CHAPTER 6: CHARACTERISTICS OF PROCESS
COSTING SYSTEMS
PROCESS COSTING
- Used by firms having homogeneous
products that pass through a series of
similar processes or departments.
- These firms usually engage in
continuous mass production of a few
similar products.
- Manufacturing costs are accumulated in
each process.
- Management accountants uses a
production cost report to track
production quantity and cost
information for each department.
UNIT COST
- Calculates by dividing process cost in
each department by the number of
equivalent units produced during the
period.
PROCESS COSTING SYSTEM
- Used in many industries such as
chemicals, oil refining, textiles, paints,
flour, canning, rubber.
- Can also be used by service
organizations with homogeneous
services and repetitive processes such
as mail sorting by a courier.
The goal is to find the combined unit cost of all
units processed in that period, including those
that are partially complete at EITHER the
beginning or the end of the accounting period.
By PARTIALLY COMPLETE, it means partially
complete for that department; a unit could be
complete for a given department but still be in
the Work-in-Process Inventory for a department
that follows in the sequence of manufacturing
processes.
EQUIVALENT UNITS
- Number of units that could have been
produced given the amount of work
actually performed and quantity of
other production inputs used for both
complete and partially complete units;
used in conjunction with process
costing.
- Equivalent units are NOT THE SAME as
physical units.
EXAMPLE:
In a given month a chemical company had in
process 30 000 gallons of a chemical, of which
20 000 gallons were complete at the end of the
month but the remaining 10 000 gallons were
only 50% complete.
25 000 gallons [20 000 + (10 000 x 50%)]
The percentage of completion is usually
measured by percentage of total cost that has
already been incurred in the production of the
product.
Equivalent units should be calculated
SEPARATELY for direct materials, direct labor,
and factory overhead when the proportion of
the total work performed on the units in the
Work-In-Process Inventories is not always the
same for each cost element.
CONVERSION COSTS
- It is the combination of factory
overhead and direct labor costs for the
purpose of computing equivalent units
of production.
Equivalent unit of conversion costs are
therefore the result of multiplying the
percentage of work is partially complete.
EXAMPLE: 1000 units estimated to be 30%
complete in the ending Work-In-Process
Inventory, the equivalent units of conversion
for the period are 300(30% x 1000 units)
DIRECT MATERIALS
- Can be added at discrete points or
continuously during production.
- If the materials are added uniformly,
the proportion used for computing
equivalent units of direct materials is
the same as the proportion for
conversion costs, and a separate
calculation of the Direct materials per
equivalent would not be necessary.
- Method for calculating unit cost under
process costing that includes all costs,
both those incurred during the current
period and those incurred in the prior
period that are shown as the beginning
work in process inventory of the current
period.
2) FIFO
- First-in, first-out
- Method for calculating the current
period’s unit cost that includes only
cost incurred and work performed
during the current period.

PRODUCTION COST REPORT

- A report that summarizes the physical

units of a department, the costs
incurred during the period, and the
costs assigned to units completed and
to units in ending work-in-process
inventories.

FIVE STEPS IN PROCESS COSTING

1) Analyze the physical flow of production

units.
2) Calculate equivalent units for each
manufacturing cost element (direct
materials, direct labor, and overhead or
direct materials and conversion costs).
3) Determine total costs for each
manufacturing cost element from STEP
2.
4) Compute cost per equivalent unit for
each manufacturing cost element from
STEP 2.
5) Assign total manufacturing costs to
units completed and ending Work-in-
Process (WIP).

TWO METHODS USED TO PREPARE THE

DEPARTMENTAL PRODUCTION COST REPORT:

