Question

1. What are the concepts underlying a process costing system? How might a company identify and group activities into a particular process?

2. What information is contained in a production report? What are equivalent units and how would a company calculate them? How does the production report and equivalent units relate to unit costs?

3. Inventory in each process can be accounted for using first-in first-out (FIFO) or weighted average costing methods. Why would a company choose to use FIFO costing? Why would a company choose to use weighted average costing?

Answer 1

Answers (1)

Process Costing

Process costing is used when there is mass production of similar products, where the costs associated with individual units of output cannot be differentiated from each other. In other words, the cost of each product produced is assumed to be the same as the cost of every other product. Under this concept, costs are accumulated over a fixed period of time, summarized, and then allocated to all of the units produced during that period of time on a consistent basis.

Types of Process Costing

There are three types of process costing, which are:

1. Weight average costs this version assumes that all costs, whether from a preceding period or the current one, are lumped together and assigned to produced units. It is the simplest version to calculate.
2. Standard costs .This version is based on standard costs. Its calculation is similar to weighted average costing, but standard costs are assigned to production units, rather than actual costs; after total costs are accumulated based on standard costs, these totals are compared to actual accumulated costs, and the difference is charged to a variance account.
3. First-in first-out costing (FIFO). FIFO is a more complex calculation that creates layers of costs, one for any units of production that were started in the previous production period but not completed, and another layer for any production that is started in the current period.

Company identify and group activities

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Managers today are enamoured of processes. It’s easy to see why. Many modern organizations are functional and hierarchical; they suffer from isolated departments, poor coordination, and limited lateral communication. All too often, work is fragmented and compartmentalized, and managers find it difficult to get things done. Scholars have faced similar problems in their research, struggling to describe organizational functioning in other than static, highly aggregated terms. For real progress to be made, the “proverbial ‘black box,’ the firm, has to be opened and studied from within