Under what conditions would a company use a process costing system? In what ways
ID: 2450552 • Letter: U
Question
Under what conditions would a company use a process costing system? In what ways are job-order and process costing similar? Assume that a company has two processing departments - Mixing followed by Firing. Explain what costs might be added to the Firing Department's Work in Process account during a period. What is meant by the term 'equivalent units of production' when the weight-average method is used? (provide an example) What is meant by a product's contribution margin ratio? (provide an example) How is this ratio useful in planning business operations? What is meant by the term "break-even point'? What is meant by the term 'margin of safety'? Are selling and administrative expenses treated as product costs or as period costs under variable costing? (Provide an answer for both variable and fixed selling and administrative expenses and include an example of each). Explain how fixed manufacturing overhead costs are shifted from one period to another period under absorption costing. What is a segment of an organization? Give two examples.Explanation / Answer
4-1 A process costing system is appropriate when a homogeneous product is produced on a continuous basis.
4-2 Process costing and job-order costing are similar in the following ways:
1.Both systems have the same basic purposes, which are to assign materials, labor, and overhead cost to products and to provide a mechanism for computing unit costs.
2.Both systems use the same basic accounts.
3.Cost flows through the accounts in basically the same way in both systems.
The costs that might be added to the Firing Department’s Work in Process account would include: (1) cost transferred in from the Mixing Department, (2) materials cost, (3) labor cost, and (4) overhead cost.
Under the weighted-average method, the equivalent units of production consist of units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department’s ending Work in Process inventory.
A product's CM Ratio shows how the contribution margin will be affected by a change in total sales. If the CM ratio is 40%, then for every dollar increase in sales, the contribution margin will increase by 40 cents ($1 Sales X CM Ratio of 40%). Net operating income will also increase by 40 cents, assuming fixed costs are not affected by change in sales. Thus, the CM ratio can be used to determine by what percentage sales need to increase to reach a specific target profit or contribution margin.
Break-Even Point
The level of sales at which profit is zero.
Margin of Safety
The excess of budgeted or actual sales over the break even dollar sales.
7-1 Selling and administrative expenses are treated as period costs under both variable costing and absorption costing.
7-2 Under absorption costing, fixed manufacturing overhead costs are included in product costs, along with direct materials, direct labor, and variable manufacturing overhead. If some of the units are not sold by the end of the period, then they are carried into the next period as inventory. The fixed manufacturing overhead cost attached to the units in ending inventory follow the units into the next period. When the units are finally sold, the fixed manufacturing overhead cost that has been carried over with the units is included as part of that period’s cost of goods sold.
7.3 Any part or activity of an organization about which a manager seeks cost, revenue, or profit data. Ex: departments, operations, sales territories, divisions, and product lines.
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