Decision Points

The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.

Decision

Guidelines

  1. Under what conditions is a process-costing system used? 

A process-costing system is used to determine cost of a product or service when masses of identical or similar units are produced. Industries using process-costing systems include the food, textiles, and oil-refining industries.

  1. How are average unit costs computed when no inventories are present?

Average unit costs are computed by dividing the total costs in a given accounting period by the total units produced in that period. 

  1. What are the five steps in a process-costing system, and how are equivalent units calculated? 

The five steps in a process-costing system are (a) summarize the flow of physical units of output, (b) compute output in terms of equivalent units, (c) summarize total costs to account for, (d) compute cost per equivalent unit, and (e) assign total costs to units completed and to units in ending work-in-process inventory.

An equivalent unit is a derived measure of output that (a) takes the quantity of each input (factor of production) in units completed or in incomplete units in work in process and (b) converts the quantity of input into the amount of completed output units that could be made with that quantity of input.

  1. What are the weighted-average and first-in, first-out (FIFO) methods of process costing? Under what conditions will they yield different levels of operating income?

The weighted-average method computes cost per equivalent unit by dividing total costs in the work-in-process account by total equivalent units completed to date and assigns this average cost to units completed and to units in ending work-in-process inventory. 

The first-in, first-out (FIFO) method computes cost per equivalent unit based on costs incurred during the current period and equivalent units of work done in the current period. 

Operating income can differ materially between the two methods when (a) direct material or conversion cost per equivalent unit varies significantly from period to period and (b) physical-inventory levels of work in process are large in relation to the total number of units transferred out of the process.

  1. How are the weighted-average and FIFO process- costing methods applied to transferred-in costs?

The weighted-average method computes transferred-in costs per equivalent unit by dividing the total transferred-in costs to date by the total equivalent transferred-in units completed to date and assigns this average cost to units completed and to units in ending work-in-process inventory. The FIFO method computes the transferred-in costs per equivalent unit based on the costs transferred in during the current period and equivalent units of transferred-in costs of work done in the current period. The FIFO method assigns transferred-in costs in the beginning work-in-process inventory to units completed; it assigns costs transferred in during the current period to start and complete new units, and then to units in ending work-in-process inventory.

  1. What is an operation-costing system, and when is it a better approach to product costing? 

Operation costing is a hybrid-costing system that blends characteristics from both job-costing (for direct materials) and processcosting systems (for conversion costs). It is a better approach to product costing when production systems share some features of custom-order manufacturing and other features of mass-production manufacturing.