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Chapter 6 Process Costing

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

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Chapter 6 Process Costing

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  1. Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn Chapter 6 Process Costing

  2. 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

  3. 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

  4. 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 Job Order vs. Process Costing

  5. Process Costing Averaging technique to assign costs to units produced Unit Cost =Production Costs Production Quantity

  6. 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

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

  8. 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

  9. 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

  10. 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

  11. 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

  12. Units Costs 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

  13. Step 1 - Units to Account For Beginning WIP 5,000 Started 200,700 Units to account for 205,700

  14. must be equal Step 2 - Units Accounted For Beginning WIP 5,000 Started 200,700 Units to account for 205,700 Finished and transferred 203,000 Ending WIP 2,700 Units accounted for 205,700

  15. 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

  16. Step 4 - Costs to Account For DM Conversion Total Beginning WIP $ 5,943 $ 16,758 $ 22,701 Current costs 321,120660,270 981,390 To account for $327,063 $677,028 $1,004,091 Weighted Average Method

  17. Step 5 - Cost per Equivalent Unit DM Conversion Total Beginning WIP $ 5,943 $ 16,758 $ 22,701 Current costs 321,120660,270 981,390 To account for $327,063 $677,028 $1,004,091 Divide by EUP 205,700 205,160 Cost per EUP $1.59 + $3.30 = $4.89 Weighted Average Method

  18. Step 6 - Assign Costs to Inventories Transferred (203,000 * $4.89) $992,670 Ending WIP Inventory Direct Materials (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 Transferred Out Ending WIP Weighted Average Method

  19. Process Costing - FIFO • Emphasizes current period costs and production • Steps 1 and 2 are the same

  20. 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 2,160Equivalent units 200,700 203,160 * beginning units * % complete in current period 5,000 * 60% = 3,000

  21. Process Costing - FIFO • Step 4 is the same • Step 5 DM Conversion Total Current costs $321,120 $660,270 $981,390 Divide by EUP 200,700 203,160 Cost per EUP $1.60 + $3.25 = $4.85

  22. Transferred Out Step 6 Assign Costs to Inventories - FIFO Transferred Beginning WIP Inventory $22,701 Cost to complete Conversion (3,000 * $3.25) 9,750 $ 32,451 Started and completed (198,000 * $4.85) 960,300 Total cost transferred $992,751 Ending inventory Direct Materials (2,700 * $1.60) $4,320 Conversion Costs (2,7000 * 80% * $3.25) 7,020 11,340 Cost accounted for $1,004,091* *must agree with costs to account for Ending WIP

  23. 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 Comparison

  24. 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)

  25. 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

  26. 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

  27. 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

  28. 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?

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