Process Costing

1
Process Costing

• Chapter 11
• Objectives
• Explain the basic ideas underlying process
  costing and how they differ from job costing
• Compute costs in process costing system
• Demonstrate the weighted average and FIFO
  methods for process costing
• Analyze process costing with multiple
  departments

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Type of Business Using Process Costing

• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________
• __________

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ComparingJob Costing vs Process Costing

• Job costing
• Costs accumulated by the job.
• Work in process has a job cost record for each
  job.
• Many unique jobs.
• Jobs built to customer order.

• Process costing
• Costs accumulated by department or process.
• Work in process has a production report for each
  batch of products.
• Homogenous products.
• Units continuously produced for inventory in
  automated process.

• Same objective _________________________
• Same inventory account ____________________
  _____
• Same OH assignment method ______________________
  ___

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ComparingJob Costing vs Process Costing
Job Costing

Direct Materials
FinishedGoods
Direct Labor
FactoryOverhead
Cost of GoodsSold
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ComparingJob Costing vs Process Costing
Process Costing

FinishedGoods

Cost of GoodsSold
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Characteristics of Process Costing
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Characteristics of Process Costing
Process costing accumulates costs by process or
department and then assigns them to a large
number of nearly identical products.
Similarprocesses
Continuousmass production
Homogeneousproducts
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Equivalent Units

• Equivalent units is a concept expressing
  partially complete units as a smaller number of
  fully complete units.
• We want to find the unit cost of performing a
  certain process in a given period, but
• A manufacturing firm typically has partially
  completed units at the end of an accounting
  period
• Equivalent units ? Physical Units

1
Two one-half filled cups are equivalent to one
full cup.
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Equivalent Units

• During its first month of business, Jones started
  15,000 units and completed 10,000 units, leaving
  5,000 units in process 30 percent complete. How
  many equivalent units of production did Jones
  have for the month?
• a. 10,000
• b. 11,500
• c. 13,500
• d. 15,000
• Now assume that Jones incurred 27,600 in
  production costs. What was Jones cost per
  equivalent unit for the period?
• a. 1.84
• b. 2.40
• c. 2.76
• d. 2.90

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Flow of Costs in Process Costing

• Costs flow through different processes or
  departments
• Use separate WIP Inventory account for each
  department
• DM, DL, OH costs can be entered directly into
  either production departments WIP Inventory
  account, not just the first department
• Transfer of costs from a department ? subsequent
  departments ? FG Inventory ? Cost of goods sold
• Transfer-in-costs (TI) costs of goods completed
  in the prior department and transferred into the
  department during the period

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5 Steps in Process Costing

• Analyze the physical flow of physical units.
• Calculate equivalent units of production for all
  manufacturing cost elements.
• Determine total cost for each manufacturing cost
  element.
• Compute cost per equivalent unit for each
  manufacturing cost element.
• Assign the total manufacturing costs to units
  completed and units of work in process at the end
  of the period.

________ ________
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Process Costing Method

• FIFO Method
• __________________ __________________
  __________________
• Assumes units in beginning work in process
  inventory are completed and transferred first.

• Weighted-Average Method
• __________________ __________________
  __________________ __________________
• Blends together units and costs in beginning
  inventory with units and costs in the current
  period.

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Weighted Average vs FIFOWhich one is better?

• FIFO costing results in a current period cost
  that can be used for performance evaluation.
• If there is no beginning inventory (JIT) or if
  beginning inventory is small, FIFO and
  weighted-average produce the same results.

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Ex 1 Basic Process Costing (No Beginning
Inventory)Adapted from Horngren et al. (2002)
page 587

• XYC Inc. produces portable CD players in large
  quantities. Assume that the company has two
  departments, assembly and testing. The
  manufacturing costs in Assembly Dept during
  February were
• Assume no beginning inventory of WIP. Suppose
  work on 19,000 CD players was begun in the
  assembly department during February, but only
  17,000 CD players were fully completed. All the
  parts had been made or placed in process, but
  only half the labor had been completed for each
  of the CD players still in process
• Compute the costs of units completed and
  transferred to the Testing Dept and the cost of
  ending WIP.

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Ex 2 Process Costing (with beginning inventory
use weighted-Average) Adapted from Horngren et
al. (2002) page 587

• ABC Inc. manufactures electric drills. Material
  is introduced at the beginning of the process in
  the Assembly Department. Conversion costs are
  applied uniformly throughout the process. As the
  process in completed, goods are immediately
  transferred to Finishing Dept.
• Data for the Assembly Dept for the July 20X1

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Process Costing with Multiple Departments

• Multiple departments in a process result in units
  and costs that are transferred from a prior
  department to the current department.
• These transferred-in costs are treated exactly
  like a direct material that is added at the
  beginning of a production process.

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Ex 3 Process Costing with Transferred In Costs