ch6

What are the five steps followed in preparing a cost of production report?

"1. Analysis of the flow of physical units 2. Calculation of the period's output (equivalent units) 3. Computation of unit cost 4. Valuation of inventories (goods transferred out and ending work in process) 5. Cost reconciliation."

Describe the two major sections of a production report.

The two major sections of a production report are unit information (units to account for and units accounted for) and cost information (costs to account for and costs accounted for).

How is the unit cost calculated under the weighted average method?

The unit cost is calculated by dividing the sum of costs in beginning work in process (including prior-period costs) and current-period costs by the weighted average equivalent output.

What is the purpose of the unit information section in a production report?

The unit information section helps measure the period's output. The unit information section in a production report is like a scale that tells you how much you've produced during a specific time period.

What does the unit information section of a production report include?

The unit information section includes the physical flow and equivalent units schedules.

Describe the differing units of measure in the transferring department and receiving department.

The units of the transferring department may be measured differently than those of the receiving department, requiring conversion to the receiving department's units of measure.

How does the weighted average method distort cost information and hinder performance measurement?

The weighted average method can distort cost information by combining costs from different periods and hinder performance measurement by making it difficult to compare actual costs with budgeted or standard costs.

When to use the weighted average costing method

The weighted average method is an alternative to FIFO and is used when costs of production remain stable from one period to the next.

Why is the weighted average method preferred for simplifying bookkeeping?

The weighted average method simplifies the bookkeeping and computation by considering all units and costs as part of the current period.

How to counter non uniform distribution?

To counter non uniform distributions, equivalent units calculations are done for each input

What are transferred-in costs in a process-costing system?

Transferred-in costs in a process-costing system refer to the manufacturing costs transferred to the next process when units are completed.

Describe the treatment of transferred-in goods in process manufacturing.

Transferred-in goods are partially completed goods received from prior departments and are treated as a separate material category when calculating equivalent units.

What is the concept of equivalent units in WIP inventories?

Ending WIP inventories introduce the concept of equivalent units, which represent the complete units that could have been produced with the total effort expended.

Describe the purpose of calculating equivalent units in the EW process.

Equivalent units are calculated in the EWIP process to accurately reflect the work completed during a period.

How are equivalent units calculated in process costing?

Equivalent units calculations are done for each input category, such as direct materials and conversion costs.

What information is essential for computing equivalent units?

Essential information includes the physical units in beginning and ending work in process, their degree of completion, and the units completed and transferred out.

What are some statistical analyses that can be used to analyze large process datasets in process manufacturing?

Some statistical analyses include data visualization, correlation analyses, significance testing, and artificial neural networks.

Describe the FIFO method in process costing unit price.

The FIFO (First-In, First-Out) method excludes the equivalent units and manufacturing costs in beginning work in process (BWIP) from the current-period unit cost calculation.

How are equivalent units of output defined?

Equivalent units describe how much work has been done on completed and uncompleted physical items, or "could have been completed". To simply calculate equivalent units, you can multiply the number of physical items by the percentage of the work done on them. For two items that are 50% done, you would have one equivalent unit (2 x 50% = 1), in addition to completed units

Define the FIFO costing method.

The FIFO costing method is an approach for assigning costs to partially completed units based on the assumption that the units completed first are sold or transferred out first.

How are equivalent units of output calculated under the weighted average method?

Equivalent units of output are calculated by adding units completed to equivalent units in ending work in process. Equivalent units in beginning work in process are included in the computation.

How are direct materials costs assigned in operation costing?

Direct materials costs are assigned using job-order procedures in operation costing.

Describe a real-world example of the application of big data analytics in process manufacturing.

A biopharmaceutical company achieved a 50 percent increase in yield for one of its vaccines, resulting in annual savings of $5 to $10 million.

Describe a physical flow schedule in operation costing.

A physical flow schedule is a schedule that accounts for all units flowing through a department during a period.

Define process in the context of process costing.

A process is a series of linked activities (operations) working toward a specific objective.

What is a process-costing system used for?

A process-costing system is used in an operational process system.

What information does a production report summarize?

A production report summarizes the manufacturing activity for a department during a period and discloses physical flow, equivalent units, total costs to account for, unit cost computation, and costs assigned to goods transferred out and to units in ending work in process.

What is the purpose of using activity-based costing (ABC) in process costing without WIP inventories?

Activity-based costing (ABC) can be employed to allocate shared overhead costs to processes in settings without WIP inventories, enhancing the accuracy of cost allocation.

Describe the characteristics of batch production processes.

Batch production processes produce batches of similar products that differ mainly in direct materials requirements.

How can big data analytics lead to improvements in process manufacturing? (3)

Big data analytics can lead to improvements by identifying areas for optimization, increasing yield, and generating cost savings.

How is unit cost calculated?

By dividing the cost of the period by the output of the period.

