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 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
 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 Supervisor’s Signature

Units Produced

 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
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 1—Units to Account For

Beginning WIP 5,000

Started 200,700
Units to account for 205,700
Step 2—Units 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 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

WA Method 2,700 * 80% = 2,160
 Step 4—Costs 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 5—Cost 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 6—Assign 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 Costing—FIFO
 Emphasizes current period costs and production
 Steps 1, 2, and 4 are the same
Step 3—Compute 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 5—Cost 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 6—Assign 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 $992,670  Transferred Out $992,751

 Ending WIP 11,421  Ending WIP 11,340

 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 material—job order costing

 Different direct labor—job order costing

 Same process—process 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 2—Spoilage
 Continuous loss—Loss occurs fairly
uniformly through the process
 Discrete loss—Loss occurs at a specific
point and is detectable only when a
quality check is performed
Appendix 2—Spoilage
 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 2—Spoilage
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