1) WEIGHTED-AVERAGE METHOD
QUESTIONS - NEVER REQUIRED, if materials are
added at all once, a separate calculation
1) Firms producing homogeneous
is required.
products that pass through a series of
- ALWAYS REQUIRED, if materials are
department generally use PROCESS
added uniformly, a separate calculation
COSTING.
is required.
2) Process costing CAN BE USED BY
14) When direct labor and factory overhead
SERVICE ORGANIZATIONS.
components are incurred in nearly
3) In order the be considered “partially
direct proportion to each other, linking
complete,” a unit MUST STILL BE IN
the costs together IS ALWAYS
WORK-IN-PROCESS.
APPROPRIATE.
4) 25000 + 20000 X 60% + 5000 X 40% =
15) 1000 X 50% = 500
39000
16) 5000 X 40% = 2000
5) In process costing, conversion costs are
17) Statements regarding process costing
DIRECT LABOR and FACTORY
that are true:
OVERHEAD.
- Complete goods are transferred to
6) Firms that use process costing ENGAGE
finished goods inventory.
IN THE CONTINOUS PRODUCTION OF A
- A separate work in process account is
FEW SIMILAR PRODUCTS.
maintained for each production
7) Linking direct labor costs and factory
development.
overhead is often practical because
18) Equivalent units should SOMETIMES be
direct labor is a significant cost element
calculated separately for direct
in process industries. (FALSE)
materials, direct labor, and factory
8) Industries that use process costing
overhead.
include
19) If direct materials are added uniformly
- CHEMICALS
during production, a separate
- LUMBER PRODUCTS
calculation of direct materials per
- FOOD PROCESSING
equivalent units is NOT NECESSARY.
9) A unit that is complete for department
20) The key document in a typical process
A and is now part of work-in-process
costing system is the PRODUCTION
inventory for department b is
COST.
considered to be PARTIALLY COMPLETE.
21) 0, since none of the units are complete
10) 6000 X 60% = 3600
for materials; the conversion
11) Equivalent units are the number of
percentage is irrelevant.
same or similar complete units that
22) The category of transferred in costs
COULD HAVE BEEN PRODUCED GIVEN
appears in WORK IN PROCESS FOR ALL
THE WORK ACTUALLY PERFORMED.
DEPARTMENTS EXCEPT THE FIRST.
12) For the process of computing
23) Units that are completed and
equivalent units of production, most
transferred from a production
process industries combine factory
department and units in ending work in
overhead and direct labor and call them
process are called OUTPUT UNITS.
CONVERSION COSTS.
24) The production cost report summarizes
13) A separate calculation of equivalent
- Costs incurred during the period
units for direct materials is
- Physical and equivalent units of a
department
- Cost assigned to completed units
25) 2000, all units are 100% complete for
materials, so the conversion percentage
is irrelevant.
26) Beginning work in process and all units
that enter a production department
during an accounting period are called
INPUT UNITS.
27) In process costing, partially completed
physical units are converted into the
equivalent number of WHOLE UNITS.
28) On the production report, the total
manufacturing cost for each cost
element is also called TOTAL COST to
ACCOUNT FOR.
29) Measuring the total work expended
during the accounting period is the
purpose of calculating EQUIVALENT
UNITS of production for each
manufacturing cost element.
30) The total cost determined in Step 3 of
the production cost report
- MUST AGREE WITH THE TOTAL COST
ASSIGNED IN STEP 5
- IS ALSO CALLED TOTAL COST TO
ACCOUNT FOR
- INCLUDES FACTORY OVERHEAD
ALLOCATION.
31) One purpose of computing cost per
equivalent unit of production is to have
a proper costing for income
determination. (TRUE)
32) In order to have a proper product
costing for income determination and
other management needs for an
accounting period, it is necessary to
compute COST PER EQUIVALENT UNITS.
33) Assigning total manufacturing costs
incurred to units completed during the
period and the units that are still in
process at the end of the period is the
objective of the PRODUCTION COST
REPORT.
34) The process costing method(s) that
includes both prior period and current
period costs when calculating unit cost
is (are) WEIGHTED-AVERAGE ONLY
35) 5000 units in beginning work in process
+ 25000 units started in a period –
20000 completed units = 10000
36) Total units accounted for equals the
sum of the units in ENDING INVENTORY
PLUS THE NUMBER OF UNITS
COMPLETED DURING THE PERIOD.
37) Under the weighted-average method,
equivalent units for each cost element
(materials, labor, overhead) equals the
sum of ENDING WORK IN PROCESS
EQUIVALENT UNITS PLUS COMPLETED
AND TRANSFERRED OUT UNITS.
38) The objective of the production cost
report is to assign manufacturing costs
incurred to BOTH UNITS COMPLETED
AND UNITS STILL IN PROCESS.
39) Process costing methods include
- FIFO
- WEIGHTED AVERAGE
40) Units to account for equals the sum of
the units in BEGINNING INVENTORY
PLUS THE NUMBER OF UNITS STARTED
DURING THE PERIOD.
41) The sum of units that were completed
during the period plus those in ending
inventory are referred to as units
ACCOUNTED FOR.
42) The calculation of weighted average
equivalent units requires units
- In ending work in process inventory
- Completed and transferred out
43) A company had beginning work in
process….