How can consideration of the implications of the FIFO and weighted average methods influence the choice of costing method in practice?

Consideration of these implications can influence the choice of costing method based on the specific needs and priorities of the organization.

How are conversion costs allocated in operation costing?

Conversion costs are allocated using process procedures. (each department allocates)

How are conversion costs assigned in operation costing?

Conversion costs are collected by process, and a predetermined conversion rate is used for cost assignment.

What are conversion costs in operation costing?

Conversion costs are the costs associated with the conversion of raw materials into finished goods.

What is cost reconciliation in operation costing?

Cost reconciliation is the process of determining whether the costs assigned to units transferred out and to units in ending work in process are equal to the costs in beginning work in process plus the manufacturing costs incurred in the current period.

Cost transferred out =

Costs added (dm+dl+oh) +costs transferred in

What is different about weighted average for unit pricing?

Counts prior period work and costs in BWIP as they belong to current period

Journal entry for cost added

Debit: WIP (where work was done) Credit: All expenses, seperated

What are the two categories of completed units in FIFO?

The two categories of completed units in FIFO are those in BWIP and those started and completed during the current period.

Describe the purpose of exploring process costing in settings with no work-in-process (WIP) inventories.

Exploring process costing in settings with no WIP inventories helps in understanding how process costing operates and is relevant to service organizations and JIT manufacturing firms. like studying how a car assembly line works without any partially completed cars, which helps us understand how process costing applies to service organizations and just-in-time (JIT) manufacturing firms.

How does FIFO treat units in BWIP?

FIFO assumes that units in BWIP are completed before any new units are started.

What is different about FIFO?

FIFO disregards BWIP costs in current period unit cost, however uses all of the equivalent units calculated

Describe the journal entry of transferring costs between processes in process costing.

In process costing, costs are collected and transferred from one process to another by debiting the work-in-process (WIP) of the receiving process and crediting the WIP of the transferring process.

Describe the cost reconciliation process in the production report.

It ensures that the costs assigned to goods or services completed and ending work in process are equal to the costs to account for.

Why is understanding process costing without work-in-process inventories relevant?

Many firms operate without work-in-process inventories, making it important to understand how process costing works in such settings.

Describe the purpose of materials requisition forms in operation costing.

Materials requisition forms identify direct materials, quantities, prices, and work order numbers, with direct materials costs posted to the work order sheet.

When might multiple calculations of equivalent units be necessary in process costing with ending WIP inventories?

Multiple calculations of equivalent units may be necessary in process costing with ending WIP inventories when materials are added non-uniformly.

What complicates cost and output definitions in process costing?

Nonuniform application of production costs, where units may not have a uniform distribution of inputs, complicates cost and output definitions in process costing. like trying to measure the ingredients in a cake when each slice has a different amount of flour, sugar, and eggs.

Explain the concept of nonuniform application of productive inputs in process costing.

Nonuniform application of productive inputs refers to the fact that direct materials and conversion costs may not be applied uniformly throughout the production process.

What is operation costing?

Operation costing blends job-order and process-costing procedures for batch production scenarios.

What is the purpose of operation costing?

Operation costing is adaptable to situations where batches of similar products have varying direct materials requirements and uniform conversion activities, streamlining cost tracking.

What does the unit information section of the production report focus on?

Output measurement.

What is process costing?

Process costing a cost accounting method used in industries with large-scale, continuous production of similar products. It involves the accumulation and transfer of costs between processes to track costs accurately.

Why are production reports important in process costing?

Production reports are vital for performance evaluation and cost control in process costing. They summarize manufacturing activity and costs for each process over a specified period.

Give examples of service organizations that can use a process-costing approach.

Service organizations that can use a process-costing approach are like assembly lines where each step in the process is standardized, such as processing tax returns, sorting mail, or changing oil.

Explain why services cannot be stored like physical products.

Services cannot be stored like physical products because they are intangible and cannot be held in inventory. However, some service production may involve work-in-process (WIP) inventories.

Describe the difference between the FIFO and weighted average methods in terms of how output is computed and what costs are used to calculate the period's unit cost.

The FIFO method divides the cost of the period by the output of the period, while the weighted average method combines costs from beginning work in process with current-period costs and treats all units as part of the current period.

How does the FIFO method differ from the weighted average method in terms of unit cost calculations?

The FIFO method excludes prior-period costs and output from unit cost calculations, focusing only on current-period output. In contrast, the weighted average method treats equivalent output and costs in BWIP as if they belong to the current period for unit cost calculations.

What is the challenge in calculating unit costs when there are significant work-in-process inventories?

The challenge is dealing with prior-period costs and work, as well as current-period costs and work, for partially finished units in the beginning work-in-process inventory. like trying to determine the ingredients and cooking time for a dish that's already partially prepared.

Describe the calculation of completion rates for units in ending work-in-process inventory.

The completion rate calculation is not always well-documented and varies in practice.

