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Chapter 10. Process Costing. C1. Learning Objectives. 1. How does process costing differ from job order product costing? 2. Why are equivalent units of production used in process costing?. C1. Continuing . . . Learning Objectives.

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chapter 10

Chapter 10

Process Costing

slide2

C1

Learning Objectives

1. How does process costing differ from job order product costing?

2. Why are equivalent units of production used in process costing?

slide3

C1

Continuing . . . Learning Objectives

3. How are equivalent units of production computed using the weighted average and FIFO methods of process costing?

4. How are unit costs and inventory values calculated using the weighted average and FIFO methods of process costing?

slide4

C1

Continuing . . . Learning Objectives

5. How is a cost of production report prepared?

6. What use do standard costs have in a process costing system?

slide5

C1

Continuing . . . Learning Objectives

7. What is the effect of multi-department processing on the computation of equivalent units of production?

8. How can quality control minimize spoilage?

9. How are journal entries prepared for a process costing system? (Appendix)

costing systems
Costing Systems

Process

Hybrid

Job

order

differences between job order and process costing
Differences BetweenJob Order and Process Costing
  • Quantity of production for which costs are being accumulated at any one time
  • Cost object to which the costs are assigned
flow of product through system
Flow of Product Through System

Process 1

Materials

Conversion Costs

Process 2

Finished

Product

Process 3

Note: Raw materials can be added in all departments.

assigning costs to production
Assigning Costs to Production
  • Production costs = Material + Labor + Overhead
  • Costs assigned to each process during period
  • Unit costs determined for each cost component and each process
  • Cost of completed unit = Sum of costs per unit for all processes through which product passes
production costs
Production Costs
  • Direct material cost measured from material requisition slips and invoiced prices
  • Direct labor cost determined from employee time sheets and wage rates
  • Overhead costs assigned through use of predetermined rates or actual costs
    • Actual overhead costs can be used if relatively constant each period and production volume is relatively steady
quantity of production
Quantity of Production

Process costing assigns costs to both fully and

partially completed units by converting partially

completed units to equivalent whole units

or

to equivalent units of production.

two process costing methods
Two Process Costing Methods
  • Weighted average (WA) method
    • Computes average cost per unit of production
    • Focuses on units completed during period and units that remain in ending WIP
  • FIFO method
    • Keeps beginning inventory and current period production and costs separated
steps in processing costing
Steps in Processing Costing

1. Calculate the total physical units for which the department is responsible

2. Determine what happened to the units

  • Where are they at the end of the period?
  • Completed and transferred
  • Partially completed and remaining in ending WIP

3. Use either weighted average or FIFO method to determine EUP for each cost component

continuing steps in processing costing
Continuing . . . Steps inProcessing Costing

4. Find the total cost to account for

  • Beginning WIP costs
  • All current costs

5. Compute cost per EUP for each cost component using either WA or FIFO EUP

6. Assign costs

  • Units completed and transferred
  • Units remaining in ending WIP
exhibit 10 5 example
Exhibit 10-5 Example

Material added at start of production

Labor and overhead added evenly

Complete as to

Conversion Costs Units

Beginning inventory 30% 12,000

Cards started during the month 115,500

Cards completed during the month 120,700

Ending inventory 80% 6,800

exhibit 10 5 example17
Exhibit 10-5 Example

Cost of beginning inventory:

Direct material $ 45,000.00

Direct labor and OH 4,678.60 $ 49,678.60

Current period costs:

Direct material $334,950.00

Direct labor and OH 202,191.00 537,141.00

weighted average steps 1 and 2
Weighted Average: Steps 1 and 2

Beginning inventory 12,000

Units started 115,500

Units to account for 127,500

======

Units completed

and transferred out 120,700

Units in ending WIP inventory 6,800

Total units accounted for 127,500

======

wa determining eup for material
WA: Determining EUP for Material

______EUP________

Completed: DM CC

From Beginning WIP 12,000 12,000

Started & Completed 108,700 108,700

Total Completed 120,700

Ending Inventory 6,800 6,800

Accounted for 127,500 127,500

====== ======

wa determining eup for conversion costs
WA:Determining EUP for Conversion Costs

______EUP________

Completed: DM CC

From Beginning WIP 12,000 12,000 12,000

Started & Completed 108,700 108,700 108,700

Total Completed 120,700

Ending Inventory 6,800 6,800 5,440

Accounted for 127,500 127,500 126,140

====== ====== ======

wa determining total costs to account for
WA:DeterminingTotal Costs to Account for

