Module 4 - Lists

Which manufacturing company should use process costing?

A gasoline refinery Correct! A gasoline refinery would always use process costing because each gallon of fuel produced would be the same. The correct answer is "a manufacturer of custom furniture" because a maker of custom furniture would make each order specific to what the customer wanted, so the individual costs of making that furniture would be tracked.

You have just been hired as the managerial accountant for the Danebor Company. Danebor company makes several products, and you are trying to understand whether process costing or job order costing would be appropriate for each product. You asked the retiring managerial accountant how she decides which product costing method to use.

A large quantity of identical products are being produced. Correct! Process costing is best suited for companies producing a large quantity of identical products.

What is process costing?

A method of product costing in which costs are accumulated and tracked by process and averaged over all products made during the period Correct! Process costing is a method of product costing whereby costs are accumulated and tracked by process or work centers and averaged over all products manufactured during a production period.

Marcos Company uses process costing to make paint. There are two processing departments—mixing and coloring. In which stage of each process would the conversion costs composed of direct labor and manufacturing overhead be incurred?

After direct materials have been introduced into each process Correct! Direct materials are usually put into production at the beginning of each process and then worked on, so the direct labor and manufacturing overhead costs usually come throughout the process, not at the beginning like direct materials.

Why would a soda company and a gasoline company both primarily use process costing?

Because each unit of product produced by the two companies is identical to other products of the same type Correct! Every can of soda product or gallon of gasoline is identical.

A company is using process costing, which cost step should be followed?

Calculate the average cost using total manufacturing costs for each product Correct! The average cost of each product is calculated by dividing the total manufacturing costs by the number of units produced during that period when using process costing.

What are the sum of direct labor and manufacturing overhead costs referred to in a process costing system?

Conversion costs Correct! Conversion costs are the direct labor and manufacturing overhead costs that are required to convert raw materials into finished goods.

Which cost would most likely be included first in a process center?

Direct materials Correct! No work can be done in a process center until the direct materials are put into the process, so direct materials are usually the first cost included in a processing center.

Which is a measure of the amount of work done during the production period under process costing?

Equivalent units of production Correct! Equivalent units of production is the term used in process costing to measure the actual work performed during the production period.

In a process costing system, production costs are accumulated in the process centers. Where do the costs go when all production work is completed in the process centers?

Finished goods inventory Correct! In a process costing system, after all work is completed in the process centers, the costs are transferred to finished goods inventory.

There are four steps involved in assigning production costs to products when using process costing:

Identify units that went into each process and identify where those units are at the end of the production period. Determine the amount of "work done" (equivalent units of production) during the production period. Note: The amount of "work done" may be different for direct materials and conversion costs. Determine the amount of production costs that went into the process and compute the product costs per unit for the production period. Compute the total and overall average cost of units completed and transferred out (cost of goods manufactured) during the production period. Compute the total cost of units remaining in process (ending work-in-process inventory) at the end of the production period.

What is true about process costing?

It is appropriate when the work performed on each product that goes through various work centers is the same. Correct! Process costing is always appropriate when the work performed on each product that goes through various work centers is the same.

Lesson 9: Process Costing

Learning Objective - Define process costing.

Lesson 11: Flow of Product Costs

Learning Objective - Explain the flow of product costs in process costing.

Lesson 10: When to Use Process Costing

Learning Objective - Identify scenarios in which process costing is appropriate.

Which products would be produced using the process costing method?

Manufacturing bottles of ketchup for sale in grocery stores Correct! Each bottle of ketchup would be the same size, have the same contents, and require the same ingredients. Thus, process costing would be used in this case.

Which is a true statement regarding process costing?

Process costing assigns costs equally to each unit produced during a period. Correct! Process costing assigns costs equally to each unit produced during a period by calculating an average cost per unit and multiplying that average cost by the number of units completed.

Process costing would work best when making which products?

Producing chewing gum Correct! Every piece of gum in a package and every package of each type of gum is basically the same, so process costing would work best for making gum.

Module Introduction: Process Costing — Characteristics

Proficiency Statement - The student identifies the need for process costing as a product costing tool.

remember that for process costing to be appropriate, two general conditions typically exist:

The activities performed in each process center are basically identical for all units. The units produced as a result of passing through the process centers are basically the same.

