Process Costing

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Process Costing
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Types of Costing Systems Used to Determine
Product Costs
Job-orderCosting
ProcessCosting

• Many units of a single, homogeneous product
  flow evenly through a continuous production
  process.
• One unit of product is indistinguishable from
  any other unit of product.
• Each unit of product is assigned the same
  average cost.

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Equivalent Units of Production Weighted Average
Method

• The weighted average method . . .
• Makes no distinction between work done in prior
  and current period.
• Blends together units and costs from prior period
  and current period.

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Production Report
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Production Report

• A reconciliation of cost flows for the
  period, including
• Total cost for units completed and
  transferred from the processing department.
• Total cost for partially completed units
  remaining in work in process.

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Production Report Example

• Work in process, May 1 200 units
• Materials 55 complete. 9,600
• Conversion 30 complete. 5,575
• Production started during May 5,000 units
• Production completed during May 4,800 units
• Costs added to production in May
• Materials cost 368,600
• Conversion cost 350,900
• Work in process, May 31 400 units
• Materials 40 complete.
• Conversion 25 complete.

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Production Report Example
Section 1 Quantity Schedule with Equivalent
Units
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Production Report Example
Section 1 Quantity Schedule with Equivalent
Units
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Production Report Example
Section 1 Quantity Schedule with Equivalent
Units
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Production Report Example
Section 2 Compute cost per equivalent unit
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Production Report Example
Section 2 Compute cost per equivalent unit
378,200 4,960 units 76.25
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Production Report Example
Section 2 Compute cost per equivalent unit
356,475 4,900 units 72.75
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Production Report Example
Section 3 Cost Reconciliation
4,800 units _at_ 149.00
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Production Report Example
Section 3 Cost Reconciliation
160 units _at_ 76.25
100 units _at_ 72.75
All costs accounted for
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QuestionsHow would the unit cost measures
change if the department uses Fifo rather than
weighted average costing?How have unit costs
changed from those of the previous month?
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Production Report -FIFO
Section 1 Quantity Schedule with Equivalent
Units
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Production Report -FIFO
Compute current period cost per equivalent unit
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Cost Reconciliation -FIFO
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Fifo differs from weighted average Current
period unit costs are based on current work done,
and current costs charged to the process.
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Fifo differs from weighted average Current
work does not include production from the
previous period, in the beginning inventory.
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Fifo differs from weighted average Transfers
out are costed as two separate lots one from the
beginning inventory, and one from current starts.
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Fifo differs from weighted average The ending
inventory is priced at current period costs (not
as a weighted average of current and prior period
costs).
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Comparisons of Weighted Average and FIFO methods
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End of Process Costing Discussion
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Spoilage in a Process CostingSystem
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Terminology
Spoilage refers to unacceptable units discarded
or sold for reduced prices.
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Normal Spoilage
Normal spoilage is spoilage that is an
inherent result of the particular production
process and arises even under efficient operating
conditions.
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Abnormal Spoilage
Abnormal spoilage is spoilage that should
not arise under efficient operating conditions.
Companies record the units of abnormal spoilage
and keep a separate Loss from Abnormal Spoilage
account.
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Accounting for spoilage in process costing using
the weighted-average method.
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Weighted-Average Spoilage
The following example is for the month
of November and relates to Big Mountain, Inc.
Direct materials are introduced at the
beginning of the production cycle.
Conversion costs are added evenly during the
cycle.
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Weighted-Average Spoilage
Normally the spoiled units are 2 of the output.
Assume that Big Mountain, Inc., had 1,000
units in the beginning work in process
inventory, 100 complete for materials (9,700),
and 60 complete for conversion (10,000).
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Weighted-Average Spoilage
Ending work in process inventory was 4,000
units (100 materials and 20 conversion).
Costs added during the month were 87,500
for materials and 72,000 for conversion.
What are the costs assigned to the units
completed, spoiled, and in ending work in process
inventory?
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Physical Units (Step 1)
Work in process, beginning (November 1) 100
material, 60 conversion costs
1,000 Started during November 35,000
36,000
Good units completed and transferred
out 31,000 Work in process, ending
inventory 100 material 20 conversion costs
4,000 35,000
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Physical Units
What is the number of spoiled units?
36,000 35,000 1,000
What is the normal spoilage?
31,000 2 620
What is the abnormal spoilage?
1,000 620 380
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Compute EquivalentUnits
Materials Conversion Completed
and transferred 31,000 31,000 Normal
spoilage 620 620 Abnormal
spoilage 380 380 Ending
inventory 4,000 800 Equivalent
units 36,000 32,800
100
20
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Compute EquivalentUnit Costs
Materials Conversion
Beginning inventory 9,700 10,000 Current
costs 87,500 72,000 Total 97,200
82,000 Equivalent units 36,000
32,800 Cost per unit 2.70
2.50
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Summarize Total Costs
Work in process beginning inventory Materials
9,700 Conversion
10,000 Total beginning inventory 19,700

• Current costs
• Materials 87,500
• Conversion 72,000
• Costs to account for 179,200

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Assign Total Costs
Good units completed and transferred out (31,000
units) Costs before adding normal
spoilage 31,000 (2.70 2.50)
161,200 Normal spoilage 620 (2.70
2.50) 3,224 Total 164,424
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Assign Total Costs (contd)
Abnormal spoilage 380 (2.70 2.50)
1,976 Work in process, ending (4,000
units) Direct materials (4,000
2.70) 10,800 Conversion (800
2.50) 2,000 Total 12,800
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Cost Reconciliation
Costs of units completed and transferred out
(including normal spoilage) 164,424 Cost of
abnormal spoilage 1,976 Costs in ending
inventory 12,800 Total costs accounted
for 179,200
The 1,976 cost of abnormal spoilage is assigned
to the Loss from Abnormal Spoilage account.