Discussion Questions and Answers:
Learning Objectives:
- Find answers of the general questions
about Fist in First Out and Average Method of process costing system.
Questions:
- How does the FIFO method differ from the
average costing method of process costing system?
See answer.
- Why are units completed and on hand in a
processing department included in the department's work in process?
See answer.
- How are equivalent production figure
computed when FIFO costing is used?
See
answer.
- A certain factory transferred out 8,800
completed units during its second period of operation. The period was
begun with 400 units 75% completed and ended with 800 units 50% completed.
Assuming that the FIFO method is used, what was the equivalent production
for the period?
See answer.
- In another factory, the equivalent
production (using the FIFO method) was 7,000 units during a period in
which 500 units, 75% complete, were on hand at the start and 600 units,75%
complete, were on hand at the end of the period. How many units were full
completed?
See answer.
- What are disadvantages of FIFO Costing
method?
See answer.
- Enumerate several of the basic
difficulties frequently encountered in process costing.
- Express on opinion as to the usefulness
of data, derived from process costing for the control of cost.
- Select the answer which best complete
the statement:
|
a |
During 19B, the Novo-Minetto Company had a total manufacturing cost of
$180,000. The business completed 14,000 units of product, of which 4,000
units were one half completed in 19A, and started production on an
additional 6,000 units that were on half completed at the end of 19B.
For 19B, the production cost per unit was:1. $18 2. $16.36
3. $12 4. $9 |
|
b |
When materials are added in a department subsequent to the first
department and additional units result, in affects the unit cost in a
cost of production report by causing: 1. an increase in the preceding
department's unit cost, which necessitates an adjustment of the
transferred-in unit cost; 2. a decrease in the preceding department's
unit cost, which necessitates an adjustment of the transferred-in unit
cost; 3. an increase in the preceding department's unit cost, but does
not necessitates an adjustment of the transferred -in unit cost; 4. a
decrease in the preceding department's unit cost, but does not
necessitates an adjustment of the transferred-in unit cost |
|
c |
Materials are added at the beginning of a process. The beginning work in
process inventory was 30% complete as to conversion cost. Using fifo
method, the total equivalent units for materials for this process during
this period are equal to the: (1) beginning inventory this period (2)
units started this period; (3) units started this period plus the
beginning inventory; (4) units started this period plus 70% of the
beginning inventory. |
Answers:
- The primary
difference between the FIFO
method and the average method of process costing lies in the treatment of
the cost of beginning work in process inventory. In the FIFO method, the
cost of the beginning work in process inventory is kept separate from the
cost of production of the current period.
When determining the FIFO cost of unit completed and transferred to next
department (process) or to finished goods, the cost of the beginning work
in process inventory and the cost necessary to complete the beginning work
in process units are added together. The sum of these two costs is the
cost assigned to the units in the beginning work in process inventory that
are transferred out. Units started and completed during the period are
assigned a cost on the basis of costs incurred during the period for the
equivalent units produced during the period.
In the FIFO method each department is regarded as a separate accounting
unit. Thus, the application of the FIFO method in practice is modified to
the extent that subsequent departments usually combine all transferred-in
costs into one amount, even though they could identify and separately
account for the costs relating preceding department's beginning inventory
ant those relating to the preceding department's units started and
completed during the period.
The average method of process costing may be simpler to use than the FIFO
method, primarily because the beginning work in process inventory is
averaged in as a part of the current production. In the average method,
the beginning work in process inventory costs are combined with current
production costs even though some of the production was begun prior to the
current period. When equivalent units are determined, work done on the
beginning inventory in a preceding period is regarded as if it were done
in the current period. Unit costs are determined by dividing the sum of
the beginning work in process and the cost of current production costs by
the equivalent units produced, including the units in the department's
beginning work in process inventory. The cost of all units transferred out
of a department during a period is the product of the number of units
completed multiplied by the average cost.
-
Units completed and
on hand in a department must be considered as work in process of that
department, because as far as total company inventory is concerned, the
units have not been transferred out of the department and therefore, are
still work in process. They are still the responsibility of the supervisor
of that department.
- When
FIFO costing is used, equivalent production figures are determined by
totaling the number of beginning work in process units restated in terms
of units completed during the current period, units started and finished
during the period, and ending units in process restated in terms of units
completed during the current period.
- Transferred
out ---------------------------------------------8,800
Less beginning inventory all units ------------------------------400
Started and finished this period --------------(8,800 - 400) = 8,400
Add beginning inventory work this period --------(400
× 25%) = 100
Add ending inventory --------------------------(800
× 50%) = 400
Equivalent production -------------------------------------= 8,900
-
Equivalent production----------------------------------7,000
Less:
Ending inventory (800 ×
75%)----------------------450
Beginning inventory (work this period) (800 ×
75%) 200
650
Started and finished this period--------------------------6,350
Add beginning inventory (all units) -----------------------500
Transferred out------------------------------------------6,850
-
This disadvantages of using the FIFO method in processing costing
are those associated with this type of costing in general, and concern the
fact that several costs used at the same time require additional
computations which can lead involved procedures and often inaccurate
calculations.
- The basic difficulties encountered in
process costing include (a) the determination of production quantities and
their stages of completion, (b) materials cost computations frequently
requiring considerable analysis, (c) the calculation lost unit costs
because units are lost due to many factors and all stages of production,
and (d) the fact that many process cost type industries are multiple
product operations which necessitate the allocation of cost to various
products using different bases, some of which are considered quite
unscientific.
- Costs computed in a cost of production
report are useful in determining inventory costs and in computing the cost
of goods sold. However, for cost control purposes, much more information
is required than is reported in the cost of production report. Unit costs
should be compared with standard unit costs or previous data top determine
whether they represent efficient operations. Also, materials, labor, and
factory overhead must be reported by item of material used, type of labor
operations involved, and overhead in a manner meaningful for cost control
purposes. Actual total and unit costs reported in a cost of production
report are necessary, but reports must also be designed to assist control
of costs.
- (a) 3
| Units completed |
14,000 |
| Less beginning inventory
(all units) |
4.000 |
| |
------ |
| Started and finished
during this period |
10,000 |
| Add beginning inventory
(work this period) - (4,000 ×
1/2) |
2,000 |
| Add ending inventory
(work this period) - (6,000 ×
1/2) |
3,000 |
| |
------ |
| Equivalent production |
15,000 |
| |
====== |
| |
|
| $180,000 manufacturing
cost / 15,000 equivalent production = $12 per unit |
|
| |
|
| (b) 2 |
|
| |
|
| (c) 2 |
|
|
