1. Traditions and Innovations
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney
Chapter 6
Process Costing

2. Learning Objectives (1 of 2)
Contrast process costing and job order costing
Explain why equivalent units of production are used in process costing
Calculate equivalent units of production using weighted average and FIFO methods
Compute unit costs and inventory values using weighted average and FIFO methods

3. Learning Objectives (2 of 2)
Explain how standard costs are used in a process costing system
Explain why a company would use a hybrid costing system
(Appendix) Explain the alternative methods used to calculate equivalent units of production

4. Costing Systems
Job order costing
Process costing
COLA

5. Process Costing Systems
Cola
Large quantity of identical units

6. Process Costing Averaging technique to assign costs to units produced
Unit Cost = Production Costs
Production Quantity

7. Process Costing The Numerator - Production Costs Costs by department
Costs by product
Direct material from material requisitions
Direct labor from time sheets and wage rates
Overhead
Actual
Predetermined application rates

8. Materials Requisition Form
Date ___________________
No. ###
Job No. _________________
Department _______________
Issued by _________________
Authorized by ___________
Inspected by _______________
Received by _____________
Item Part Unit of Quantity Quantity Unit Total
No. No. Descrip. Measure Required Issued Cost Cost

9. Employee Time Sheet Employee Name _______________
Employee No. _______________
Department _______________
For week ending
_______
Start Stop Total
Type of Work Job No. Time Time Day Hours
Employee Signature Supervisor’s Signature

10. Process Costing 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

11. Equivalent Units
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

12. Process Costing Methods
Weighted average method
combine
beginning work in process
current period production
FIFO method
separate

13. Process Costing Methods
Weighted Average
Beginning WIP %
Started and finished %
Ending WIP % completed
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
THE
DIFFERENCE

14. Process Costing Direct material Direct labor Overhead
added at beginning, during, and/or end of process
Direct labor
added throughout the process
Overhead
based on direct labor
based on other, multiple cost drivers

15. Process Costing Steps Units to account for Units accounted for
Determine equivalent units
Costs to account for
Compute cost per equivalent unit
Assign costs to inventories
Units
Costs

16. Cost of Production Report
Name of Department 3
for the period --- 2
Production Data:
Units to account for
Units accounted for EUP for each cost
Cost Data:
Costs to account for
Cost per EUP
Cost Assignment:
Transferred Out
Ending Work In Process Inventory 1 4 5 6

17. Step 1 - Units to Account For
Beginning WIP ,000
Started ,000
Units to account for 535,000

18. Step 2 - Units Accounted For
Beginning WIP ,000
Started ,000
Units to account for 535,000
must be
equal
Finished and transferred 523,000
Ending WIP ,000
Units accounted for 535,000

19. Step 3 - Compute Equivalent Units
DM CC
Beginning WIP inventory 25, ,000
Started and completed 498, ,000
Ending WIP inventory 12, ,600* Equivalent units 535, ,600
* ending units * % complete
12,000 * 80% = 9,600
Weighted Average Method

20. Step 4 - Costs to Account For
DM CC Total
Beginning WIP $ 42, $ 17, $ 59,802 Current costs , , ,190
To account for $476, $356, $832,992
Weighted Average Method

21. Step 5 - Cost per Equivalent Unit
DM CC Total
Beginning WIP $ 42, $ 17, $ 59,802 Current costs , , ,190
To account for $476, $356, $832,992
Divide by EUP , ,600
Cost per EUP $.89 $.67 $1.56
Weighted Average Method

22. Step 6 - Assign Costs to Inventories
Transferred (523,000 * $1.56) $815,880
Ending WIP Inventory
Direct Materials
(12,000 * $.89) $10,680
Conversion
(12,000 * 80% * $.67) , ,112
Cost accounted for $832,992*
*must agree with costs to account for
Transferred
Out
Ending
WIP
Weighted Average Method

23. Process Costing - FIFO Emphasize current period costs and production
Steps 1 and 2 are the same
Step 3
DM CC
Beginning WIP/completed ,000*
Started and completed 498, ,000
Ending WIP Inventory 12, ,600 Equivalent units 510, ,600
* beginning units * % complete in current period
25,000 * 60% = 15,000

24. Process Costing - FIFO Step 4 is the same Step 5 DM CC Total
Current costs $433, $339, $773,190
Divide by EUP , ,600
Cost per EUP $.85 $.65 $1.50

25. Step 6 Assign Costs to Inventories - FIFO
Transferred
Beginning WIP Inventory $59,802
Cost to complete
Conversion (15,000 * $.65) 9,750 $ 69,552
Started and completed
(498,000 * $1.50) ,000
Ending WIP
Direct Materials
(12,000 * $.85) $10,200
Conversion
(12,000 * 80% * $.65) , ,440
Cost accounted for $832,992*
*must agree with costs to account for
Transferred
Out
Ending
WIP

26. Process Costing Comparison
Weighted Average
EUP DM ,000
EUP CC ,600
Cost per unit DM $ .89
Cost per unit CC
Total $1.56
Transferred Out $815,880
Ending WIP ,112
Total $832,992
FIFO
EUP DM ,000
EUP CC ,600
Cost per unit DM $ .85
Cost per unit CC
Total $1.50
Transferred Out $816,552
Ending WIP ,440
Total $832,992

27. 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
Successor Processing Department

28. Multidepartment Processing
Wait
Process 1
Materials
Transferred-in
Costs
Transferred-in
Costs
Process 2
Finished
Product
Process 3
Wait

29. 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

30. Hybrid Costing Systems
Characteristics of job order and process costing systems
Various Product Lines
different direct material - job order costing
same process - process costing
Hybrid costing used for furniture, clothing, jam

31. Questions What is an equivalent unit of production?
What is the difference between the weighted average and FIFO methods of calculating equivalent units?
Why would a company use a hybrid costing system?