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Chapter 6:

Process Costing
Cost Accounting:
Foundations and Evolutions, 8e
Kinney Raiborn
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?
How are equivalent units of production, unit costs, and inventory values
determined using the standard costing method of process costing?
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 normal and abnormal spoilage losses treated in an
EUP schedule?
Job Order vs. Process Costing

Job Order Process Costing


Small quantities of Large quantities of
distinct products or homogeneous products
services 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
Process Costing

Averaging technique to assign costs to units


produced

Unit Cost = Production Costs


Production Quantity
Production Costs
The NumeratorProduction 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
Materials Requisition Form

Date ___________________ No. 341


Job No. _________________ Department _______________
Authorized by ___________ Issued by _________________
Received by _____________ Inspected by _______________
Item Part Unit of Quantity Quantity Unit Total
No. No. Descrip. Measure Required Issued Cost Cost
Employee Time Sheet
Employee Name _______________
Employee No. _______________ For week ending
Department _______________
_______

Start Stop Total


Type of Work Job No. Time Time Day Hours

Employee Signature Supervisors Signature


Units Produced

The DenominatorUnits 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
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 (WA) Method
Combines
beginning work in process
current period production
First-in, First-Out (FIFO) Method
Separates
beginning work in process
current period production
Process Costing Methods
WA
Beginning WIP 100%
Started and finished 100%
Ending WIP % completed
The Difference
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
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 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
Cost of Production Report
Name of Department
for the period ---
Production Data:
Units to account for
Units accounted for * Numbers correlate to the
EUP for each cost process costing steps in the
previous slide
Cost Data:
Costs to account for
Cost per EUP
Cost Assignment:
Transferred Out
Ending Work in Process Inventory
Step 1Units to Account For

Beginning WIP 5,000


Started 200,700
Units to account for 205,700
Step 2Units Accounted For

Beginning WIP 5,000


Started 200,700
Units to account for 205,700
must
Finished and transferred 203,000 be
Ending WIP 2,700 equal
Units accounted for 205,700
Step 3Compute 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


WA Method 2,700 * 80% = 2,160
Step 4Costs to Account For
DM Conversion Total
Beginning WIP $ 5,943 $ 16,758 $ 22,701
Current costs 321,120 660,270 981,390
To account for $327,063 $677,028 $1,004,091

WA Method
Step 5Cost per Equivalent Unit
DM Conversion Total
Beginning WIP $ 5,943 $ 16,758 $ 22,701
Current costs 321,120 660,270 981,390
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

WA Method
Step 6Assign Costs to Inventories

Transferred (203,000 * $4.89) $992,670


Ending WIP Inventory Transferred
Direct Materials Out Ending
(2,700 * $1.59) $4,293 WIP
Conversion Costs
(2,700 * 80% * $3.30) 7,128 11,421
Cost accounted for $1,004,091*
*must agree with costs to account for

WA Method
Process CostingFIFO
Emphasizes current period costs and production
Steps 1, 2, and 4 are the same
Step 3Compute Equivalent Units
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


FIFO Method 5,000 * 60% = 3,000
Step 5Cost per Equivalent Unit

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

* Recall that Step 4 is the same


FIFO Method as used for the WA method
Step 6Assign Costs to Inventories
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 Transferred $992,751
Ending inventory
Out
Direct Materials Ending
(2,700 * $1.60) $4,320 WIP
Conversion Costs
(2,7000 * 80% * $3.25) 7,020 11,340
Cost accounted for $1,004,091*
*must agree with costs to account for
FIFO Method
Process Costing Comparison
WA FIFO
EUP DM 205,700 EUP DM 200,700
EUP Conversion 205,160 EUP Conversion 203,160

Cost per unit DM $1.59 Cost per unit DM $1.60


Cost per unit Conv. 3.30 Cost per unit Conv. 3.25

Total $4.89 Total $4.85


Transferred Out $992,751
Transferred Out $992,670
Ending WIP 11,340
Ending WIP 11,421
Total $1,004,091
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)
Multidepartment Processing

Process 1 Wait
Materials

Transferred-In Process 2
Cost

Finished Process 3 Wait


Product
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
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 materialjob order costing

Different direct laborjob order costing

Same processprocess costing

Hybrid costing used for furniture, clothing, jam


Appendix 1
Alternative Cost Computation
There are two alternative methods to
calculate WA and FIFO EUP
Use alternative methods
To confirm standard computation
As a simplified computation
Appendix 1
Traditional Cost Computation

Conversion Costs WA FIFO


Beginning WIP inventory 5,000 3,000
Started and completed 198,000 198,000
Ending WIP inventory 2,160 2,160
Equivalent units 205,160 203,160
Appendix 1
Alternative Cost Computation 1
Units transferred out (whole units)
Plus: Ending work in process (equivalent units)
WA EUP
Less: Beginning work in process (equivalent units)
FIFO EUP
Appendix 1
Alternative Cost Computation 1
Conversion Costs
Candles transferred 203,000
Ending WIP EUP 2,160
WA EUP 205,160
Beginning WIP EUP (2,000)
FIFO EUP 203,160
Appendix 1
Alternative Cost Computation 2
Total units to account for
Less: EUP to be completed next period
WA EUP
Less : EUP completed in prior period
FIFO EUP
Appendix 1
Alternative Cost Computation 2
Conversion Costs
Total units to account for 205,700
EUP to be completed next period (540)
WA EUP 205,160
EUP completed in prior period (2,000)
FIFO EUP 203,160
Appendix 2Spoilage
Continuous lossLoss occurs fairly
uniformly through the process
Discrete lossLoss occurs at a specific
point and is detectable only when a
quality check is performed
Appendix 2Spoilage
Normal shrinkage and continuous losses
Assign costs only to units that have passed the
inspection point
Use Method of Neglect
Excludes spoiled units in the equivalent units schedule
Spreads cost of lost units proportionately over the
good units transferred and those remaining in WIP
inventory
Abnormal losses
Period expense
Accounted for on an equivalent unit basis
Appendix 2Spoilage
Normal Abnormal
Spoilage Spoilage
Loss in all ending
Continuous inventory and Period expense
Loss transferred-out units in EUP
on an EUP basis

Loss in all units past


Discrete inspection point in
Loss ending inventory and Period expense
transferred out on an in EUP
EUP basis
Questions

What is an EUP?
What is the difference between the WA and
FIFO methods of calculating equivalent
units?
Why would a company use a hybrid costing
system?
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