Chapter 7Chapter 7

Process Process CostingCosting

7-2

Learning ObjectivesLearning Objectives1. Explain the concept and purpose of equivalent units.2. Assign costs to products using a five-step process.3.Assign costs to products using weighted-

average costing.

4. Prepare and analyze a production cost report.5.Assign costs to products using first-in, first-

out (FIFO) costing.

6.Analyze the accounting choice between FIFO and weighted-average costing.

7. Know when to use process or job costing.

8.Compare and contrast operation costing with job costing and process costing.

7-3Job versus Process Job versus Process CostingCosting

Direct Materials, Direct Labor, and Factory Overhead

Job 121

Job 122

Job 123

Finished Goods

Cost of Goods Sold

Direct Materials, Direct Labor, and Factory Overhead

Process A

Process B

Process C

Finished Goods

Cost of Goods Sold

Job Costing

Process Costing

7-4

Equivalent Units Equivalent Units 1. Explain the concept and purpose of equivalent units.

When manufacturing a product using a continuous process we assume all units have the same costs.

Some units are not completed

Equivalent units

Problem:

Answer:

7-5Equivalent Units Equivalent Units ContinuedContinued

Number of units that could have been completed with the given costs.

Equivalent Units (EqU)

Number of units in process

EqU=x Percentage of completion

=.5

+1

2 x .5 1=

.5

7-6Equivalent Units Equivalent Units ContinuedContinued

Jerilee has a big weekend planned. She works Friday night, plans to go to the football game Saturday, and wants to go to the fair on Sunday. She determines she will have ten hours to study.

She can do all of her Accounting, all of her Spanish, or some Accounting and some Spanish.

Jerilee has 10 hours of Accounting and 10 hours of Spanish.

Problem:

Answer:

7-7Equivalent Units Equivalent Units ContinuedContinuedShe can do her Accounting

Accounting 10

x 100%

= 10

Spanish 0 x 0 = 0

10 One class finished

She can do her Spanish

Accounting 0 x 0 = 0

Spanish 10

x 100%

= 10

10One class finished

7-8Equivalent Units Equivalent Units ContinuedContinuedShe can do half of each

Accounting 10

x 50% = 5

Spanish 10

x 50% = 5

10

Equivalent to one class finished

Or a combination

Accounting 10

x 60% = 6

Spanish 10

x 40% = 4

10

Equivalent to one class finished

7-9Product Costing in a Process Product Costing in a Process IndustryIndustry

2. Assign costs to products using a five-step process.

Five steps to Costing a Product

1. Measure the physical flow of resources.2. Compute the equivalent units of production.3. Identify the product costs for which to account.4. Compute the costs per equivalent unit.5. Assign product cost to batches of work.

7-10Assumptions about Costs in Assumptions about Costs in WIPWIP

Current Period Beginning Balance

Current Period Prior Period

How do we account for beginning balance and current period activities and costs?

We combine beginning balance and current period activities and costs.

Unit costs are a

weighted average

One possibility:

weighted average

7-11

We separate prior period and current period activities and trace the beginning balance and current period costs to the respective units.

Assumptions about Costs in WIP Assumptions about Costs in WIP ContinuedContinued

Prior Period Current Period

Another possibility:

We assume units from last period are completed and transferred out first.

First-in, First-out (FIFO)

Prior Period Current Period then

FIFO

7-12Process Costing: an Process Costing: an ExampleExample

Bart’s Beverages Blending Department

Units Materials Costs

Conversion Costs

WIP October 1 1,000a $1,113 $194

October activity 5,000 22,487 14,056

Total 6,000 $23,600 $14,250

5,500Transferred out

WIP October 31 500b

Total 6,000

a 25% complete with respect to materials and 10% with respect to conversion costs.b 80% complete with respect to materials and 40% with respect to conversion costs.

7-13Process Costing: Weighted Process Costing: Weighted AverageAverage

1. Measure the physical flow of resources.2. Compute the equivalent units of production.3. Identify the product costs for which to account.4. Compute the costs per equivalent unit.5. Assign product cost to batches of work.

