Question

1. Provide an example that shows process costing divided among different departments. In determining overhead can each department uses its own pre-determined overhead rate? Provide justification if you disagree. If you agree, justify it and provide an example.

2. Provide an example that shows process costing divided among different departments. In determining overhead can each department uses its own pre-determined overhead rate? Provide justification if you disagree. If you agree, justify it and provide an example.

Answer 1

Answer

Yes, each department can use its own pre-determined overhead rate. Every department has its own cost and overhead structure, hence it can use its own pre-determined overhead rate as computed. But it should be taken carefully i.e; the overhead rate computed of the department should be in accordance with all the cost and expenses incurred exclusively for that particular department and if not it should be properly bifurcated among the various other departments to whom those are concerned.

Process costing is a cost accounting system that gathers manufacturing costs separately for each process. Process costing system is used by those manufacturers who produce mass amounts of indistinguishable products in a nonstop stream. It is suitable for those products whose productionis a process connecting diverse departments and costs flow from one department to another. For instance, it is the cost accounting system used by oil refineries, chemical producers, etc. In process costing, costs are accumulated by department for a time period. For instance, for one month on costs of production reports,

Cost to Make One Unit in One Department = Department’s Cost for the Month/No. of Units produced during the Month

For example, the pre-determined overhead rate for the processing department is computed to be $2.3/ unit. Hence while computing the total cost of the processing department this computed rate can be taken into consideration.