Process Costing

Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

1. Chapter 6
Process Costing
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. 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

3. 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

4. Job order costing Process costing
COLA
Costing Systems

5. Process Costing Systems
Large quantity of
identical units
Cola

6. Process Costing
Averaging technique to assign
costs to units produced
Unit Cost = Production Costs
Production Quantity

7. 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

8. Materials Requisition Form
Date ___________________ No. ###
Job No. _________________
Authorized by ___________
Department _______________
Issued by _________________
Inspected by _______________
Item Part Unit of Quantity Quantity Unit Total
No. No. Descrip. Measure Required Issued Cost Cost
Received by _____________

9. 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 Supervisor’s Signature

10. 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

11. 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

12. Process Costing Methods
•Weighted average method
–combine
•beginning work in process
•current period production
•FIFO method
–separate
•beginning work in process
•current period production

13. 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
THE
DIFFERENCE

14. 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

15. Process Costing Steps
1Units to account for
2Units accounted for
3Determine equivalent units
4Costs to account for
5Compute cost per equivalent unit
6Assign costs to inventories
Units
Costs

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

17. Step 1 -Units to Account For
Beginning WIP 25,000
Started 510,000
Units to account for 535,000

18. Step 2 -Units Accounted For
Finished and transferred523,000
Ending WIP 12,000
Units accounted for 535,000
Beginning WIP 25,000
Started 510,000
Units to account for 535,000
must
be
equal

19. Step 3 -Compute Equivalent Units
DM CC
Beginning WIP inventory25,00025,000
Started and completed498,000498,000
Ending WIP inventory12,0009,600*
Equivalent units 535,000532,600
*ending units * % complete
12,000 * 80% = 9,600
Weighted Average Method

20. Step 4 -Costs to Account For
DM CC Total
Beginning WIP $ 42,650 $ 17,152 $ 59,802
Current costs433,500339,690773,190
To account for$476,150 $356,842 $832,992
Weighted Average Method

21. Step 5 -Cost per Equivalent Unit
DM CC Total
Beginning WIP $ 42,650 $ 17,152 $ 59,802
Current costs433,500339,690773,190
To account for$476,150 $356,842 $832,992
Divide by EUP535,000 532,600
Cost per EUP $.89 $.67 $1.56
Weighted Average Method

22. 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
Weighted Average Method
Transferred
Out Ending
WIP

23. Process Costing -FIFO
•Emphasize current period costs and production
•Steps 1 and 2 are the same
•Step 3
DM CC
Beginning WIP/completed0 15,000*
Started and completed498,000498,000
Ending WIP Inventory12,0009,600
Equivalent units 510,000522,600
*beginning units * % complete in current period
25,000 * 60% = 15,000

24. Process Costing -FIFO
•Step 4 is the same
•Step 5
DM CC Total
Current costs$433,500 $339,690 $773,190
Divide by EUP510,000 522,600
Cost per EUP $.85 $.65 $1.50

25. 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
Transferred
Out
Ending
WIP

26. 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

27. 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

28. Multidepartment Processing
Process 1
Process 3
Process 2
Finished
Product
Materials
Wait
Wait
Transferred-in
Costs
Transferred-in
Costs

29. 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

30. 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

31. 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?