of process costing
auto assembly plants, hot dog manufacturing, any large mechanized production facility
what do these costing systems do?
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why do we need to allocate total product costs to units of product?
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products must be sold in small quantities...
sometimes one at a time (automobiles, loaves of bread), a dozen or two at a time (eggs, cookies)
product costs must be transferred...
from Finished Goods to COGS as sales are made. this requires a correct and accurate accounting of product costs per unit, to have a proper matching of product costs against related sales revenue.
managers need to maintain cost control...
over the manufacturing process. process costing provides managers with feedback that can be used to compare similar product costs from one month to the next, keeping costs in line with projected manufacturing budgets
a fraction of a cent cost change can represent a large dollar change...
in overall profitability, when selling millions of units of product a month. managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities.
what do process costing systems do?
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Process Costing
traces and accumulates direct costs, and allocated indirect costs, through a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an entire month's production. Eventually, costs have to be allocated to indiv
five step approach to process costing (PECUA)
1. summarize the flow of physical units of output (P)
2. compute output in terms of equivalent units (E)
3. summarize total costs to account for (C)
4. compute equivalent units costs (U)
5. assign total costs to units completed and to units in ending work
what is an equivalent unit?
refers to the amount of manufacturing activity that has been applied to a batch of physical units
- an indication of the amount of work done by manufacturers who have partially completed units on hand at the end of an accounting period
- the number of com
when are equivalent units calculated?
used at the end of the month to prepare monthly production reports; they are also used at year end to determine ending inventory values
equivalent unit concept
has to do with costs incurred, in the form of materials, labor, and overhead
In a furniture company, a wooden chair could be in any stage of the production process..
so equivalent units would be appropriate
in a cookie bakery, there is no carry over of partially completed cookies from one day to the next...
so the company would not need to calculate equivalent units of production
two basic methods of process costing
1. weighted average
2. first in, first out (FIFO)
weighted average process costing
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WA key difference from FIFO
- the WA method combines work done to date regardless of whether it is performed in the previous period or the current period; thus, the stage of completion of the current period's beginning WIP is not used in computing equivalent units
- to compute equiv
FIFO Process Costing
- assigns the cost of previous period's equivalent units in beginning work in process inventory to the first units completed and transferred out of the process
- assigns the cost of equivalent units worked on during the current period -- first to complete
FIFO key difference WA
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When there is beginning work in process, units transferred out can be computed by subtracting...
ending work in process units from the units accounted for
what characteristics describe process costing?
1. once production begins, it continues until the finished product emerges
2. all units of production receive precisely the same amount of material, labor, and overhead
3. work in process accounts are maintained for each production department
which item is not a calculation performed on a production cost report?
cost of goods transferred remaining in work in process
number of physical units to be accounted for
calculation performed on a production report
materials cost per equivalent unit
calculation performed a production repot
cost of goods transferred out of finished goods
calculation performed on a prod report
which of the following would use process costing?
crayon manufacturer
equivalent units are usually determined for
direct materials and conversion costs
recording the transfer of the cost of items completed in the forming department to the packaging department would include a:
debit to Work in Process Inventory -- Packaging
conversion cost include:
direct labor and manufacturing overhead
the number of equivalent units is computed as:
the number of physical units * percentage of completion
which of the following is included in the costs transferred out of the second process of a three step production process?
costs of the previous process combined with costs of the current process
the flow of costs is essentially the same in a job order and a process cost system
TRUE
the method of assigning costs is essentially the same in a job order and a process cost sysyem
FALSE
the physical units are a measure of the work done during a period, expressed in fully completed units
FALSE
manufacturing costs in beginning work in process are ignored in computing the cost of units transferred out and the cost of ending work in process
FALSE
a cost reconciliation schedule is prepared to assign total costs to units transferred out and in ending work in process
TRUE
the units transferred in from the first department to the second department should be included in the computation of the equivalent units for the second department under which method(s) of process costing?
weighted average and FIFO
what are transferred in costs as used in a process cost accounting system?
costs of the product of a previous internal process that is subsequently used in a succeeding internal process
in a process costing system, how is the unit cost affected in a production cost report when materials are added in a department subsequent to the first department and the added materials result in additional units?
the first department's unit cost is decreased, which necessitates an adjustment of the transferred-in unit cost
purchased materials are added in the second department of a three-department process. This addition increases the number of units produced in the second department and will...
always change the direct labor cost percentage in the ending WIP inventory
Purchased materials are added in the second department of a three-department process. This addition DOES NOT increase the number of units produced in the second department and will...
increase total unit cost
Why are transferred-on costs differentiated from other types of direct materials?
they usually consist of the basic units being processed
Why are equivalent units of production used in process accounting?
to provide a means of allocating cost to partially completed units
Which of the following is a characteristic of a process costing system?
WIP inventory is restated in terms of completed inventory
Which of the following characteristics applies to process costing but not to job order costing?
equivalent units of production
An equivalent unit of material or conversion cost is equal to...
the amount of material or conversion cost necessary to complete one unit of production
In the computation of manufacturing cost per equivalent unit, the weighted average method of process costing considers...
current costs plus cost of beginning WIP inventory
When should process costing techniques be used in assigning costs to products?
if the product is composed of mass-produced homogeneous units