important

Process Costing

A system for assigning costs to a large number of identical units that typically pass through a series of uniform production steps. Costs are averaged over the units produced such that each unit bears the same unit cost.

facility level cost

Cost required to sustain the organization.

conversion costs

Direct Labor + Manufacturing Overhead

prime costs

Direct Materials + Direct Labor

Batch-level activities

Tasks that are performed each time a batch is processed

traditional system

based on volume; over costs high volume products, under costs low volume products

costs of unit-level activities

be proportional to the number of units produces

use process when a company produces a

continuous flow of units that are indistinguishable from one another

step 1 of 2 prong application

cost to activity pool

process costing accumulates costs by

department

unit costs in process costing are computed by

department

example of compute equivalent units of materials

dept A has 500 units in its ending work in process inventory that are 60% complete with respect to processing in the department these 500 partially complete units are equivalent to 300 fully complete units (500 x 60% = 300) ; 300 equivalent units in the output

product-level activity: testing new products, administering parts inventories, designing products

direct labor-hours, direct labor-hours

compute the number of units transferred to the next processing department

ending inventory of the last department

Cost of ending work in process inventory

equivalent units x cost per equivalent unit (total cost/ equivalent units)

facility level costs include

factory management salaries, insurance, property taxes, building depreciation

Activity based costing system

fixed traditional by lowering high volume costs, raising low volume costs

facility-level activity cost pools

general factory pool

accounts like work in process are maintained for each processing department

in a process costing flow

process costing system is most commonly used in

industries that convert raw materials into uniform products on a continuous basis ex: bricks, soda, paper

cost accumulation in a process cost system

instead of assigning costs to hundreds of different jobs, costs are assigned to only a few processing departments

product level activities include maintaining

inventories of parts for a product

example of product level activities

issuing engineer change notices to modify a product to meet a customer's specifications

unit-level activity cost pools

labor related pool, machine related pool

Batch-level activity cost pools

machine setup pool, production order pool

compute the equivalent units for conversion costs

number of partially complete units x percentage completion

compute the number or equivalent units for material costs

number of partially complete units x percentage completion

formula for equivalent units

number of partially complete units x percentage completion

traditional system effect on high volume products

over costs

product-level activity cost pools

parts administration pool

unit level activity

performed each time a unit is produces

step 2 of 2 prong application

pool to products

batch level activity example

processing purchase orders

activity cost pool equation example

$1,600,000 machine setups/4,000 setups= $400.00 per setup

compute the cost per equivalent units for conversion costs

(cost of beginning work in process inventory + cost added during period)/ equivalent units of production

costs at the batch level depend on

the number of batches processed rather than the number of units produced

equivalent units

the number of complete units that could have obtained from the materials and effort that went into the partially complete units

completed production of the A first department in processing is transferred to

the work in process department in B; then completed units to finished goods

cost per equivalent unit for conversion costs

total conversion cost/ equivalent units

compute the cost per equivalent units for material costs

total cost/ equivalent units

t or f utilities is process costing

true

acronym for 4 activity levels

u better pass fail

traditional system effect on low volume products

under costs

4 activity levels

unit, batch, product, facility

compute the units in ending work in process inventory

units in beginning work in process inventory + units started into production or transferred in = units in ending inventory + units completed and transferred out

compute the total cost transferred to the next department

units transferred out x cost per equivalent unit

ex of processing departments

valley's potato chip factory has 3 processing departments- preparing potatoes, cooking, inspecting and packaging

each department in process costing has a sepearate

work in process account

2 essential features of processing departments

1) activity in the dept. is performed uniformly on all of the units passing through 2) all units produced are identical

2 prong application of allocation of overhead costs (ABC)

1) overhead costs are assigned to activity cost pools 2) costs in the activity cost pools are allocated to products using activity rates and activity measures.

activity cost pool

A "bucket" in which costs are accumulated that relate to a single activity measure in an activity-based costing system.

volume-based costing system

A product-costing system in which costs are assigned to products on the basis of a single activity base related to volume

Unit-level activity: processing units on machines, processing units by hand, consuming factory supplies

activity measures: machine-hours, direct labor-hours, units produced

batch-level activity: processing purchase orders, setting up equipment, processing production orders, and handling material

activity measures: purchase orders processed, production orders processed, number of setups, setup hours, pounds of material handled; number of times material moved

compute the activity rate for a given activity pool

activity rate= estimated overhead cost/total expected activity

process costing assigns costs uniformly to

all identical units

processing department

an organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product

materials, labor, and overhead costs can be added to which processing department?

any