Short Answer Questions 1 Define process costing and deseribe

Short Answer Questions 1. Define process costing and deseribe the types of companies that use process costinyg. 2. How does a process cost system differ from a job costing system? What is meant by the term equivalent units? Of what use is the computation of the numbers of equivalent units of production? 3.

Solution

1)

Process costing is a method of assigning manufacturing costs to units produced. Process costing assumes all units produced are identical and hence apply costs to each unit uniformly.

Thus process costing is used in companies where mass production of identical units occurs.

2)

In job costing system, all the relevant manufacturing costs are assigned to a particular product whereas in process costing costs are assigned to all the similar products produced.

Thus job costing is used in companies where unique products are produced whereas process costing is used where there is mass production of unique products.

3)

Equivalent units are calculated to assign the costs to transferred out and work in process inventory.

It is theoretically the number of completed units that a process has manufactured.

Equivalent units are calculated by multiplying the number of units with their % of completion in terms of particular cost category such as direct materials cost or conversion cost etc.

Then cost per equivalent units is calculated for each category of costs and applied to transfer out and work in process inventory to calculate the costs associated with it.