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Unformatted text preview: 17-1CHAPTER 17PROCESS-COSTING17-1Industries using process costing in their manufacturing area include chemical processing,oil refining, pharmaceutical, plastics, brick and tile manufacturing, semiconductor chips, beverages,and breakfast cereals.17-2Process costing systems separate costs into cost categories according to the timing ofwhen costs are introduced into the process. Often, only two cost classifications, direct materialsand conversion costs, are necessary. Direct materials are frequently added at one point in time,often the start or the end of the process, and all conversion costs are added at about the same time,but in a pattern different from direct materials costs.17-3Equivalent units is a derived amount of output units that takes the quantity of each input(factor of production) in units completed or in work in process, and converts it into the amount ofcompleted output units that could be made with that quantity of input. Each equivalent unit iscomprised of the physical quantities of direct materials and conversion costs inputs necessary toproduce output of one fully completed unit. Equivalent unit measures are necessary since allphysical units are not completed to the same extent.17-4 The accuracy of the estimates of completion depend on the care and skill of the estimatorand the nature of the process. Aircraft blades may differ substantially in the finishing necessary toobtain a final product. The amount of work may not always be easy to ascertain in advance.17-5The 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:Compute equivalent unit costs.Step 4:Summarize total costs to account for.Step 5:Assign total costs to units completed and to units in ending work in process.17-6Three inventory methods associated with process costing are:Weighted average.First-in, first-out.Standard costing.17-7The weighted-average process-costing method assigns the average equivalent unit cost ofall work done to date (regardless of when it was done) to equivalent units completed andtransferred out, and to equivalent units in ending work-in-process inventory.17-8FIFO computations are distinctive because they assign the cost of the earliest equivalentunits available (starting with equivalent units in beginning work-in-process inventory) to unitscompleted and transferred out, and the cost of the most recent equivalent units worked on duringthe period to ending work-in-process inventory. In contrast, the weighted average method costsunits completed and transferred out and in ending work in process at the same average cost.17-217-9FIFO should be called a modified or departmental FIFO method because the goodstransferred in during a given period usually bear a single average unit cost as a matter ofconvenience....
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- Spring '10
- Cost Accounting