Process Costing

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Cost Accounting Foundations and
Evolutions Kinney, Prather, Raiborn
Chapter 6 Process Costing
2
Learning Objectives (1 of 3)

• Contrast process costing and job order costing
• Explain why equivalent units of production are
  used in process costing
• Calculate equivalent units of production, unit
  costs, and inventory values using weighted
  average method of process costing

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Learning Objectives (2 of 3)

• Compute equivalent units of production, unit
  costs, and inventory values using FIFO method of
  process costing
• Explain how standard costs are used in a process
  costing system
• Explain why a company would use a hybrid costing
  system

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Learning Objectives (3 of 3)

• (Appendix 1) Explain the alternative methods used
  to calculate equivalent units of production
• (Appendix 2) Describe how normal and abnormal
  spoilage losses are treated in an EUP schedule

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Job Order vs. Process Costing

• Job Order
• Assign costs to job and then to units within the
  job

• Process Costing
• Using an averaging technique, assign costs
  directly to units produced during the period

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Process Costing

• The Numerator - Production Costs
• Accumulate costs by department
• Accumulate costs by product
• Direct material from material requisitions
• Direct labor from time sheets and wage rates
• Overhead
• Actual
• Predetermined application rates

Unit Cost Production Costs
Production Quantity
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Process Costing

• Production Costs
• Direct material from material requisitions
• Direct labor from time sheets and wage rates
• Overhead
• Actual
• Predetermined application rates

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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

Unit Cost Production Costs
Production Quantity
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Equivalent Units of Production (EUP)

• 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
• Assumes FIFO physical flow through the production
  department

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Two Process Costing Methods

• Weighted Average Method
• combines
• beginning work in process
• current period production
• FIFO Method
• separates
• beginning work in process
• current period production

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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

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Process Costing

• Direct material
• added at the beginning, during, and/or at the end
  of process
• Direct labor
• added throughout the process
• Overhead
• added throughout the process
• based on direct labor
• based on other, multiple cost drivers

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Process Costing Steps

• Units to account for
• Units accounted for
• Determine equivalent units
• Costs to account for
• Compute cost per equivalent unit
• Assign costs to inventories

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

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Process Costing with Standard Costs

• Assigns a normal production cost to the
  equivalent units of output each period
• Allows managers to quickly recognize and
  investigate significant deviations from expected
  production costs
• Allows benchmarking with other firms

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Hybrid Costing Systems

• Characteristics of job order and process costing
  systems
• Various product lines
• different direct material - job order costing
• different direct labor job order costing
• same process - process costing
• Hybrid costing used for furniture, clothing, jam

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Appendix 2 - Spoilage
Normal Spoilage
Abnormal Spoilage
Loss in all ending inventory and transferred out
units on an EUP basis
Continuous Loss
Period expense in EUP
Loss in all units past inspection point in ending
inventory and transferred out on an EUP basis
Discrete Loss
Period expense in EUP
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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?