No Slide Title

Process CostingCost AccountingDomingo M. Palatino

Learning Objectives (1 of 2)Contrast process costing and job order costingExplain why equivalent units of production are used in process costingCalculate equivalent units of production using weighted average and FIFO methodsCompute 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 systemExplain why a company would use a hybrid costing systemExplain the alternative methods used to calculate equivalent units of production

Job order costingProcess costing

COLACosting SystemsProcess Costing SystemsLarge quantity of identical units

ColaProcess CostingAveraging technique to assign costs to units produced

Unit Cost =Production Costs Production QuantityProcess CostingThe Numerator - Production CostsCosts by departmentCosts by productDirect material from material requisitionsDirect labor from time sheets and wage ratesOverhead 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 Supervisors SignatureProcess CostingThe Denominator - Units ProducedComplicated by work in processUnits started last period and completed this periodUnits started this period and not completedConvert partially completed units to equivalent whole unitsEquivalent UnitsApproximation of the number of whole units of output that could have been produced from the actual effort expendedIncludes unitsstarted last period and finished this periodstarted and finished this periodstarted this period and not finishedProcess Costing MethodsWeighted average methodcombinebeginning work in process current period productionFIFO methodseparatebeginning work in processcurrent period production

Process Costing MethodsWeighted AverageBeginning WIP 100%Started and finished 100%Ending WIP % completedFIFOBeginning WIP % completedStarted and finished100%Ending WIP% completedTHEDIFFERENCEProcess CostingDirect materialadded at beginning, during, and/or end of processDirect laboradded throughout the processOverheadadded throughout the processbased on direct laborbased on other, multiple cost driversProcess Costing StepsUnits to account forUnits accounted forDetermine equivalent unitsCosts to account forCompute cost per equivalent unitAssign costs to inventoriesUnitsCostsCost of Production ReportName of Departmentfor the period ---Production Data:Units to account forUnits accounted forEUP for each costCost Data:Costs to account forCost per EUPCost Assignment:Transferred OutEnding Work In Process Inventory123456Step 1 - Units to Account ForBeginning WIP 25,000Started 510,000Units to account for535,000Step 2 - Units Accounted ForFinished and transferred523,000Ending WIP 12,000Units accounted for535,000Beginning WIP 25,000Started 510,000Units to account for535,000mustbeequalStep 3 - Compute Equivalent Units DM CCBeginning WIP inventory 25,000 25,000Started and completed498,000498,000Ending WIP inventory 12,000 9,600* Equivalent units 535,000532,600* ending units * % complete12,000 * 80% = 9,600Weighted Average MethodStep 4 - Costs to Account ForDMCC 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 MethodStep 5 - Cost per Equivalent UnitDMCC TotalBeginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500 339,690 773,190To account for $476,150 $356,842 $832,992 Divide by EUP 535,000 532,600Cost per EUP$.89 $.67$1.56Weighted Average MethodStep 6 - Assign Costs to InventoriesTransferred (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 forWeighted Average MethodTransferredOutEndingWIPProcess Costing - FIFOEmphasize current period costs and productionSteps 1 and 2 are the sameStep 3 DM CCBeginning WIP/completed 0 15,000*Started and completed498,000498,000Ending WIP Inventory 12,000 9,600 Equivalent units 510,000522,600* beginning units * % complete in current period25,000 * 60% = 15,000Process Costing - FIFOStep 4 is the sameStep 5DMCC TotalCurrent costs $433,500 $339,690 $773,190

Divide by EUP 510,000 522,600

Cost per EUP$.85 $.65$1.50Step 6 Assign Costs to Inventories - FIFOTransferred 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 forTransferredOutEndingWIPProcess Costing ComparisonWeighted AverageEUP DM 535,000EUP CC 532,600Cost per unit DM $ .89Cost per unit CC .67Total $1.56Transferred Out $815,880Ending WIP 17,112Total $832,992FIFOEUP DM 510,000EUP CC 522,600Cost per unit DM $ .85Cost per unit CC .65Total $1.50Transferred Out $816,552Ending WIP 16,440Total $832,992Process CostingThe purpose of the six steps Assign a value to ending work in processAssign a value to items transferred outPrepare this journal entryFinished GoodsWork in ProcessorSuccessor Processing DepartmentWork in Process

Multidepartment ProcessingProcess 1Process 3Process 2FinishedProductMaterialsWaitWaitTransferred-inCostsTransferred-inCostsProcess Costing with Standard CostsSimplify costing processEliminate periodic cost recomputationsSame as FIFO computationsemphasize current period costs and productionInventories are stated at standard costVariances are calculated for material, labor, and overheadHybrid Costing SystemsCharacteristics of job order and process costing systemsVarious Product Linesdifferent direct material - job order costingsame process - process costingHybrid costing used for furniture, clothing, jamQuestionsWhat 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?