Final answer:
In the process costing system, costs are carried forward to the next process to ensure all costs are accounted for until the product's completion. It's used where production is homogeneous and continuous. Both fixed and variable costs are considered in this system; however, fixed costs are sunk and do not affect future decisions, while variable costs can change and are significant for economic decisions.
Step-by-step explanation:
In the process costing system, the costs are: a) Carried forward to the next process, so all costs in the production are accounted for. This is because in a process costing system, the cost of a product is accumulated through each stage of production and passes along to the next stage until the product is completed. This system is typically used in industries where products are homogeneous and produced on a continuous basis, such as in chemical manufacturing or food processing.
As we consider firm's costs, especially in the short-run, we understand that fixed costs, which must be incurred before any output is produced, are considered sunk costs and do not influence future production or pricing decisions. Variable costs, on the other hand, vary with the level of output and are relevant for making economic decisions as they reflect the cost of producing additional units and may show diminishing marginal returns.Thus, when thinking about process costing, it's important to understand that total costs, including both variable and fixed components, are allocated to units of production and then carried forward as inventory moves through the processes until it is sold, at which point the costs are recognized as an expense through the cost of goods sold.