» Process costing system
Process costing - general questions and answers
General Questions and Answers about Process Costing System:
- What is the primary objective in process
- Job order and process costing procedures
are used by different types of industries. Discuss the procedure
appropriate for each type.
- 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
- What are the distinguishing
characteristics of process costing procedures?
- Discuss three product flow formats.
- Compare the cost accumulation and
summarizing procedures of job order costing and process costing.
- Can predetermined overhead rates be used
in process costing?
- 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?
- What is the the purpose of a cost of
- What are the various sections of a cost
of production report?
- 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?
- Are month-to-month fluctuations in
average unit cost computed in a cost of production report meaningful data
in attempting to control costs?
- What is the equivalent units of
production? explain in terms of its effect on computed unit costs.
- 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?
- 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
- (a) What is difference
between normal and abnormal loss? (b) Explain how
both should be reported for management purposes.
- Select the answer which best completes
(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
(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
(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.
- 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.
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.
- (a) Process (b) Process - for stock
items (c) Process (d) Job order (e) process (f) process (g) Job order
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
(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.
- 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.
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.
- 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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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
(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.
- (a) 2
You may also be interested in other useful articles
from "process costing system" chapter:
Definition and explanation of process costing system
Characteristics and Procedures of Process Costing System
- Costing By Departments
- Product Flow
Procedure for Materials, Labor and Factory Overhead Costs in a Process
of Production Report (CPR)
General Questions and Answers About Process Costing
Exercises and Problems
Process Costing System - Case Study
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