Principles of Accounting: Chapter Twenty

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Chapter Summary

Chapter 20 introduces process costing. Process costing is suited to situations where goods are produced in a continuous process, such as refining of petrochemicals. The method is compared to job costing, and a detailed illustration is developed.

Process costing begins with the concept of equivalent units, which is the amount of in-process production expressed in terms of finished units. Cost per equivalent unit is measured and becomes the basis for final cost allocation between work in process and finished goods. The book illustrates the weighted-average cost method, although other techniques (FIFO) are possible. A cost of production report provides a composite view of the entire process costing method, and gives rise to a series of journal entries.

Activity-based costing is an alternative technique that looks at organizational activities and identifies the related costs. Those costs are then assigned based on how a particular activity is consumed in production. The chapter outlines a series of steps that can be followed to implement ABC. A case study is used to demonstrate ABC and its impact on the decision process.

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

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Objectives: Chapter Twenty

The following learning objectives for this chapter map to the curriculum design for our online university-level courses. These courses are offered through Utah State University, and result in the awarding of up to 6 hours of highly transferrable college credit. To learn more, check out the classroom link.

The purpose and functioning of a process cost accounting system.

Describe the approach to accumulating product cost using a job costing system.

Describe the fundamental characteristics of a process costing system.

Compare and contrast process costing and job order costing systems.

Describe the steps in applying process costing.

The concept of equivalent units of production.

What is an equivalent unit of production and what are conversion costs?

Why is it important to differentiate between materials and conversion costs?

Calculate equivalent units of production, taking into account beginning work in process, and current period production amounts (using the weighted-average method).

Assigning total cost to completed units and units in process.

Be able to prepare a cost of production report (using the weighted-average method).

Identify the nature and timing of journal entries that are necessitated by process costing.

Understand the overall cost flow from department to department, and how total inventory costs are compiled.

Activity-based costing systems.

Identify the problem associated with traditional costing methods, and describe how activity-based costing mitigates this concern.

Be able to illustrate the fundamental mathematics of activity-based costing versus traditional approaches.

Know ABC concepts relating to cost objects, activity drivers, activities, resource drivers, and resources.

Describe the different "levels" at which activities can occur and tell why this is important for ABC.

Be able to enumerate the steps in setting up an ABC system.

Understand how and why ABC can produce different outcomes than traditional costing approaches; know the importance of ABC to management decision making.

Know that ABC may not be consistent with GAAP in a particular situation; understanding the fundamental difference in the handling of manufacturing versus nonmanufacturing costs.

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