2 - For process costing to be appropriate, two general conditions must exist:

The activities performed in each process center must be basically identical for all units. The units produced as a result of passing through the process centers must be basically the same.

What is a unique feature of process costing?

The units go through process centers when being produced. Correct! With process costing, every unit goes through at least two process centers where costs are accumulated by period and the average cost of all products is computed.

Michael Yoshida is a new accountant at Dellberg Manufacturing Company. Frank studied process costing in school, but it has been a couple of years since he reviewed the material. Frank has been asked by Dellberg's head accountant (the controller) to do the adjustment necessary to account for the total production costs remaining in work-in-process inventory at the end of the period. Michael is trying to remember the correct treatment. In a process costing system, what happens to the total production costs remaining in work-in-process inventory at the end of the period?

They are carried forward as beginning work-in-process inventory for the next period. Correct! The total production costs remaining in work-in-process inventory at the end of the period are carried forward as beginning work-in-process inventory for the next period and are included in the production cost computations for that subsequent period.

Which description defines total production cost?

Total production costs are equal to direct materials plus conversion costs. Correct! Direct materials plus conversion costs (direct labor and manufacturing overhead) is the total production cost.

Which definition summarizes process costing?

Use of total manufacturing cost and total units of production to assign production costs equally to identical units Correct! Process costing is the use of total manufacturing cost and total units of production to assign production costs equally to identical units.

When is it appropriate to use process costing?

When a company produces a large volume of products using a series of uniform processes Correct! The appropriate situation in which to use process costing is when a company produces large volumes of products or services using a series of uniform processes

Assume a production process using process costing starts with a certain number of units in beginning inventory that are partially completed, a certain number of units are started and completed during the period, and the ending inventory at the end of the period is partially complete.

You would add the work required to complete the units in beginning inventory to the number of units started and completed during the period to the degree of completion of the ending inventory units. Correct! To determine the equivalent units of production in this situation in this period, you would add the work required to complete the units in beginning inventory plus the number of units started and completed during the period plus the degree of completion of the ending inventory units.

Costs are usually assigned to products in large batches, which may include

a month's production.

With process costing, production costs for a period are

accumulated and then averaged over all units manufactured during that period.

Because these companies cannot focus on costing a particular job, they focus on costing the

amount of work done for a particular period of time.

The appropriate scenario for the use of process costing is when a company produces large volumes of a product or service using

at least two processes and each item produced is basically identical

Process costing makes sense when production units are

basically identical

The ending work-in-process inventory becomes the

beginning work-in-process inventory for the next period.

The cost associated with the units completed and transferred out of the production process (to finished goods inventory) is called

cost of goods manufactured.

Hence, conversion costs include all costs of

direct labor and manufacturing overhead

The production costs in process costing include

direct materials, which are usually introduced in the beginning of a manufacturing process, and the conversion costs, which are made up of direct labor and manufacturing overhead.

The cost associated with the unfinished items remaining in production at the end of the period is the

ending work-in-process inventory cost, which is carried forward to the next period.

The cost associated with unfinished units remains assigned to the production process and is labeled

ending work-in-process inventory.

Costs associated with the units for which all production work is completed are transferred to

finished goods inventory

Eventually, average costs per product are assigned to

individual units of a product produced during the month

When using a process costing system, all the production costs for each work or process center for a given period are

lumped together

2 - Some manufacturing companies cannot use job order costing because they cannot

separate and identify each job (product) being produced

The concept of conversion costs is important because, while 100% of the direct materials may be put into production,

some of those materials will not be completed by the end of the period.

There is no attempt to assign manufacturing costs to

specific products

The total manufacturing cost is the sum of

the cost of the beginning work-in-process inventory (carried forward from the previous period) and the costs added to the production process this period

As a result, all units produced during that period are assigned

the same cost

Process costing is a cost and managerial accounting approach that

traces and accumulates direct costs and accrues indirect costs incurred by a period rather than by products during a manufacturing process.

Because direct materials are usually introduced into a process before the direct labor and manufacturing overhead costs are incurred in process costing , direct materials costs are usually

tracked separately from direct labor and manufacturing overhead.

Process costing is typically used by companies producing large volumes of products or services using a series of

uniform processes, departments, or work centers