Question

1. What is the purpose of each of the three primary steps in a process costing system. Describe each of the three steps.

2. Why is a process costing system not appropriate for companies that produce items that are distinctly different from one another?

Please do not use other peoples answers that are already on Chegg for these questions. I would like different opinions. Thanks!

Answer 1

1. Process Costing is a management accounting. It is used for homogeneous goods, like – paper, chemical, lumber and food. This method includes following steps while costing products:

• Physical Flow of Unit – process costing is based on a very distinct flow of units through the company’s production system and goods flow through these production systems. The cost is allocated to each product while producing the product. These costs are direct material, labor and manufacturing overhead and these direct cost are assign to specific production of goods.

• Equivalent Units of Production – these units represents the number of units completed at each stage of production. This method is used as a measuring tool as at the end of every stage there are incomplete units, which are measured based on the percentage of completion. In process costing, incomplete equivalent units are termed as work – in – process.

• Cost per equivalent unit – the calculation is work – in – process plus cost incurred during the month divided by the equivalent units. Businesses often split the production cost into direct material costs and conversion costs. Work – in – process represents the incomplete units from the previous month.

2. Process costing is used by those companies where identical units are produced in batches using a consistent process. The three main components of process costing – direct material, direct labor and manufacturing overhead are assigned to departments rather than individual product making it difficult for the businesses manufacturing different units in a batch. Therefore, process costing system is not appropriate for the companies that produces items that are distinctly different from one another.