Chapter 8: Process Costing
Compute the equivalent units of
Job Costing
 each job is considered unique and can
(but might not) follow the same path
through production as other jobs
Process costing
 assumes that all units are homogenous
and follow the same path through the
production processes
DETERMINING EQUIVALENT UNITS
Equivalent Unit
 number of complete physical units to
which units in inventories are equal in
terms of work done to date
 physical units x estimated percentage
that an “average” unit in inventory is
“complete” with respect to the individual
resource
 65% = (30%+75%+90%) / 3
USING PRODUCT COSTING IN A PROCESS
INDUSTRY
5 Steps
1. Measure the physical flow of resources.
2.
production.
3. Identify the costs to assign to products.
4. Compute the costs per equivalent unit.
5. Assign product cost to batches of work.
STEP 1: MEASURE THE PHYSICAL FLOW
OF RESOURCES
WIP, beg + Unit started = Unit TO + WIP, end
20 k + 92k = 96k + 16k
STEP 2: COMPUTE THE EQUIVALENT
UNITS OF PRODUCTION
(4,800 = 16,000 x 30%)
STEP 3: IDENTIFY THE PRODUCT COSTS
FOR WHICH TO ACCOUNT
Weighted-average process costing
 inventory method that for product
costing purposes combines costs and
equivalent units of a period with the
costs and the equivalent units in
beginning inventory
  combining the work and costs, uses
average cost of the current work and the
in inventory
 the average is weighted by the number
of EU in each batch
 combines the work and the costs for the
two periods (last and current one)
REPORTING THIS INFORMATION TO
MANAGERS: THE PRODUCTION COST
First-in, First-out (FIFO) process costing
REPORT
 separating the costs of the current work
and the work in beginning inventory
Production cost report
 assumes that all beginning WIP units
 report that summarizes production and
are transferred out first
cost results for a period
 ending WIP comes from the work
 generally used by managers to monitor
started during the current month
production and cost flows
 keeps the 2 periods separate
 managers are able to determine
Similarity
whether inventory levels are getting too
 average the cost of production over all
high, costs are not low enough, or the
units produced
number of units produced is too low
Difference
Sections 1 and 2
 the way that the costs and work are
 managing the physical flow of units
aggregated
 Section 1 – summarizes the flow of
physical units
 Section 2 – shows EU for direct
materials and conversion costs (EU TO
and EU remaining in WIP)
Sections 3, 4, and 5
 managing costs
 Section 3 – shows the costs to be
accounted for
 Section 4 – shows how to compute the
cost per EU for materials and
conversion costs
STEP 4: COMPUTE THE COSTS PER  Section 5 – shows the cost assignment
EQUIVALENT UNIT (WEIGHTED AVERAGE) performed in Step 5 for direct materials
and conversion

STEP 5: ASSIGN PRODUCT COST TO

BATCHES OF WORK (WAPC)
 5 Steps

1. Measure the physical flow of

resources
2. Compute the EU of production.
 EU to complete beginning WIP
inventory
 EU of goods started and
completed during the current
period (TO – Beg. WIP)
 EU of goods still in ending WIP
inventory
3. Identify the product costs for which
to account
4. Compute the costs per EU (FIFO)

5. Assign the product cost to batches of
work.

Cost of goods transferred out:

ASSIGNING COSTS USING FIFO PROCESS

COSTING

Disadvantage of weighted-average costing

 mixes current period costs with costs of
products in beginning inventory, making
it impossible for managers to know how
much it cost to make a product in this
period

FIFO
 transfers out the costs in beginning
inventory in a lump sum but does not
mingle them with current period costs
 gives managers better information about
the work done in the current period
 managers can identify and manage
current period costs
 inventory numbers are more likely to
reflect reality that weighted average
costs