DM CC Total

Beginning WIP $ 45,000.00 $ 4,678.60 $ 49,678.60

Current Period 334,950.00202,191.00537,141.00

Total Cost

to Account

For $379,950.00 $206,869.60 $586,819.60

========= ========= =========

wa calculate cost per eup
WA: Calculate Cost per EUP

DM CC Total

Beginning WIP $ 45,000.00 $ 4,678.60 $ 49,678.60

Current Period 334,950.00202,191.00537,141.00

Total Cost

to Account

For $379,950.00 $206,869.60 $586,819.60

EUP  127,500  126,140

Cost per EUP $2.98 $1.64 $4.62

==== ==== ====

wa assign costs
WA: Assign Costs

Cost of goods transferred

(120,700 x $4.62) $557,634.00

Ending Inventory: (6,800 units)

Material (6,800 x $2.98) $20,264.00

Conversion Costs (5,440 x $1.64) 8,921.60 29,185.60

Total Costs Accounted for $586,819.60

=========

fifo determining eup for material
FIFO:DeterminingEUP for Material

______EUP________

Completed: DM CC

From Beginning WIP 12,000 0

Started & Completed 108,700 108,700

Total Completed 120,700

Ending Inventory 6,800 6,800

Accounted for 127,500 115,500

====== ======

fifo determining eup for conversion costs
FIFO:Determining EUP for Conversion Costs

______EUP________

Completed: DM CC

From Beginning WIP 12,000 0 8,400

Started & Completed 108,700 108,700 108,700

Total Completed 120,700

Ending Inventory 6,800 6,800 5,440

Accounted for 127,500 115,500 122,540

====== ====== ======

fifo calculate cost per eup
FIFO: Calculate Cost per EUP

DM CC Total

Beginning WIP $ 49,678.60

Current Period $334,950.00 $202,191.00 537,141.00

Total Cost

to Account For $586,819.60

=========

EUP  115,500  122,540

Cost per EUP $2.90 $1.65 $4.55

==== ==== ====

fifo assign costs
FIFO: Assign Costs

Cost of goods transferred:

Beginning inventory costs $ 49,678.60

Costs to complete:

Conversion costs (8,400 x $1.65) 13,860.00

Total cost of BI transferred $ 63,538.60

Started and completed (108,700 x $4.55) 494,585.00$558,123.60

Ending Inventory: (6,800 units)

Material (6,800 x $2.90) $19,720.00

Conversion Costs (5,440 x $1.65) 8,976.00 28,696.00

Total Costs Accounted for $586,819.60

=========

process costing with standard costs
Process Costing with Standard Costs

Actual costing requires that a new production cost be computed each production period.

Standard costing eliminates such recomputations, although standards do need to be reviewed at least once a year to keep the amounts current.

comparison of wa and fifo methods
Comparison of WA and FIFO Methods
  • Cost assignment is easier for WA method
  • FIFO method reflects actual physical flow of goods through production
  • When period costs fluctuate, FIFO method gives managers better information with which to control costs and on which to base decisions because it does not combine costs of different periods
  • FIFO method focuses on current period costs – managerial performance is evaluated on basis of costs incurred only in the current period
multiple departments succeeding departments
Multiple Departments:Succeeding Departments

EUP_____

TI DM CC

Beginning Inventory ### 100%

Transferred In ### 100%

To account for ###

Completed ###

Ending Inventory ###100%

Accounted for ###

method of neglect
Method of Neglect

Under the method of neglect:

  • Spoiled units are simply excluded from the equivalent unit production schedule.
  • The total cost of producing both good and spoiled units is assigned solely to the good units, raising the cost of those units.
implementing quality processes
Implementing Quality Processes

Managers who are aware of spoilage costs can make better decisions as to whether to ignore the causes of spoilage or try to correct them.

Impediments to such awareness include using the method of neglect and “burying” the cost of spoilage in predetermined overhead rates rather than accounting for the spoilage separately.

continuing implementing quality processes
Continuing . . .Implementing Quality Processes

Many companies now build quality into their processes, which reduces the need for quality control inspections.

Often, these companies use statistical process control (SPC) to reduce spoilage.

SPC relies on the idea that natural variations occur in a process over time due to random factors and are to be expected.