52. Process Costing

Question 1

What is the challenge of using a period of time to track costs under a process costing system and how do organizations handle this challenge?

Answer 1

The challenge of using a period of time is the presence of partially completed units of work. Organizations with process costing systems need to solve this problem before production costs can be divided by output to create cost-per-unit measures needed in accounting and management processes. This challenge is handled by using “equivalent units” of production.

Question 2

What are the three steps that a company can use to compute the cost of goods manufactured when using the FIFO method?

Answer 2

Step 1: Assume the beginning inventory (which represents the prior month’s production costs to get beginning inventory partially completed) is first in production for the month, so include these costs in costs transferred out in the current month (cost of goods manufactured).
Step 2: Account for the production costs to complete the beginning work-in-process inventory.
Step 3: Account for the remaining units of work transferred out to the warehouse with all the work performed in the current month.

Question 3

Describe what constitutes “normal” and “abnormal” spoilage. How is each of these types of spoilage accounted for?

Answer 3

Normal Spoilage: Spoilage represents units of work that are lost in the production process and cannot be transferred forward to the next department. Normal spoilage is an accepted cost of production. The costs of normal spoilage are transferred forward to the finished goods inventory account (or the next work-in-process account).
•Abnormal Spoilage: This spoilage represents an unacceptable loss in the production process. The costs are transferred into a loss account that is immediately recognized on the income statement.

Question 4

Briefly describe the fundamentals of the weighted-average process costing method.

Answer 4

• The weighted-average method saves a few mathematical steps by aggregating costs spent and work done in the previous period on beginning inventory with costs spent and work done in the current period.
• This method doesn’t really represent how costs and work actually flow in most organizations.
• The use of computers gives little reason for the weighted-average method to be used; however, some organizations still use it.

Question 5

Computationally, how does the weighted-average method differ from the FIFO method?

Answer 5

• The basic difference between the weighted average method and the FIFO method is that the weighted-average method assumes that the beginning balance in the work-in-process account is 0% complete at the beginning of the period (regardless of its actual level of completion).
• The weighted-average method also treats all costs actually spent during the previous period on beginning inventory as part of the costs spent in the current period.