Use the five step process.

Weighted Average

L.O. 3 Assign costs to products using weighted-average costing.

7-14Step 1: Measure the physical flow of Step 1: Measure the physical flow of

resources.resources.

BB +Units Started

=Units Transferred Out

EB+

1,000a

+ 5,000

6,000

Total gallons to account for

= 5,500

+ 500b

6,000

Total gallons accounted for

a 25% complete with respect to materials and 10% with respect to conversion costs.b 80% complete with respect to materials and 40% with respect to conversion costs.

7-15

Step 2: Compute the equivalent units of Step 2: Compute the equivalent units of production.production.

5,500Transferred out 5,500 5,500

Work in process, October 31

500 400a 200b

Equivalent units

5,900 5,700

Physical Units Material

sConversion

Equivalent Units

a 500 units x 80%b 500 units x 40%

7-16

Step 3: Identify costs for which to Step 3: Identify costs for which to account.account.

Total Costs

Materials Costs

Conversion Costs

WIP October 1 $1,307 $1,113 $194

October costs 36,543 22,487 14,056

Total $37,850

$23,600 $14,250

7-17

Step 4: Compute the costs per Step 4: Compute the costs per equivalent unit.equivalent unit.

Total Materials

Conversion

$1,307 $1,113 $194WIP, October 1

22,487 14,05636,543October costs

$4.00 $2.50Cost per EqU

$37,850

$23,600 $14,250Total costs (Step 3)

5,900 5,700Total EqU (Step 2)

7-18

Step 5: Assign product cost to batches Step 5: Assign product cost to batches of work.of work.

Total Materials

ConversionTransferred out

WIP, October 31

$4.00 $2.50Cost per EqU (Step 4)

5,500 5,500EqU (Step 2)

$4.00 $2.50Cost per EqU (Step 4)

400 200EqU (Step 2)

$35,750

$22,000 $13,750Costs transferred out

2,100Costs WIP, October 31

$1,600 $500

$37,850

Total cost assigned

$23,600 $14,250

7-19The Production Cost The Production Cost ReportReport L.O. 4 Prepare and analyze a production cost

report.

A report that summarizes production and costs for a period

Used by managers to monitor production and cost flows

Production cost report

Why?

7-20

Month Ending October 31

The Production Cost ReportThe Production Cost ReportBlending Department

Materials

Conversion

PhysicalUnits to be accounted for

Units accounted for

WIP beginning inventory 1,000

Completed and transferred out

5,500 5,500 5,500

WIP ending inventory 500 400a 200b

Total units to account for 6,000 5,900 5,700

Total units to account for 6,000

Units Equivalent Units

a 500 units x 80%

b 500 units x 40%

Units started in this period

5,000

Weighted Average

7-21

The Production Cost Report The Production Cost Report ContinuedContinued

Costs to be accounted for

Costs assigned to units transferred out

35,750 22,000e 13,750f

Costs assigned to WIP ending inventory

2,100 1,600g 500h

Total costs accounted for $37,850 $23,600 $14,250

WIP beginning inventory $1,307 1,113 194

Total costs to be accounted for

$37,850 $23,600 $14,250

Current period costs 22,487 14,05636,543

Materials ConversionTotalCosts to be accounted for

Costs per equivalent unit $4.00c $2.50d

c $23,600/5,900 units d $14,250/5,700 units

e $4.00 x 5,500 units f $2.50 x 5,500 units

g $4.00 x 400 units h $2.50 x 200 units

7-22

Assigning Costs using FIFOAssigning Costs using FIFOL.O. 5 Assign costs to products using first-in, first-out (FIFO) costing.

Use the same five step process.1. Measure the physical flow of resources.2. Compute the equivalent units of production.3. Identify the product costs for which to account.4. Compute the costs per equivalent unit.5. Assign product cost to batches of work.

FIFO

7-23Step 1: Measure the physical flow of Step 1: Measure the physical flow of

resources.resources.

