1. Chapter 6: Process Costing
Cost Accounting:
Foundations & Evolutions, 9e
Kinney and Raiborn

2. 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?
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 equivalent units of production, unit costs, and inventory values determined using the standard costing method of process costing?
(Appendix 3) How are normal and abnormal spoilage losses treated in an EUP schedule?

3. Job Order vs. Process Costing
Small quantities of distinct products or service
Assign costs to job and then to units within the job
Process Costing
Large quantities of homogeneous products or services
Using an averaging technique, assign costs directly to units produced during the period

4. Process Costing Numerator
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

5. Process Costing Denominator
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

6. Equivalent Units of Production (EUP)
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

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

8. Process Costing Steps Units Costs 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

9. Two Process Costing Methods
Weighted Average Method
combines
beginning work in process
current period production
FIFO Method
separates

10. 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

11. Cost of Production Report
Name of Department 3
for the period ---
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 2 1 4 5 6

12. 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, etc.

13. 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

14. Process Costing with Standard Costs
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

15. Loss in all ending inventory and transferred out units on an EUP basis
Spoilage
Normal
Spoilage
Abnormal
Spoilage
Loss in all ending inventory and transferred out units on an EUP basis
Continuous
Loss
Period expense
in EUP
Loss in all units past inspection point in ending inventory and transferred out on an EUP basis
Discrete
Loss
Period expense
in EUP

16. 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?

17. 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