Chapter 6

Process Costing

Cost AccountingTraditions and Innovations

Barfield, Raiborn, Kinney

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

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

Job order costing Process costing

COLA

Costing Systems

Process Costing Systems

Large quantity of identical unitsCola

Process Costing

Averaging technique to assign

costs to units produced

Unit Cost = Production Costs Production Quantity

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

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 _____________

Employee Time SheetEmployee Name _______________

Employee No. _______________

Department _______________

For week ending

_______

Start Stop Total Type of Work Job No. Time Time Day Hours

Employee Signature Supervisor’s Signature

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

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

Process Costing Methods

• Weighted average method– combine

• beginning work in process • current period production

• FIFO method– separate

• beginning work in process• current period production

Process Costing MethodsWeighted Average

Beginning WIP 100%

Started and finished 100%

Ending WIP % completed

FIFO

Beginning WIP % completed

Started and finished 100%

Ending WIP % completed

THEDIFFERENCE

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

Process Costing Steps

1 Units to account for

2 Units accounted for

3 Determine equivalent units

4 Costs to account for

5 Compute cost per equivalent unit

6 Assign costs to inventories

Units

Costs

Cost of Production ReportName of Department

for the period ---

Production Data:Units to account forUnits accounted for EUP for each cost

Cost Data:Costs to account forCost per EUP

Cost Assignment:Transferred OutEnding Work In Process Inventory

1 2

3

4

56

Step 1 - Units to Account For

Beginning WIP 25,000

Started 510,000

Units to account for 535,000

Step 2 - Units Accounted For

Finished and transferred 523,000

Ending WIP 12,000

Units accounted for 535,000

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

mustbeequal

Step 3 - Compute Equivalent Units

DM CCBeginning WIP inventory 25,000 25,000Started and completed 498,000 498,000Ending WIP inventory 12,000 9,600* Equivalent units 535,000 532,600

* ending units * % complete12,000 * 80% = 9,600

Weighted Average Method

Step 4 - Costs to Account For

DM CC TotalBeginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500 339,690 773,190To account for $476,150 $356,842 $832,992

Weighted Average Method

Step 5 - Cost per Equivalent Unit

DM CC TotalBeginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500 339,690 773,190To 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

Step 6 - Assign Costs to Inventories

Transferred (523,000 * $1.56) $815,880Ending WIP Inventory Direct Materials (12,000 * $.89) $10,680 Conversion (12,000 * 80% * $.67) 6,432 17,112Cost accounted for $832,992**must agree with costs to account for

Weighted Average Method

TransferredOut Ending

WIP

Process Costing - FIFO• Emphasize current period costs and production• Steps 1 and 2 are the same• Step 3

DM CCBeginning WIP/completed 0 15,000*Started and completed 498,000 498,000Ending WIP Inventory 12,000 9,600 Equivalent units 510,000 522,600

* beginning units * % complete in current period25,000 * 60% = 15,000

Process Costing - FIFO• Step 4 is the same

• Step 5

DM CC TotalCurrent costs $433,500 $339,690 $773,190

Divide by EUP 510,000 522,600

Cost per EUP $.85 $.65 $1.50

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) 747,000Ending WIP Direct Materials (12,000 * $.85) $10,200 Conversion (12,000 * 80% * $.65) 6,420 16,440Cost accounted for $832,992**must agree with costs to account for

TransferredOut Ending

WIP

Process Costing ComparisonWeighted 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

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

Multidepartment Processing

Process 1

Process 3

Process 2

FinishedProduct

MaterialsWait

Wait

Transferred-inCosts

Transferred-inCosts

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

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

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?