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

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

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

Costing Systems Job order costing Process costing COLA

Process Costing Systems Cola Large quantity of identical units

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

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

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

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

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

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

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

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

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

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

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

Step 1 - Units to Account For Beginning WIP 25,000 Started 510,000 Units to account for 535,000

Step 2 - Units Accounted For Beginning WIP 25,000 Started 510,000 Units to account for 535,000 must be equal Finished and transferred 523,000 Ending WIP 12,000 Units accounted for 535,000

Step 3 - Compute Equivalent Units DM CC Beginning WIP inventory 25,000 25,000 Started and completed 498,000 498,000 Ending WIP inventory 12,000 9,600* Equivalent units 535,000 532,600 * ending units * % complete 12,000 * 80% = 9,600 Weighted Average Method

Step 4 - Costs to Account For DM CC Total Beginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500 339,690 773,190 To account for $476,150 $356,842 $832,992 Weighted Average Method

Step 5 - Cost per Equivalent Unit DM CC Total Beginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500 339,690 773,190 To account for $476,150 $356,842 $832,992 Divide by EUP 535,000 532,600 Cost per EUP $.89 $.67 $1.56 Weighted Average Method

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) 6,432 17,112 Cost accounted for $832,992* *must agree with costs to account for Transferred Out Ending WIP Weighted Average Method

Process Costing - FIFO Emphasize current period costs and production Steps 1 and 2 are the same Step 3 DM CC Beginning WIP/completed 0 15,000* Started and completed 498,000 498,000 Ending WIP Inventory 12,000 9,600 Equivalent units 510,000 522,600 * beginning units * % complete in current period 25,000 * 60% = 15,000

Process Costing - FIFO Step 4 is the same Step 5 DM CC Total Current costs $433,500 $339,690 $773,190 Divide by EUP 510,000 522,600 Cost per EUP $.85 $.65 $1.50

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) 747,000 Ending WIP Direct Materials (12,000 * $.85) $10,200 Conversion (12,000 * 80% * $.65) 6,420 16,440 Cost accounted for $832,992* *must agree with costs to account for Transferred Out Ending WIP

Process Costing Comparison Weighted Average EUP DM 535,000 EUP CC 532,600 Cost per unit DM $ .89 Cost per unit CC .67 Total $1.56 Transferred Out $815,880 Ending WIP 17,112 Total $832,992 FIFO EUP DM 510,000 EUP CC 522,600 Cost per unit DM $ .85 Cost per unit CC .65 Total $1.50 Transferred Out $816,552 Ending WIP 16,440 Total $832,992

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

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

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

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

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?