1. Prepared by Diane Tanner University of North Florida ACG 4361 1 Process Costing 3-4

2. Comparing Job and Process Costing Unique Homogeneous Both systems……  Have the same purpose --- to accumulate total product costs and to assign those costs to each unit manufactured  Assign material, labor and overhead costs to cost objects  Use the same manufacturing (product cost) accounts

3. The Use of Process Costing  Used in environments where  Production passes through multiple process centers  Most often sequential  A single product is produced continually  Units of product are homogeneous  Virtually identical  Example industries include those involved with  Paper, petroleum, chemicals

4. Accounting Differences Between Job and Process Costing  Accumulates costs by process/departments  Assigns actual DM, DL and MOH to processing departments, then allocates total costs to units produced  Utilizes multiple WIP control accounts  One for each process  Accumulates costs by jobs  Assigns actual DM and DL cost to jobs  Allocates MOH to jobs  Utilizes a single WIP control account Job Costing Process Costing

5. Comparing Cost Flows Job Costing Process Costing

6. Department Processes  Companies utilize departments which process a portion or stage of a product uniformly  DM, DL, and MOH are added in each process  Each department will have some partially completed units in beginning and ending inventory  Complicates the determination of the number of units completed and the unit cost to assign  Estimates are made about the percentage of completion of the unfinished units  Converts unfinished physical units into equivalent units 6

7. Physical and Equivalent Units  Physical units  The actual number of units the company works on, regardless if the units are finished at the end of the month or not  Equivalent units  The number of full units that could have been completed if all efforts had been put forth to only start and complete units rather than leaving some units partially finished 7 50% 50% 50% 50% + ++ = 2 equivalent units Or 4 × 50% = 2

8. Process Costing Methods  Weighted-average method  No separation between current period and prior period work  Averages current period production costs with beginning inventory costs  Combines units and costs from prior and current periods  FIFO method  Segregates current period production work from the work effort in the beginning WIP units  Considered more accurate than the weighted-average method 8

9. Cost Categories Costs are separately tracked in three categories  Direct materials  Conversion costs  Assumes overhead is assigned at the same rate direct labor is incurred  Transferred-in costs  Costs associated with units worked on in a previous department 9

10. Process Costing Steps Step 1:Summarize the physical units. Step 2: Determine the equivalent units. Step 3: Determine the accumulated costs separately for transferred-in costs, direct materials and conversion costs. Step 4: Determine the costs per equivalent unit separately for direct materials and conversion costs. Step 5: Assign the cost per unit to units transferred to finished goods and units in ending work in process. 10

11. Weighted Average: Reconciling Physical Units Example PsyCo started this month with 1,200 units on hand and started on new 2,100 units. There were 800 units in ending inventory that are 40% complete. Reconcile the physical units. 11 Unit in beginning WIP inventory1,200 Units started during the period2,100 Units to be accounted for3,300 Units completed and transferred out? Units in ending WIP inventory 800 Units accounted for 3,300 Must be equal 2,500

12. FIFO: Reconciling Physical Units Example PsyCo started this month with 1,200 units on hand and started on new 2,100 units. There were 800 units in ending inventory that are 40% complete. Reconcile the physical units. 12 Unit in beginning WIP inventory1,200 Units started during the period2,100 Units to be accounted for3,300 Units in beginning WIP inventory Units started, completed, & transferred out? Units in ending WIP inventory 800 Units accounted for 3,300 Must be equal 1,300 1,200

13. Weighted Average: Equivalent Units Example PsyCo started this month with 1,200 units on hand and started on new 2,100 units. There were 800 units in ending inventory that are 40% complete. Materials are added at the beginning of the production process. How many equivalent units were produced in June? Unit in beg. WIP inventory1,200 Units started in June2,100 Units to be accounted for3,300 Units completed and transf. out2,500 Units in ending WIP inventory 800 Units accounted for3,300 Direct Materials Conversion Costs 100% 2,500 100%40% 320 800 3,300 2,820 Equivalent units for Direct Materials Equivalent units for Conversion Costs

14. Production Cost Report A separate report is created for each process department, usually monthly Identifies the total cost transferred out of each WIP account into FG, and the cost of ending WIP Contains 5 sections 1: Physical units of output 2: Equivalent units 3: Total costs to account for 4: Costs per equivalent unit 5: Assignment of the cost to completed units and to units in ending work-in-process 14 Parallels the steps required to perform process costing

15. 15 The End