Management Accounting
Chapter 4:
process-costing system: in a process-costing system, the unit cost of a product or service is
obtained by assigning total costs to many identical or similar units
โ The principal difference between process costing and job costing is the extent of averaging used
to calculate unit costs of products or services
โ separate costs into cost categories according to the timing of when costs are introduced into the
process
Conversion costs: all manufacturing costs other than direct material costs
Case 1: no opening stock, no work in progress
โ This case shows that in a process-costing system, unit costs can be averaged by dividing total
costs in a given accounting period by total units produced in that period. Because each unit is
identical, we assume all units receive the same amount of direct materials and conversion costs.
Case 2: no opening stock, work in progress
โ the assembled units are fully processed with respect to direct materials
โ 5 Steps to calculate costs:
1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. Compute equivalent unit costs
4. Summarize total costs to account for
5. Assign total costs to units completed and to units in closing work in progress
Equivalent units: is a derived amount of output units that takes the quantity of each input (factor of
production) in units completed or in work in progress, and converts it into the amount of completed
output units that could be made with that quantity of input
Stock cost-flow method:
โ weighted-average process-costing method: calculates the equivalent-unit cost of the work
done to date (regardless of the period in which it was done) and assigns this cost to equivalent units
completed and transferred out of the process and to the equivalent units in closing work-in-progress
stock
โ First-in, first-out (FIFO) process-costing method: assigns the cost of the previous period's
equivalent units in opening work-in-progress stock ti the first units completed and transferred out of
the process and assigns the cost of equivalent units worked on during the current period first to
complete beginning stock, then to start and complete new units and finally to units in closing work-
in-progress stock โ distinctive feature: work done on opening stock before the current period is
kept separate from work done in the current period
Major advantage of FIFO:
it provides managers with information about changes in the costs per unit from one period to the
next. Managers can use this information to evaluate their performance in the current period
compared with a benchmark or compared with their performance in the previous period
Major advantage of weighted-average:
its computational simplicity and its reporting of a more representative average unit cost when input
prices fluctuate markedly from month to month
Under the standard-costing method, teams of design and process engineers, operations personnel
and management accountants determine separate standard or equivalent-unit costs on the basis of
