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Unformatted text preview: 17-1 CHAPTER 17 PROCESS COSTING 17-1 The main difference between process costing and job costing is the extent of averaging used to compute unit costs of products or services. In a job costing system, individual jobs use different quantities of production resources, so it would be incorrect to cost each job at the same average production cost. In contrast, when identical or similar units of products or services are mass-produced, not processed as individual jobs, process costing is used to calculate an average production cost for all units produced. 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, and all conversion costs are added at about the same time, but in a pattern different from direct materials costs. 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. 17-5The 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: 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. 17-6Three 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.17-2 17-8FIFO computations are distinctive because they assign the cost of the previous accounting periods equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process and assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new...
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This note was uploaded on 02/06/2012 for the course FIN 201 taught by Professor Dr.ada during the Summer '08 term at Alfred University.
- Summer '08