Chapter Three

Process Costing

Objectives
1. Describe how products flow through departments and how costs flow through accounts in process costing. 2. Discuss the concept of an equivalent unit. 3. Calculate the cost per equivalent unit. 4. Calculate the cost of goods completed and the ending Work in Process balance in a processing department. 5. Describe a production cost report. 6. Describe process costing for multiple departments.

Difference Between Job-Order and Process Costing Systems

Job-Order Costing Systems assign costs to heterogeneous jobs. Process Costing Systems spread total manufacturing costs over total, homogenous, units produced.

Difference Between Job-Order and Process Costing Systems

Product and Cost Flows

1. Product Flows Through Departments (p 82)

2. Cost Flows Through Accounts (p 85)

3. Conversion direct + = labor Costs manufacturing overhead

Product Flows Through Departments

Cost Flows Through Accounts

Calculating Unit Cost

To compute unit costs it is first necessary to compute Equivalent Units.

How Equivalent Units are Calculated

Cost Per Equivalent Unit

Weighted average unit cost in a Process Costing System is calculated as follows: Cost Per Equivalent Unit =

Cost in BWIP + Costs incurred currently Units completed + Equivalent units in EWIP

Calculating and Applying Cost Per Equivalent Unit: Mixing Department Example
Units: BWIP:10,000 gallons, 80% complete labor/overhead Started:70,000 gallons, 60,000 of these completed EWIP:20,000 gallons, 50% complete. No spoilage or missing units.
Costs: BWIP:$18,000 material, $7,800 labor, $23,400 overhead Added:$142,000 of material, $62,200 labor Overhead: applied at a predetermined rate of $3 per dollar of labor or $186,600.

Calculating and Applying Cost Per Equivalent Unit: Mixing Department Example
Calculate: Cost per equivalent unit. Answer: $6 Solution: Material: $160,000/80,000=$2 Labor: $ 70,000/70,000=$1 Overhead: $210,000/70,000=$3 Total Costs/Unit: =$6

Calculating and Applying Cost Per Equivalent Unit: Mixing Department Example

Calculating and Applying Cost Per Equivalent Unit: Mixing Department Example

Calculating and Applying Cost Per Equivalent Unit: Mixing Department Example

Production Cost Report

Production Cost Report Contains: 1. Reconciliation of units. 2. Reconciliation of costs. 3. Details of the cost per equivalent unit calculations.

Reconciliation of Units
BWIP + the number of units started = the number of units completed EWIP.

Reconciliation of Costs
BWIP + costs added = costs transferred out + EWIP.

Basic Steps in Process Costing: A Summary

1. Account for the number of physical units. 2. Calculate the cost per equivalent unit for material, labor and overhead. 3. Assign cost to items completed and items in EWIP. 4. Account for the amount of product cost (reconciling costs and units identifies spoilage or missing units).

Dealing With Transferred-In Costs

1. Process Costing Systems generally use several processes; not just one. 2. The costs from the previous processes are called Transferred-In costs . They are included in the current process, so the product accumulates cost or value as it flows through to finished goods inventory 3. Transferred-In costs are treated just like other product costs (l.e. material, labor and overhead).

Process Costing and Incremental Analysis

1. Decisions are based on costing information obtained through Process Costing Systems. 2. Incremental Analysis is frequently used to make these decisions. 3. In incremental analysis we need to identify the extra cost of further processing to the extra benefit, and be wary of including allocated sunk costs.

Quick Review Question #1

1. The best example of a business requiring a process costing system would be a(n); a. Soap manufacturer. b. Automobile repair shop. c. Custom cabinet shop. d. Antique furniture restorer.

Quick Review Answer #1

1. The best example of a business requiring a process costing system would be a(n); a. Soap manufacturer. b. Automobile repair shop. c. Custom cabinet shop. d. Antique furniture restorer.

Quick Review Question #2

2. Costs in a process costing system are ultimately traced to a. Specific processes. b. Specific customers. c. Specific jobs. d. Specific production personnel.

Quick Review Answer #2

2. Costs in a process costing system are ultimately traced to a. Specific processes. b. Specific customers. c. Specific jobs. d. Specific production personnel.

Quick Review Question #3

3. BWIP consisted of 2,500 units, 100% complete for materials and 60% for conversion costs. 8,000 additional units were started. 9,000 units were completed and transferred out. How many physical units are in EWIP? a. 1,500. b. 10,500. c. 14,500. d. 0.

Quick Review Answer #3

3. BWIP consisted of 2,500 units, 100% complete for materials and 60% for conversion costs. 8,000 additional units were started. 9,000 units were completed and transferred out. How many physical units are in EWIP? a. 1,500. b. 10,500. c. 14,500. d. 0.

Quick Review Question #4

4. Using question #3 data, assume ending inventory was 100% complete for materials and 80% complete for conversion costs? Calculate equivalent units of production for materials and conversion costs. a. 6,500 & 6,500 b. 8,000 & 6,500 c. 8,000 & 8,700 d. 9,000 & 8,700

Quick Review Answer #4

4. Using question #3 data, assume ending inventory was 100% complete for materials and 80% complete for conversion costs? Calculate equivalent units of production for materials and conversion costs. a. 6,500 & 6,500 b. 8,000 & 6,500 c. 8,000 & 8,700 d. 9,000 & 8,700