General Questions and Answers about Process Costing System


General Questions and Answers about Process Costing System:

Questions:

  1. What is the primary objective in process costing? See answer
  2. Job order and process costing procedures are used by different types of industries. Discuss the procedure appropriate for each type. See answer
  3. For the following products indicate whether job order costing or process costing procedures would be required.

    (a) Gasoline (b) Sewing machines (c) Chocolate syrup (d) Text books (e) Dacron yarn (f) Cigarettes (g) Space capsules (h) Men’s and women’s suites. See answer

  4. What are the distinguishing characteristics of process costing procedures? See answer
  5. Discuss three product flow formats. See answer
  6. Compare the cost accumulation and summarizing procedures of job order costing and process costing. See answer
  7. Can predetermined overhead rates be used in process costing? See answer
  8. Would one expect to find service departments in a firm using process costing? If so, how would they be be handled? Would cost of production reports be used for service departments? See answer
  9. What is the the purpose of a cost of production report? See answer
  10. What are the various sections of a cost of production report? See answer
  11. Separate cost of production reports are prepared for each producing department. Whey is this method used in preference to one report for the entire firm? See answer
  12. Are month-to-month fluctuations in average unit cost computed in a cost of production report meaningful data in attempting to control costs? See answer
  13. What is the equivalent units of production? explain in terms of its effect on computed unit costs. See answer
  14. In process costing, physical inventories of work in process must be taken at the end of each accounting period. Ordinarily, all department heads are responsible for their own inventories, and the methods they use to determine such data are crude by comparison with procedures used for determining year end physical inventory. It is not unusual for a department head to estimate rather than count inventories is process. Consequently, figures are bound to save errors. Is this good practice or should more accurate methods be used, such as having inventory teams determine inventories? See answer
  15. What is the justification for spreading the cost of lost units over the remaining good units? Should the cost of these units ever be charged to overhead? Will the answer be different if un its are lost (a) in the originating department, (b) at the beginning of a department’s operations, (c) during operations, or (d) at the end of operations? See answer
  16.  (a) What is difference between normal and abnormal loss? (b) Explain how both should be reported for management purposes. See answer
  17. Select the answer which best completes the statement.
    (a) A characteristics which applies to process costing but not to job order costing system: (1) identifiable batches of production; (2) equivalent units of production; (3) averaging process; (4) use of standard costs
    (b) In processing goods through a factory, materials are successively run through producing departments A, B, and C.  For product costing purposes, Department B should treat items received from department A as: (1) materials; (2) work in process; (3) finished goods; (4) equivalent units.
    (c) The type of spoilage that should not effect the recoded cost of inventories is: (1) abnormal spoilage; (2) normal spoilage; (3) seasonal spoilage; (4) standard spoilage.
    (d) Transferred in costs in a cost of production report are most similar to: (1) materials added at the beginning of the process; (2) conversion costs added during the process; (3) costs transferred to the next process; (4) costs included in beginning inventory. See answer

Answers:

  1. The primary objective in process costing is to determine the costs of materials, labor, and factory overhead (FOH) used to process units of production through each department, thereby determining the cost of a finished unit. The ultimate objective is to control costs.
  2. The nature a firm’s manufacturing operations determines whether job order costing or process costing procedures are used. If costs can be associated and accumulated by orders, job order costing will be used; if operations are more or less continuous and identity of orders is lost, process cost is applicable.
  3. (a) Process (b) Process – for stock items (c) Process (d) Job order (e) process (f) process (g) Job order (h) process
  4. The distinguishing characteristics of process cost procedures are:
    (a) A cost of production report is used.
    (b) Production is accumulated and reported by departments.
    (c) Costs are posted to departmental work in process accounts.
    (d) Production in process at the end of a period is restated in terms of completed units.
    (e) Total departmental costs is divided by total departmental production to complete unit costs.
    (f) Costs are transferred from one department to another to arrive at a final unit cost for the completed product.
  5. Three product flow formats are: sequential, parallel, and selective:

    Sequential Product Flow:
    In a sequential product flow, each item manufactured goes through the same set of operation. Materials are placed into production in the Blending Department, and labor and factory overhead are added. When the work is finished in the Blending Department, it moves to the Testing Department. The second process, and any succeeding processes, may add more materials or simply work on the partially completed input from the preceding departments, adding only labor and factory overhead, as in this example. After the product has been processed by the Terminal Department, it is a completed product and becomes a part of finished goods inventory.

    Parallel Flow:
    In a parallel product flow, certain portion of the work are done simultaneously and then brought together in a final process or processes for completion and transfer to finished goods inventory. As in the previous illustration, materials may be added in subsequent processes.

    Selective Product Flow:
    In a selective product flow, the product moves to different departments within the plant, depending upon the desired final product. For example, in meet processing, after the initial butchering process, some of the product goes directly to the Packaging Department and then to finished goods inventory; some goes to the Smoking Department and then to the Packaging Department and finally to finished goods inventory; Some goes to the grinding department, then to the packaging department and lastly to finished goods inventory. Transfer of costs from the Butchering Department involves joint cost allocation, discussed on By-Products and Joint Products Costing page.

  6. materials costs - In job order costing, materials requisitions are used and charges made to order; in process costing, charges are to departments, with infrequent use of materials requisitions.

    Labor Costs - Time tickets are use din job order costing to accumulate costs by jobs; In process costing, labor costs are charged to departments, and therefore detailed time records are not necessary.

    Factory Overhead – Job costing requires the use of predetermined overhead rates for charging overhead to orders; In process costing, actual overhead may be used, and the need to distinguish carefully between direct and indirect materials and labor does not exist. However, predetermined rates are desirable under certain conditions.

