Question

Question 1:

(a) Under what circumstances would the number of equivalent units of materials differ from the number of equivalent units of labor and overhead in the same department in the same period? Under what circumstances would they be the same?

(b) Units are usually assumed to be at the same stage of completion for both labor and overhead. What is the reason for this assumption?

(c) Would an automobile plant that makes specialty race cars use job costing or process costing? Would an automobile plant that makes all-terrain vehicles use job costing or process costing? Explain your answer.

Answer 1

Answer A. Circumstances when Equivalent units of Material differ from ewuivalent units of Overhead and Labour.

- When Direct Material and Direct Labour and Overhead are added at different stages in production cycle then Number of equivalent units of material differ from equivalent units of labour and Overhead.

Circumstances When Equivalent units of Material equal the equivalent units of Labour and Overhead.

- When Direct Material, Labour and Overhead are added at the same stage in production cycle then Equivalent units of Material equal the equivalent units of Labour and Overhead.

Answer B. Generally, it is assumed that both Direct labour and Overhead are at the same stage of completion. Reason for this assumption is that Managerial accountants use a single term 'Conversion costs' for direct labour and Overhead.

They add the Labour cost and overhead as conversion cost in cost sheets also.

Conversion cost is that cost which is incurred to convert the Raw Material into Completed Product.

Answer C. An Automobile Plant manufacturing the speciality race cars should use Job costing.

Reason - Job costing is generally used when Production is in multiple jobs/Batches and Products vary from each other or Products are custom made like in construction industry, all buildings are custom made and Process Costing is used when Production is in the continous process and products are identical to each other like in beverages industry, drinks are manufactures in lots and all are identical to each other and uses the same production process

Hence For race cars, Job order costing should be used since Race cars are generally custom made or Speciality. They are different from each other and are not like regular cars. Hence Using job costing would be appropriate for Race cars manufacturing

An Automobile Manufacturing the All terrain Vehicles should use the Job costing system.

Reason - All terrain vehicles are also custom based and differ from one another. Hence applying process costing would not be suitable.