Cost Accounting Foundations and Evolutions
Kinney, Prather, Raiborn
Chapter 6 Process Costing
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, unit costs, and inventory values using weighted average method of process costing
Learning Objectives (2 of 2)
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
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
Process Costing
Averaging technique to assign costs to units produced
Unit Cost =
Production Costs Production Quantity
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
Process Costing
Production Costs
Direct material from material requisitions Direct labor from time sheets and wage rates Overhead Actual Predetermined application rates
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
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
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
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
Process Costing Steps
1 2 3 4 5 6 Units to account for Units accounted for Determine equivalent units Costs to account for Compute cost per equivalent unit Assign costs to inventories
Units
Costs
Step 1 - Units to Account For
Beginning WIP Started Units to account for 5,000 200,700 205,700
Step 2 - Units Accounted For
Beginning WIP Started Units to account for
Finished and transferred Ending WIP Units accounted for
5,000 200,700 205,700
must 203,000 be 2,700 equal 205,700
Step 3 - Compute Equivalent Units
DM Conversion Beginning WIP inventory 5,000 5,000 Started and completed 198,000 198,000 Ending WIP inventory 2,700 2,160* Equivalent units 205,700 205,160
* ending units * % complete 2,700 * 80% = 2,160
Weighted Average Method
Step 4 - Costs to Account For
Beginning WIP Current costs To account for
DM Conversion Total $ 5,943 $ 16,758 $ 22,701 321,120 660,270 981,390 $327,063 $677,028 $1,004,091
Weighted Average Method
Step 5 - Cost per Equivalent Unit
Beginning WIP Current costs To account for Divide by EUP DM Conversion Total $ 5,943 $ 16,758 $ 22,701 321,120 660,270 981,390 $327,063 $677,028 $1,004,091 205,700 205,160
Cost per EUP
$1.59 +
$3.30 = $4.89
Weighted Average Method
Step 6 - Assign Costs to Inventories
Transferred (203,000 * $4.89) $992,670 Transferred Ending WIP Inventory Out Ending Direct Materials WIP (2,700 * $1.59) $ 4,293 Conversion Costs (2,700 * 80% * $3.30) 7,128 11,421 Cost accounted for $1,004,091* *must agree with costs to account for Weighted Average Method
Process Costing - FIFO
Emphasizes current period costs and production Steps 1 and 2 are the same
Process Costing - FIFO
Step 3
DM Conversion Beginning WIP/completed 0 3,000* Started and completed 198,000 198,000 Ending WIP Inventory 2,700 2,160 Equivalent units 200,700 203,160
* beginning units * % complete in current period 5,000 * 60% = 3,000
Process Costing - FIFO
Step 4 is the same Step 5
Current costs Divide by EUP Cost per EUP DM Conversion Total $321,120 $660,270 $981,390 200,700 $1.60 + 203,160 $3.25 = $4.85
Transferred Beginning WIP Inventory $22,701 Cost to complete Conversion (3,000 * $3.25) 9,750 Started and completed (198,000 * $4.85) Total cost transferred Transferred Ending inventory Out Direct Materials (2,700 * $1.60) $4,320 Conversion Costs (2,7000 * 80% * $3.25) 7,020 Cost accounted for *must agree with costs to account for
Step 6 Assign Costs to Inventories - FIFO
$ 32,451 960,300 $992,751
Ending WIP
11,340 $1,004,091*
Process Costing Comparison
Weighted Average EUP DM 205,700 EUP Conversion 205,160 Cost per unit DM $ 1.59 Cost per unit Conv. 3.30 Total $4.89 Transferred Out $992,670 Ending WIP 11,421 Total $1,004,091 FIFO EUP DM 200,700 EUP Conversion 203,160 Cost per unit DM $ 1.60 Cost per unit Conv. 3.25 Total $ 4.85 Transferred Out $ 992,751 Ending WIP 11,340 Total $1,004,091
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 Transferred In Cost (successor department) Work in Process (current department)
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
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
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
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?