    Summarizing Costs – A job order cost sheet is used to accumulate the costs of an order in job order costing system; a cost of production report is used in process costing system. In job order costing, costs are summarized on completion of an order; in process costing, periodic weekly or monthly summaries determine unit costs.

  7. Predetermined overhead rates can and should be used if production is not stable or if factory overhead is significant cost. As stated frequently, the charging of actual overhead to orders or products may result in improper costs Furthermore, the clerical detail connected with actual overhead can become quite cumbersome and cause delay in the execution of efficient and timely costing.
  8. The existence of service departments does not depend on a company’s order or process cost procedures. It depends mainly on the needs of the manufacturing operations. Therefore, in process costing, service departments are also used and handled. In the same way as in job order costing. Of course, no cost of production reports for service departments would be needed, but departmental expense analysis sheets would still be used.
  9. A cost of production report is an effective weekly or monthly summary of materials, labor, and factory overhead consumed by each department or cost center, along with a record of units of output. It provides essential data to those responsible for cost control.
  10. The various sections of a cost of production report are: (a) cost transferred from a preceding department, (b) materials, labor, and factory overhead added by a department, (c) unit costs added by a department, (d) unit and total costs accumulated to the end of operations in a department, (e) the cost of beginning and ending work in process inventories, and (f) cost transferred to a succeeding department or to a finished goods storeroom.
  11. Separate departmental cost of production reports are used to control costs successfully and to accumulate costs more accurately. In many instances total company cost of production reports could not be used because of the various stages of work in process.
  12. As long as fluctuating average unit costs are not caused by fluctuating production volumes, they are meaningful data in the control of costs. In such cases the fluctuations can be traced to improved or decreased efficiencies, which could lead to improve cost control.
  13. The equivalent production figure for a department represents the number of units that could have been completed from materials, labor, and overhead used during a period. It is computed by restating units in process at the end of a period in terms of completed units and adding this figure to the number of units actually completed. This explanation assumes no beginning work in process inventories. A department’s equivalent production is divided into its costs to compute departmental unit costs. Therefore, production figures have a direct effect on computed unit costs.
  14. The need for accuracy in determining work in process is in a large part determined by the materiality of the inventory which, in many instances, is rather small or insignificant. Whenever an inventory figure is needed, the quantitative data will ordinarily come from departmental supervisors. The cost department will apply  cost data. Quantitative data based on actual physical counts are desirable, but estimates based on the capacity of various equipment, such as holding tanks, can be quite acceptable. The validity of estimates can be determined through analysis of reasons for higher or poor estimate of work in process. In most instances, the use of a permanent inventory team is impractical not only because work in process values are usually  not substantial, but because determination of the quantity of work in process can be performed best by departmental personnel familiar with the product and factory operations.
  15. Whenever a loss of units is normal in producing the final units, the good units completed absorb all costs, resulting in a spreading of the cost of lost units over the remaining good units. When abnormal or unusual losses occur, the cost ordinarily assigned to any such lost units might be charged to factory overhead or to a current period expense account. This method results in the assignment of normal (nonloss) costs to remaining good units.

    When units are lost in departments subsequent to the first, an adjustment must be made to the unit cost representing work done in preceding departments. The fewer units must absorb the preceding department’s costs, resulting in an increase in that department’s unit cost.

    Ordinarily, there is no difference in completed unit costs whether units are lost at the beginning or during operations. The cost of lost units is spread over remaining good units including those still in process. However, when units are lost at the end of operations, after completion, or are otherwise identified as not pertaining to work in process units, the cost of these lost units is customarily assigned to finished units only. No lost unit cost is assigned to units still in process.

  16. (a) Normal spoilage arises under normal, efficient operating conditions; i.e., it is inherent in the production process and is uncontrollable in the short run. Abnormal spoilage is not expected under the normal, efficient operating conditions; i.e., it is not inherent in the production process and management usually considers it avoidable or controllable. Thus, by definition, the critical factor in distinguishing between normal and abnormal spoilage is the degree of controllability of units spoiled.  Any spoilage that occurs during a production process  functioning within the expected usual range of performance is considered normal. Any spoilage occurring in amounts in excess of the defined usual range is considered abnormal (controllable).

    (b) Conceptually the cost of normal loss should be included in the cost of good units produced because of its association with normal production. Likewise, the cost of abnormal loss should be accounted for as a loss because of its abnormal unusual nature and should be separately identified as a loss on reports for management.

    For practical reasons, there may be no distinction between normal and abnormal loss in reports for management, since it is sometimes very difficult (or impossible) to do so. The production process may be relatively new or the process may be altered often enough to make such a distinction impractical or too costly. Whenever possible, however should be made and accounted for as discussed in the preceding paragraphs.

  17. (a) 2
    (b) 1
    (c) 1
    (d) 1

You may also be interested in other useful articles from “process costing system” chapter:

  1. Definition and explanation of process costing system
  2. Characteristics  and Procedures of Process Costing System
  3. Costing By Departments
  4. Product Flow
  5. Procedure for Materials, Labor and Factory Overhead Costs in a Process Costing System
  6. Cost of Production Report (CPR)
  7. General Questions and Answers About Process Costing
  8. Exercises and Problems
  9. Process Costing System – Case Study

Other Related Accounting Articles:

Recommended Books !



Or

Download E accounting book in MS-word format for just 20 $ - Click here to Download
This entry was posted in Process Costing System and tagged , , , , , , , , , . Bookmark the permalink.

Comments / Questions

No Comments or Questions yet be the first to comment.



Leave a comment or question

(required)

(required)