Question

Job order manufacturing and process manufacturing are two major costing systems used in manufacturing. The unique feature for process costing system is the concept of equivalent units. Read chapter 16 and answer below questions:

1) What is meant by equivalent units of production, and why are they important when a process cost accounting system is used?

2) Briefly explain the conditions under which job order cost accounting systems and process cost accounting systems are commonly applied.

3) What's the difference between FIFO and weighted-average methods of process costing to assign costs to the product?

Answer 1

1)

The Equivalent Units of Production means the completed portion of units actually manufactured and ready for further process or sale.

In processing cost accounting system, it is very important and necessary to determine the equivalent units to know how many units are actually competed in the manufacturing process and ready to transfer to next process to start the further manufacturing process.

2)

Job order cost accounting system is used specifically for particular jobs where the manufacturing process independent and meant only for particular jobs. For example, when a manufacturing unit receives orders to manufacture specifically particular jobs, such manufacturing units uses Job Order Cost Accounting System to account the cost of such jobs.

Process cost accounting system is used when the output of one process will become the input for subsequent process or the output of one process is used as input for one or more subsequent processes during the manufacturing process, in such cases, the manufacturing units uses the Process Costing Accounting System to account the cost of such processes.

3)

FIFO stands for First In First Out where the goods received first, will be sold first. For example, if there are 20 units in Beginning Inventory, purchase of 25 units and suppose the sale of units are 30 then the 20 units from the beginning inventory are issued and the balance of 10 units (30 - 20) are issued from purchases so there will be a balance of 15 units from the purchases.

Weighted average method is another cost accounting method used while issuing units based on the weights given to the cost price of the units from both beginning inventory and subsequent purchases.

Both of these methods are commonly used along with LIFO and Specific Identification methods.