1. What are the characteristics of a company that would be more likely to use pr
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Question
1. What are the characteristics of a company that would be more likely to use process costing than job order costing?
2. How do the weighted average and first- in, first- out methods of process costing differ in their treatment of beginning Work in Process Inventory units?
3. What is an ‘‘ equivalent unit of production,’’ and why is it a necessary concept to employ in a process costing system?
4. Is one equivalent unit computation sufficient for all cost components? Explain your answer.
5. What is meant by the phrase units started and completed? Why is this phrase more closely associated with the first- in, first- out method of process costing than with the weighted average method?
6. What is meant by the phrase transferred out cost? Why does the transferred out cost under the WA method include only one computation, but the FIFO method includes multiple computations?
Explanation / Answer
Answer:1
A company that produces homogeneous goods in mass quantities is likely to use a process costing system. The company can either have a single department or multiple departments.
Job order costing and process costing are similar in that they are both methods of assigning costs to products. Also, the methods use similar product accounts (raw materials, work in process, finished goods, cost of goods sold) to capture the costs associated with production and use similar cost pools (DM, DL, OH).
Job order costing and process costing differ in the way in which costs are gathered. In a job order costing system, costs are accumulated by department and by job; in a process costing system, costs are accumulated by production departments for the products that flow through those departments. In process costing, production must be determined on the basis of equivalent units to properly allocate the costs associated with each cost component to the work that was completed during the period and to the work that is still in process at the end of the period. Equivalent units of production are unnecessary in job order costing.
Answer:2
The only difference between weighted average and FIFO equivalent units of production is in the treatment of the work that was completed on beginning inventory in the prior period. Under weighted average, the work performed on beginning inventory in the prior period is combined with the work performed during the current period. Under FIFO, the work performed on beginning inventory during the prior period is held out separately and not commingled with the work performed during the current period.
The FIFO method more accurately portrays the actual physical flow of units through the manufacturing process, because it is most likely that the units in beginning inventory will be the first units to be completed during the current period - thus a firstin,firstout flow.
Answer:3
. Equivalent units of production is an approach to put partially completed and wholly completed units on a comparable basis. Without use of equivalent units, partially completed and fully completed units would be combined as if they were homogeneous measures of output. This would result in meaningless data since fully and partially completed units are different outputs.
Answer:4 One EUP calculation is generally not sufficient because each component may be at a different percentage of completion within a production department. However, if components are at the same percentage of completion, one EUP calculation can be made. For example, if OH is applied on the basis of direct labor, a single “conversion” cost component calculation can be made. Or, if several direct materials are added at the beginning of the process, they may be combined as a single cost component.
Answer:5
The units "started and completed" in a period are calculated as the total units completed during the period minus the units that were in the beginning inventory. This figure can be used in both the weighted average and FIFO methods shown in the chapter. (There are, however, other methods of computing EUP in which the units started and completed are not shown separately.) This calculation is not necessary for the weighted average method because work performed on the current period’s beginning inventory in the prior period need not be separated from work performed to complete the beginning inventory in the current period. This calculation is necessary for the FIFO method because work in the prior period cannot be commingled with work performed in the current period.
Under weighted average, costs are assigned to ending inventory by multiplying the cost per EUP for each cost component times the EUP calculated for that component; these costs are then totaled. Costs are assigned to the units completed/transferred out by multiplying the total cost per EUP times the number of units that have been completed and transferred out during the period.
The cost assigned to ending inventory is handled the same way for FIFO as for weighted average. In determining the cost of the units completed and transferred out, however, the cost of completing the beginning inventory must first be determined by multiplying the equivalent units of production performed this period for each cost component times the cost per EUP for each cost component. The cost of completing the beginning inventory is then added to the original beginning inventory cost to find the total cost of producing the beginning inventory units. The cost of the units started and completed in the current period is found by multiplying the total cost per EUP times the number of units started and completed this period. Adding the total cost of producing beginning inventory to the cost of the units started and completed will give the total cost transferred out of the department during the period.
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