Chapter 6:
Process Costing
Cost Accounting:
Foundations & Evolutions, 9e
Kinney and Raiborn
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Learning Objectives
Why are equivalent units of production used in process costing?
How are equivalent units of production, unit costs, and inventory values
determined using the weighted average (WA) method of process costing?
How are equivalent units of production, unit costs, and inventory values
determined using the first-in, first-out (FIFO) method of process costing?
How are transferred-in costs and units accounted for in a multidepartment
production setting?
Why would a company use a hybrid costing system?
(Appendix 1) What alternative methods can be used to calculate equivalent
units of production?
(Appendix 2) How are equivalent units of production, unit costs, and
inventory values determined using the standard costing method of process
costing?
(Appendix 3) How are normal and abnormal spoilage losses treated in an
EUP schedule?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Job Order vs. Process Costing
Job Order Process Costing
Small quantities of Large quantities of
distinct products or homogeneous products
service or services
Assign costs to job and Using an averaging
then to units within the technique, assign costs
job directly to units produced
during the period
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing Numerator
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing Denominator
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing
Direct material
added at the beginning, during, and/or at
the end of the process
Direct labor
added throughout the process
Overhead
added throughout the process
based on direct labor
based on other, multiple cost drivers
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing Steps
1 Units to account for
2 Units accounted for Units
3 Determine equivalent units
4 Costs to account for
5 Compute cost per equivalent unit Costs
6 Assign costs to inventories
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing Methods
Weighted Average
Beginning WIP 100%
Started and finished 100%
Ending WIP THE % completed
DIFFERENCE
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Cost of Production Report
Name of Department
for the period --- 3
Production Data: 2
1
Units to account for
Units accounted for EUP for each cost
Cost Data:
Costs to account for 4
Cost per EUP 5
6
Cost Assignment:
Transferred Out
Ending Work In Process Inventory
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
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, etc.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Spoilage
Normal Abnormal
Spoilage Spoilage
Loss in all ending
Continuous inventory and
Loss transferred out units Period expense
on an EUP basis in EUP
Loss in all units past
Discrete inspection point in
ending inventory and Period expense
Loss
transferred out on an in EUP
EUP basis
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
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?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Potential Ethical Issues
Over or underestimating completion %
for ending WIP inventory to distort results
Using outdated standard costs
Ignoring the assignment of significant
direct costs to specific jobs
Treating abnormal spoilage as normal
spoilage
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