44) A company has 7000 units….
45) Both the physical flow and the cost flow
of goods are affected by the processing
costing method chosen (FALSE)
46) A company had 2000 units of work in
process…..
47) A company has 7000 units….
48) A company had 2000 units of work in
process….
49) A company started the month with
8000 units….
50) The physical flow of units IS ALWAYS
THE SAME UNDER THE FIFO AND
WEIGHTED AVERAGE METHODS.
51) A company had 2000 units…
52) The total cost to manufacture product
units under the FIFO costing method
WILL ALWAYS BE EQUAL TO TOTAL
COST UNDER THE WEIGHTED AVERAGE
METHOD.
53) A company had 2000 units….
54) A company started the month with
8000 units…..

61) A company had 5000 units of work in

process…
55) A company had 2000 units….

56) The total costs incurred to manufacture 62) Direct materials cost in beginning work
products units is dependent upon the in process totaled 100000….
process costing method used. (FALSE)
57) To calculate the FIFO equivalent units,
take the weighted average equivalent
units and SUBTRACT BEGINNING work
in process equivalent units.
58) Direct materials cost in beginning work
in process totaled 100000
63) A company had 5000 units…

59) A company had beginning work in

process of 1000000….

64) A company had 2000 units….

60) A company had 2000 units….

65) A company had 2000 units….
66) Direct materials costs in beginning work
in process totaled 100000…
67) A company had 5000 units….
68) A firm may choose the FIFO method
over the weighted average method
because FIFO PROVIDES IMPROVED
PERFORMANCE MEASUREMENT WHEN
COSTS ARE CHANGING SIGNIFICANTLY
FROM PERIOD TO PERIOD.
69) Transferred in costs are similar to direct
materials introduced at the beginning
of production. (TRUE)
70) The current department is the second in
a sequence of processes. There were
2000 units….
71) The finishing department is the second
processing department for a company.
At the beginning of the month there
were 5000 units…
72) Which of the following will be different
under FIFO costing than under the
weighted average method?
- ENDING WORK IN PROCESS
- BEGINNING WORK IN PROCESS
- COST OF GOODS COMPLETED
73) Transferred in costs are similar to
conversion costs (FALSE)
74) The finishing department is the second
processing department for a company.
At the beginning of the month there
were 5000 units…
75) The current department is the second in
a sequence of processes. There were
2000 units….
76) The current department is the second in
a sequence of processes. There were
2000 units….

77) The finishing department is the second
processing department for a company.
At the beginning of the month there
were 5000 units…
78) When using process costing, production
labor costs are debited to WORK IN
PROCESS INVENTORY.
79) The finishing department is the second
processing department for a company.
At the beginning of the month there
were 5000 units…
80) The current department is the second in
a sequence of processes. There were
2000 units….
81) Activity-based costing is an important
enhancement to process costing when
PRODUCTS AND PROCESSES VARY.
82) If a company has relatively little work in
process inventory, which of the
following would be appropriate?
BACKFLUSH COSTING
83) When using process costing, material
requisitioned are recorded with a credit
to MATERIALS INVENTORY
84) ABC Costing is always an important
enhancement to process costing.
(FALSE)
85) A method that charges current
production costs directly to finished
goods inventory is BACKFLUSH
COSTING.
86) Either normal costing or standard
costing may be used WITH JOB AND
ORDER COSTING.
87) When a company uses a backflush
costing, units in WIP or finished goods
MUST BE PULLED OUT OF COST OF
GOODS SOLD AT YEAR END.
88) A key advantage of using the
STANDARD cost approach for process
costing is that it provides a means for
evaluating performance.
89) Direct materials and direct labors are
added to a product based on actual cost
when using NORMAL COSTING ONLY.
90)