Describe the cost flows in a process-costing system.

The cost flows in a process-costing system are similar to those in a job-order costing system with two key differences.

What is the cost of the transferred-in materials in process costing?

The cost of the transferred-in materials is the cost of the units transferred in from the prior process.

What is the difference between a unit completed and transferred out during a period and one in ending work-in-process (WIP) inventories?

The difference between a unit completed and transferred out during a period and one in ending WIP inventories is that the ending WIP is incomplete and their costs should differ in process costing with WIP inventories. like the difference between a finished cake that is served and a cake that is still being baked and not yet ready to be served.

What implications can the differences between the FIFO and weighted average methods have on cost information and potential distortions?

The differences can lead to variations in cost information and potential distortions, particularly in more complex production processes.

Describe the equivalent units schedule in process costing.

The equivalent units schedule considers fully completed units as output and partially completed units in ending work in process based on their degree of completion.

Cost Reconciliation

The final section of the production report that compares the costs to account for with the costs accounted for to ensure that they are equal.

What transactions do the journal entries capture during the production process?

The journal entries capture various cost transactions during the production process, such as materials requisitions and the application of overhead and direct labor.

What are the physical and cost flow elements in operation costing? (3)

The physical and cost flow elements in operation costing include work orders, materials requisition forms, and the assignment of conversion costs based on predetermined rates.

What potential errors can occur when using the weighted average method in settings with significant changes in input costs from one period to the next?

The potential for underestimation or overestimation of the current-period costs.

What are the two steps in building a production report in process costing?

The preparation of a physical flow schedule and the calculation of equivalent units.

What is the principle of process costing when computing the unit cost for a period?

The principle of process costing when computing the unit cost for a period is to divide the costs of the period by the output of the period. like dividing the total cost of making a batch of cookies by the number of cookies produced to find the cost per cookie.

What is the process-costing principle?

The process-costing principle states that costs of the period should be divided by the output of the period.

What method is used for the production report and journal entries?

The production report and journal entries are based on the FIFO method.

Describe the purpose of a production report in process costing.

The production report serves as a counterpart to the job-order cost sheet, acting as a subsidiary to the WIP account.

What are the three categories of manufacturing inputs in process manufacturing?

The three categories are transferred-in materials, direct materials added, and conversion costs.

Describe the total cost of goods transferred out (FIFO).

The total cost of goods transferred out is the sum of the costs of the units started and completed in the current period and the cost of the units completed from beginning work in process.

Explain how the total unit cost for units started and completed is calculated in FIFO.

The total unit cost for units started and completed is calculated by dividing total current manufacturing costs by the current-period equivalent output.

Describe the two approaches for dealing with prior-period output and costs in beginning work in process.

The two approaches are the first-in, first-out (FIFO) costing method and the weighted average method.

Describe the role of transferred-in goods in departmental production reports.

Transferred-in goods, received by a prior department, are considered a type of direct material for the receiving department in departmental production reports. However, the output measures of the transferring and receiving departments might not match, requiring the remeasurement of transferred-in goods for accurate cost allocation.

Define transferred-out units in process costing.

Transferred-out units are complete and moving on, thus making it a equivalent unit

Why is understanding the flow of costs crucial in operation costing?

Understanding the flow of costs is crucial for accurate accounting and efficient cost management in operation costing.

Why is understanding the handling of transferred-in materials important in process costing?

Understanding the handling of transferred-in materials is essential in process costing, where different departments collaborate to create a final product.

Why is it important to understand the differences between the FIFO and weighted average methods?

Understanding these differences can help in making informed decisions about cost calculations and choosing the appropriate costing method for an organization.

The cost of EWIP is

Unit cost multiplied by the equivalent units found in EWIP

How are unit costs calculated in a process-costing system?

Unit costs are calculated by dividing the manufacturing costs by the output of a process department during a specific period.

Two parts of physical flow schedule:

Units to account for and units accounted for

What is the purpose of work orders?

Work orders are used to collect production costs for product batches and to initiate production.

Define work orders in operation costing.

Work orders collect production costs for each batch, tracking costs and initiating production.

When are work-in-process (WIP) inventories not present in process costing?

Work-in-process (WIP) inventories are not present in process costing in cases such as service organizations and just-in-time (JIT) manufacturing firms.

cost of units transferred out, as well as EWIP (FIFO)

cost incurred prior period BWIP + cost of completing BWIP this period + cost of units started and completed this period = Total cost of units transferred out + EWIP = total costs assigned (accounted for)

Unit cost is calculated based on

equivalent units, not completed units

Increase in profits by cost reduction formula =

savings of the period / output of the period

What is the purpose of a production report in process? (3)

summarizes the manufacturing activity that takes place in a process department for a given period of time. it also serves as a source document for transferring costs between departments and provides information about physical units processed and associated manufacturing costs.

What could be an objective in process costing?

to determine the cost of producing cement.