hort Answer Questions Define process costing and describe t

hort Answer Questions . Define process costing and describe the types of companies that use process costing. 2. How does a process cost system differ from a job costing system? What is meant by the term equivalent unis? Of what use is the computation of the numbers of equivalent units of production? 3. 4. 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? Units are usually assumed to be at the same stage of completion for both labor and overhead. What is the reason for this assumption? 5. 6. 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.

Solution

1. Process costing is a method of cost allocation to products. This costing is used when there is mass production of like / similar products. This is used beause cost is assumed to be same for all these products and it cannot be allocated individually. Industries which generally produce a single item use process costing : Examples of industries are in Petrochemical products.

2. In Job costing system of costing which is used by companies which produces different / unique products. In Job costing, costs are allocated on different products. For eg Product A - $10, Product B - $20 and Product C = $40. In case of process costing total costs incurred are allocated to all the products.

3. When at the end of the period of costing, if all the units are not completed, they are termed as WIP - Work in progress. Some portion of costs have already been incurred for making these units. These units are converted to equivalaent finished products for the purpose of costing. For instance: Company X produced 1000 units of finished product and there were 100 units in WIP which were completed 50%. So in this case equivalent production for WIP units will be 100*50% = 50. So total production will be 1050.

4. In case of a process, where there is difference in % of material cost and manpower cost which has been incurred at the end of the period on WIP, the number of equivalent units of material will differ from the number of equivalent units of labour and overhead. For instance, Company X has the following WIP at the end of the period : Total units : 100 units, Material Cost incurred = 80% and Labour and OH costs incurred = 50%. So equivalent units as per material will be 80 units and as per Labour and OH costs will be 50 units.