Frequently Asked Question
Process Cost Accounting FAQS
1. What is Process Cost Accounting?
Process costing is a term used in cost accounting to define one process for collecting and assigning manufacturing costs to the units produced. Processing cost is used when nearly identical units are mass produced.
2. What is job order costing?
Job order costing or job costing is a system for conveying manufacturing costs to an individual product or batches of products. Normally, the job order costing system is used only when the products manufactured are sufficiently different from each other. (When products are identical or nearly identical, the process costing system will likely be used.)
3. What is absorption costing?
Absorption costing means that all of the manufacturing costs are absorbed through the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labor, and both variable and fixed manufacturing overhead. As a result, absorption costing is also discussed to as full costing or the full absorption method.
4. Why use normal costing instead of actual costing?
Normal costing uses a prearranged annual overhead rate to assign manufacturing overhead to products. In other words, the overhead rate under normal costing is based on the expected overhead costs for the whole accounting year and the expected production volume for the entire year.
Under actual costing each month’s actual costs and each month’s actual production volume are used to assign overhead costs. Since most companies will experience month to month variations in activity, the actual monthly overhead rates will likely vary from month to month.
5. What is Management accounting?
Management accounting is an internal business function that offers accounting information to department managers, which allows them to be informed, make better business decisions and plan department strategies to increase revenue while decreasing costs.