Process%20Costing

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Cost Accounting Traditions and Innovations Barfiel
d, Raiborn, Kinney
Chapter 6 Process Costing
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Learning Objectives (1 of 2)

• Contrast process costing and job order costing
• Explain why equivalent units of production are
  used in process costing
• Calculate equivalent units of production using
  weighted average and FIFO methods
• Compute unit costs and inventory values using
  weighted average and FIFO methods

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Learning Objectives (2 of 2)

• Explain how standard costs are used in a process
  costing system
• Explain why a company would use a hybrid costing
  system
• (Appendix) Explain the alternative methods used
  to calculate equivalent units of production

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Costing Systems
Job order costing
Process costing
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Process Costing Systems
Large quantity of identical units
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Process Costing

• Averaging technique to assign
• costs to units produced

Unit Cost Production Costs
Production Quantity
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Process Costing

• The Numerator - Production Costs
• Costs by department
• Costs by product
• Direct material from material requisitions
• Direct labor from time sheets and wage rates
• Overhead
• Actual
• Predetermined application rates

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Materials Requisition Form
No.
Date ___________________
Department _______________
Job No. _________________
Issued by _________________
Authorized by ___________
Inspected by _______________
Received by _____________
Item Part Unit of Quantity
Quantity Unit Total No. No. Descrip.
Measure Required Issued Cost Cost
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Employee Time Sheet
Employee Name _______________ Employee No.
_______________ Department _______________
For week ending _______

Start Stop Total Type of
Work Job No. Time Time Day
Hours
Employee Signature
Supervisors Signature
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Process Costing

• The Denominator - Units Produced
• Complicated by work in process
• Units started last period and completed this
  period
• Units started this period and not completed
• Convert partially completed units to equivalent
  whole units

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Equivalent Units

• Approximation of the number of whole units of
  output that could have been produced from the
  actual effort expended
• Includes units
• started last period and finished this period
• started and finished this period
• started this period and not finished

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Process Costing Methods

• Weighted average method
• combine
• beginning work in process
• current period production
• FIFO method
• separate
• beginning work in process
• current period production

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Process Costing Methods

• Weighted Average
• Beginning WIP 100
• Started and finished 100
• Ending WIP completed
• FIFO
• Beginning WIP completed
• Started and finished 100
• Ending WIP completed

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Process Costing

• Direct material
• added at beginning, during, and/or end of process
• Direct labor
• added throughout the process
• Overhead
• added throughout the process
• based on direct labor
• based on other, multiple cost drivers

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Process Costing Steps

• Units to account for
• Units accounted for
• Determine equivalent units
• Costs to account for
• Compute cost per equivalent unit
• Assign costs to inventories

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Cost of Production Report
Name of Department
3
for the period ---
2
1
Production Data Units to account for Units
accounted for EUP for each cost Cost Data Costs
to account for Cost per EUP Cost
Assignment Transferred Out Ending Work In
Process Inventory
4
5
6
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Step 1 - Units to Account For

• Beginning WIP 25,000
• Started 510,000
• Units to account for 535,000

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Step 2 - Units Accounted For
Beginning WIP 25,000 Started
510,000 Units to account for 535,000
Finished and transferred 523,000 Ending WIP
12,000 Units accounted for 535,000
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Step 3 - Compute Equivalent Units
DM CC Beginning WIP inventory
25,000 25,000 Started and completed 498,000 498
,000 Ending WIP inventory 12,000 9,600
Equivalent units 535,000 532,600
ending units complete 12,000 80 9,600
Weighted Average Method
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Step 4 - Costs to Account For
DM CC Total Beginning WIP
42,650 17,152 59,802 Current costs
433,500 339,690 773,190 To account
for 476,150 356,842 832,992
Weighted Average Method
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Step 5 - Cost per Equivalent Unit
DM CC Total Beginning WIP
42,650 17,152 59,802 Current costs
433,500 339,690 773,190 To account
for 476,150 356,842 832,992
Divide by EUP 535,000 532,600 Cost per
EUP .89 .67 1.56
Weighted Average Method
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Step 6 - Assign Costs to Inventories
Transferred (523,000 1.56) 815,880 Ending
WIP Inventory Direct Materials (12,000
.89) 10,680 Conversion (12,000 80
.67) 6,432 17,112 Cost accounted
for 832,992 must agree with costs to
account for
Transferred Out
Ending WIP
Weighted Average Method
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Process Costing - FIFO

• Emphasize current period costs and production
• Steps 1 and 2 are the same
• Step 3

DM CC Beginning WIP/completed 0
15,000 Started and completed 498,000 498,000 End
ing WIP Inventory 12,000 9,600 Equivalent
units 510,000 522,600
beginning units complete in current
period 25,000 60 15,000
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Process Costing - FIFO

• Step 4 is the same
• Step 5

DM CC Total Current costs
433,500 339,690 773,190 Divide by
EUP 510,000 522,600 Cost per
EUP .85 .65 1.50
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Step 6 Assign Costs to Inventories - FIFO
Transferred Beginning WIP Inventory
59,802 Cost to complete Conversion (15,000
.65) 9,750 69,552 Started and completed
(498,000 1.50) 747,000 Ending WIP
Direct Materials (12,000 .85)
10,200 Conversion (12,000 80 .65)
6,420 16,440 Cost accounted
for 832,992 must agree with costs to
account for
Ending WIP
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Process Costing Comparison

• Weighted Average
• EUP DM 535,000
• EUP CC 532,600
• Cost per unit DM .89
• Cost per unit CC .67
• Total 1.56
• Transferred Out 815,880
• Ending WIP 17,112
• Total 832,992

• FIFO
• EUP DM 510,000
• EUP CC 522,600
• Cost per unit DM .85
• Cost per unit CC .65
• Total 1.50
• Transferred Out 816,552
• Ending WIP 16,440
• Total 832,992

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Process Costing

• The purpose of the six steps
• Assign a value to ending work in process
• Assign a value to items transferred out
• Prepare this journal entry
• Finished Goods
• Work in Process
• or
• Successor Processing Department
• Work in Process

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Multidepartment Processing
Wait
Process 1
Materials
Transferred-in Costs
Transferred-in Costs
Process 2
Finished Product
Process 3
Wait
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Process Costing with Standard Costs

• Simplify costing process
• Eliminate periodic cost recomputations
• Same as FIFO computations
• emphasize current period costs and production
• Inventories are stated at standard cost
• Variances are calculated for material, labor, and
  overhead

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Hybrid Costing Systems

• Characteristics of job order and process costing
  systems
• Various Product Lines
• different direct material - job order costing
• same process - process costing
• Hybrid costing used for furniture, clothing, jam

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Questions

• What is an equivalent unit of production?
• What is the difference between the weighted
  average and FIFO methods of calculating
  equivalent units?
• Why would a company use a hybrid costing system?