CHAPTER 6

PROCESS COSTING
QUESTIONS
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.

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 first-in, first-out flow.

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.

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.

148

4.

Chapter 6

One EUP calculation is generally not sufficient for all cost components because
the components may be at different percentages of completion within a production
department. However, if components are at the same percentage of completion, a
single EUP calculation can be made. For example, if overhead 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,
these DMs may be combined as a single cost component.
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 necessary for the FIFO method because work in the prior
period cannot be commingled with work performed in the current period. This
calculation is not necessary for the weighted average method because work
performed on the current periods beginning inventory in the prior period need not
be separated from work performed to complete the beginning inventory in the
current period.

6.

The term transferred out cost is the cost amount that is sent from a WIP
inventory account to either the next WIP department or to FG inventory. Under
the WA method, the units transferred are not distinguished by when they were
begun (whether in the previous or the current period); thus, all transferred out
units have the same per-unit cost and only one computation is necessary. Under
the FIFO method, the units that were in the beginning WIP inventory are
considered separately from those that were begun in the current period. Thus, the
beginning WIP costs must attach to those specific units, which must then be
completed at current period costs for direct material, direct labor, and overhead.
After determination of the total cost to manufacture the beginning WIP inventory
units, the next computation reflects the units that were started and completed in
the current period, which only contain current period costs.

7.

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.

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.

Chapter 6

149

8.

The only difference between process costing in a multi-department environment

and a single department environment is that there will be a cost component
labeled "Transferred In." The costs of previous departments must follow the flow
of goods into successor departments to determine the full cost of production.

9.

The cost per unit transferred out of the first department will always be equal to
the cost per unit transferred in to the second department
unless there is a
change in the unit measurement in the second department. For example, if the
first department might use pounds of cereal, but the second department might
measure units in 24-oz. boxes of cereal. Thus, if the cost per pound transferred
out were $2.00, the cost per box transferred in would be $3.00.
10. Under a standard costing system, the Raw Material, In-Process, and Finished
Goods Inventory accounts are accounted for at standard costs. Actual costs of
each process or each department are also captured in a standard costing system
and variances can be computed as differences between the standard and actual
amounts for each cost component. The variances provide information to
management about the efficiency of operations because they reflect differences
between expected (standard) and actual costs.

11. A hybrid costing system is one in which process costing is used to account for
certain product costs and job order costing is used to account for other product
costs. Hybrid costing is common in environments that have, for example, material
costs that vary substantially from one production run to another (gold versus
copper), but require all products to flow through the same physical conversion
processes. In this example, the material would be accounted for on a job order
basis and the conversion would be accounted for using process costing.
12. The ?method of neglect? is used to treat the cost of normal spoilage in a process
costing system. Under this method, the spoiled units are simply ignored in the
cost of production report because it is assumed that there will always be a given
level (or less) of spoilage and that such a level cannot be eliminated. By using the
method, the good production absorbs the cost of the spoiled production.
13. Normal loss refers to an expected reduction in production quantity based on the
production technology and production practices of the company. Abnormal loss
refers to a quantity of loss above the normal loss quantity.

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.