Chapter 5, Problem 1QC

(Learning Objective 1) Which of the following is false concerning process costing?

1. a. It accumulates production costs by activities.
2. b. It transfers costs from one processing department to the next.
3. c. It is well suited for a company whose products are indistinguishable from each other.
4. d. It uses multiple WIP accounts, one for each processing department.

To determine

To identify: The false statement about process costing from the given statements.

Answer to Problem 1QC

Option a. It accumulates production cost by activities is the false statement about process costing.

Explanation of Solution

a.

It accumulates production cost by activities: This is the correct option because the production cost of activities is defined as job costing but not as process costing.  The activities fall under particular job or various levels of jobs are measured in terms of cost which is incurred. These all costs are combined and the aggregate amount of cost for jobs is determined. So, it is about job costing and not about process costing.

b.

It transfers cost from one processing department to the next: The transfer cost from one processing department to the next is defined as the process costing. E.g. In manufacturing of a particular product, the product needs to go through Center process, Shell process & packaging process to make available to the consumer. So each department incurs a cost, this is costs called as process costing. Thus, the statement is not false about process costing and the said option is incorrect.

c.

It is well suited for the company whose products are indistinguishable from each other: This option is not correct because this statement defines process costing. The process costing is applied for mass production of identical products.

d.

It uses multiple WIP accounts, one for each processing department: This option is incorrect because this statement also defines process costing. In this type, direct material, direct labor & manufacturing overhead is assigned to each process like Center, Shell & packaging. So the WIP of inventory costing is also taken into account for each department. This costing is calculated on the basis of manufacturing overhead. Therefore, the given statement is correctly associated with the process costing.