Question

I personally dont really have a understanding of process costing . any key points or meaning will be helpful.

• What is your understanding of process costing? What are the Equivalent Units of Production? Distinguish the difference between the use of weighted average and FIFO in computing the product cost using a process costing?

Answer 1

Process Costing is defined as a branch of operation costing, that determines the cost of a product at each stage, i.e. process of production. It is an accounting method which is adopted by the factories or industries where the standardized identical product is produced, as well as it passes through multiple processes for being transformed into the final product.

Features of Process Costing

• The plant has various divisions, and each division is a stage of production.
• The production is carried out continuously, by way of the simultaneous, standardized and sequential process.
• The output of a process is the input of another.
• The production from the last process is transferred to finished stock.
• The final product is homogeneous.
• Both direct and indirect costs are charged to the processes.
• The production may result in joint and by-products.
• Losses like normal and abnormal loss occur at different stages of production which are also taken into consideration while calculating the unit cost.
• The output of one process is transferred to another one at a price that includes the profit of the previous process and not at the cost.
• At the end of the period, if there remains the stock of finished goods, then it is also expressed in equivalent completed units. It can be calculated as:
  Equivalent units of semi-finished goods or WIP = Actual number of units in process × Percentage of work completed

2-

An equivalent unit of production is an expression of the amount of work done by a manufacturer on units of output that are partially completed at the end of an accounting period. Basically the fully completed units and the partially completed units are expressed in terms of fully completed units.

Equivalent units are used in the production cost reports for the producing departments of manufacturers using a process costing system. Cost accounting textbooks are likely to present the cost calculations per equivalent unit of production under two cost flow assumptions: weighted-average and FIFO.

3

According to the Accounting for Management website, the main difference between the FIFO and weighted average method is in the treatment of beginning work-in-process or unfinished goods inventory. The weighted average method includes this inventory in computing process costs, while the FIFO method keeps it separate.