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Impacts Cost Accounting "- Chapter 17
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Impacts Cost Accounting "- Chapter 17
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CHAPTER 17PROCESS COSTING
17-1 Industries using process costing in their manufacturing area include chemical processing,
oil refining, pharmaceuticals, plastics, brick and tile manufacturing, semiconductor chips,
beverages, and breakfast cereals.
17-2 Process costing systems separate costs into cost categories according to the timing of
when costs are introduced into the process. Often, only two cost classifications, direct materials
and conversion costs, are necessary. Direct materials are frequently added at one point in time,
often the start or the end of the process. All conversion costs are added at about the same time,
but in a pattern different from direct materials costs. Conversion costs are often added
throughout the process, which can of any length of time, lasting from seconds to several months.
17-3 Equivalent units is a derived amount of output units that takes the quantity of each input
(factor of production) in units completed or in incomplete units in work in process, and converts
the quantity of input into the amount of completed output units that could be made with that
quantity of input. Each equivalent unit is comprised of the physical quantities of direct materials
or conversion costs inputs necessary to produce output of one fully completed unit. Equivalent
unit measures are necessary since all physical units are not completed to the same extent at the
same time.
17-4 The accuracy of the estimates of completion depends on the care and skill of the
estimator and the nature of the process. Semiconductor chips may differ substantially in the
finishing necessary to obtain a final product. The amount of work necessary to finish a product
may not always be easy to ascertain in advance.
17-5 The five key steps in process costing follow:
Step 1: Summarize the flow of physical units of output.
Step 2: Compute output in terms of equivalent units.
Step 3: Summarize total costs to account for.
Step 4: Compute cost per equivalent unit.
Step 5: Assign total costs to units completed and to units in ending work in process.
17-6 Three inventory methods associated with process costing are:
• Weighted average.
• First-in, first-out.
• Standard costing.
17-7 The weighted-average process-costing method calculates the equivalent-unit cost of all
the work done to date (regardless of the accounting period in which it was done), assigns this
cost to equivalent units completed and transferred out of the process, and to equivalent units in
ending work-in-process inventory.
17-1
, 17-8 FIFO computations are distinctive because they assign the cost of the previous
accounting period’s equivalent units in beginning work-in-process inventory to the first units
completed and transferred out of the process and assign the cost of equivalent units worked on
during the current period first to complete beginning inventory, next to start and complete new
units, and finally to units in ending work-in-process inventory. In contrast, the weighted-average
method costs units completed and transferred out and in ending work in process at the same
average cost.
17-9 FIFO should be called a modified or departmental FIFO method because the goods
transferred in during a given period usually bear a single average unit cost (rather than a distinct
FIFO cost for each unit transferred in) as a matter of convenience.
17-10 A major advantage of FIFO is that managers can judge the performance in the current
period independently from the performance in the preceding period.
17-11 The journal entries in process costing are basically similar to those made in job-costing
systems. The main difference is that, in process costing, there is often more than one work-in-
process account––one for each process.
17-12 Standard-cost procedures are particularly appropriate to process-costing systems where
there are various combinations of materials and operations used to make a wide variety of similar
products as in the textiles, paints, and ceramics industries. Standard-cost procedures also avoid
the intricacies involved in detailed tracking with weighted-average or FIFO methods when there
are frequent price variations over time.
17-13 There are two reasons why the accountant should distinguish between transferred-in
costs and additional direct materials costs for a particular department:
(a) All direct materials may not be added at the beginning of the department process.
(b) The control methods and responsibilities may be different for transferred-in items and
materials added in the department.
17-14 No. Transferred-in costs or previous department costs are costs incurred in a previous
department that have been charged to a subsequent department. These costs may be costs
incurred in that previous department during this accounting period or a preceding accounting
period.
17-15 Materials are only one cost item. Other items (often included in a conversion costs pool)
include labor, energy, and maintenance. If the costs of these items vary over time, this variability
can cause a difference in cost of goods sold and inventory amounts when the weighted-average
or FIFO methods are used.
A second factor is the amount of inventory on hand at the beginning or end of an
accounting period. The smaller the amount of production held in beginning or ending inventory
relative to the total number of units transferred out, the smaller the effect on operating income,
cost of goods sold, or inventory amounts from the use of weighted-average or FIFO methods.
17-2
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