BB +Units Started

=Units Transferred Out

EB+

1,000a

+ 5,000

6,000

Total gallons to account for

= 5,500

+ 500b

6,000

Total gallons accounted for

a 25% complete with respect to materials and 10% with respect to conversion costs.b 80% complete with respect to materials and 40% with respect to conversion costs.

Exactly the same as weighted average.

7-24

Step 2: Compute the equivalent units of Step 2: Compute the equivalent units of production.production.

5,500Transferred out

WIP October 31 500 400c 200d

Equivalent units 5,650 5,600

Physical Units

Materials

Conversion

Equivalent Units

From WIP October 1

1,000 750a 900b

Units started and completed in October 4,500 4,500 4,500

c 500 units x 80% d 500 units x 40%

a 1,000 units x 75%

b 1,000 units x 90%

7-25

Step 3: Identify costs for which to Step 3: Identify costs for which to account.account.

Total Costs

Materials Costs

Conversion Costs

WIP October 1 $1,307 $1,113 $194

October costs 36,543 22,487 14,056

Total $37,850

$23,600 $14,250

Exactly the same as weighted average.

7-26

Step 4: Compute the costs per Step 4: Compute the costs per equivalent unit.equivalent unit.

Total Materials

Conversion

$22,487 $14,056$36,543

October costs

$3.98 $2.51Cost per equivalent unit

5,650 5,600Equivalent units (Step 2)

Note: Include only current period costs and activities.

7-27

Step 5: Assign product cost to batches Step 5: Assign product cost to batches of work.of work.

Total Materials

Conversion

Transferred outUnits in WIP October 1

$1,307 $1,113 $194

Complete beginning WIP

Prior period costs

EU (Step 2) [A] 750 900

$3.98 $2.51Cost per EU (Step 4) [B]

Cost to complete beginning WIP [A x B]

5,244 2,985 2,259

Units started and completed in October

4,500 4,500 4,500

$3.98 $2.51Cost per EU [B]

Cost of units started, completed and transferred out [B x C]

29,205 17,910 11,295

$22,008 $13,748Total cost of units transferred out

$35,756

Number of units [C]

7-28

Step 5: Assign product cost to batches of work Step 5: Assign product cost to batches of work continuedcontinued

Total Materials

Conversion

Transferred out*

WIP, October 31

$3.98 $2.51Cost per EU (Step 4)

400 200EU (Step 2)

2,094Costs WIP, October 31

$1,592 $502

$37,850Total cost assigned

$23,600 $14,250

* From previous page

$22,008* $13,748*$35,756*

7-29

Comparison of FIFO and Weighted Comparison of FIFO and Weighted AverageAverage

L.O. 6 Analyze the accounting choice between FIFO and weighted-average costing.

Separates prior period and current period activities and traces the prior period and current period costs to the respective units.

FIFO

Does not separate prior period and current period activities and costs.

Weighted Average

7-30

Comparison of FIFO and Weighted Average Comparison of FIFO and Weighted Average ContinuedContinued

Bart’s Beverages Blending Department

FIFOWeighted Average

Costs to account for $37,850

Cost of goods transferred out

$35,756

2,094Costs WIP, October 31

$37,850Costs accounted for

$35,750

2,100

$37,850

Cost per EU

Materials

Conversion

$3.98

$2.51

$4.00

$2.50

7-31

L.O. 7 Know when to use process or job costing.

Choosing between Job and Process Choosing between Job and Process CostingCosting

Job Costing

Process Costing

An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.

An accounting system used when identical units are produced through a series of uniform production steps.

Custom Homes

Movies

Services

Cornflakes

Beverages

Paint

7-32

Operation CostingOperation Costing

Job Costing Process Costing

An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.

An accounting system used when identical units are produced through a series of uniform production steps.

Operation Costing

A hybrid costing system often used in manufacturing goods that have some common characteristics plus some individual characteristics.

Automobiles

Computers

Clothing

L.O. 8 Compare and contrast operation costing with job costing and process costing.

7-33

Chapter 7

Finalmente!

Finally!