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Chapter 10 Process Costing
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Learning Objectives 1. How does process costing differ from job order product costing? 2. Why are equivalent units of production used in process costing? C1
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Continuing . . . Learning Objectives
3. How are equivalent units of production computed using the weighted average and FIFO methods of process costing? 4. How are unit costs and inventory values calculated using the weighted average and FIFO methods of process costing? C1
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Continuing . . . Learning Objectives
5. How is a cost of production report prepared? 6. What use do standard costs have in a process costing system? C1
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Continuing . . . Learning Objectives
7. What is the effect of multi-department processing on the computation of equivalent units of production? 8. How can quality control minimize spoilage? 9. How are journal entries prepared for a process costing system? (Appendix) C1
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Costing Systems Process Hybrid Job order
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Differences Between Job Order and Process Costing
Quantity of production for which costs are being accumulated at any one time Cost object to which the costs are assigned Page 219
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Flow of Product Through System
Process 1 Materials Conversion Costs Process 2 Finished Product Process 3 Note: Raw materials can be added in all departments.
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Assigning Costs to Production
Production costs = Material + Labor + Overhead Costs assigned to each process during period Unit costs determined for each cost component and each process Cost of completed unit = Sum of costs per unit for all processes through which product passes
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Production Costs Direct material cost measured from material requisition slips and invoiced prices Direct labor cost determined from employee time sheets and wage rates Overhead costs assigned through use of predetermined rates or actual costs Actual overhead costs can be used if relatively constant each period and production volume is relatively steady Page 223
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Quantity of Production
Process costing assigns costs to both fully and partially completed units by converting partially completed units to equivalent whole units or to equivalent units of production.
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Equivalent Units of Production
+ OR and
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Two Process Costing Methods
Weighted average (WA) method Computes average cost per unit of production Focuses on units completed during period and units that remain in ending WIP FIFO method Keeps beginning inventory and current period production and costs separated Page 226
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Steps in Processing Costing
1. Calculate the total physical units for which the department is responsible 2. Determine what happened to the units Where are they at the end of the period? Completed and transferred Partially completed and remaining in ending WIP 3. Use either weighted average or FIFO method to determine EUP for each cost component Page 228
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Continuing . . . Steps in Processing Costing
4. Find the total cost to account for Beginning WIP costs All current costs 5. Compute cost per EUP for each cost component using either WA or FIFO EUP 6. Assign costs Units completed and transferred Units remaining in ending WIP Page 229
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Material added at start of production Labor and overhead added evenly
Exhibit 10-5 Example Material added at start of production Labor and overhead added evenly Complete as to Conversion Costs Units Beginning inventory 30% 12,000 Cards started during the month 115,500 Cards completed during the month 120,700 Ending inventory 80% ,800
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Exhibit 10-5 Example Cost of beginning inventory:
Direct material $ 45,000.00 Direct labor and OH , $ 49,678.60 Current period costs: Direct material $334,950.00 Direct labor and OH , ,141.00
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Weighted Average: Steps 1 and 2
Beginning inventory ,000 Units started ,500 Units to account for 127,500 ====== Units completed and transferred out ,700 Units in ending WIP inventory 6,800 Total units accounted for 127,500 Page 231
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WA: Determining EUP for Material
Completed: DM CC From Beginning WIP 12, ,000 Started & Completed 108, ,700 Total Completed 120,700 Ending Inventory 6, ,800 Accounted for 127, ,500 ====== ====== Page 232
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WA: Determining EUP for Conversion Costs
Completed: DM CC From Beginning WIP 12, , ,000 Started & Completed 108, , ,700 Total Completed 120,700 Ending Inventory 6, , ,440 Accounted for 127, , ,140 ====== ====== ======
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WA: Determining Total Costs to Account for
DM CC Total Beginning WIP $ 45, $ 4, $ 49,678.60 Current Period , , ,141.00 Total Cost to Account For $379, $206, $586,819.60 ========= ========= =========
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WA: Calculate Cost per EUP
DM CC Total Beginning WIP $ 45, $ 4, $ 49,678.60 Current Period , , ,141.00 Total Cost to Account For $379, $206, $586,819.60 EUP 127, 126,140 Cost per EUP $ $ $4.62 ==== ==== ====
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WA: Assign Costs Cost of goods transferred
(120,700 x $4.62) $557,634.00 Ending Inventory: (6,800 units) Material (6,800 x $2.98) $20,264.00 Conversion Costs (5,440 x $1.64) 8, ,185.60 Total Costs Accounted for $586,819.60 =========
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FIFO: Determining EUP for Material
Completed: DM CC From Beginning WIP 12, Started & Completed 108, ,700 Total Completed 120,700 Ending Inventory 6, ,800 Accounted for 127, ,500 ====== ======
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FIFO: Determining EUP for Conversion Costs
Completed: DM CC From Beginning WIP 12, ,400 Started & Completed 108, , ,700 Total Completed 120,700 Ending Inventory 6, , ,440 Accounted for 127, , ,540 ====== ====== ======
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FIFO: Calculate Cost per EUP
DM CC Total Beginning WIP $ 49,678.60 Current Period $334, $202, ,141.00 Total Cost to Account For $586,819.60 ========= EUP 115, 122,540 Cost per EUP $ $ $4.55 ==== ==== ====
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FIFO: Assign Costs Cost of goods transferred:
Beginning inventory costs $ 49,678.60 Costs to complete: Conversion costs (8,400 x $1.65) ,860.00 Total cost of BI transferred $ 63,538.60 Started and completed (108,700 x $4.55) 494, $558,123.60 Ending Inventory: (6,800 units) Material (6,800 x $2.90) $19,720.00 Conversion Costs (5,440 x $1.65) 8, ,696.00 Total Costs Accounted for $586,819.60 =========
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Process Costing with Standard Costs
Actual costing requires that a new production cost be computed each production period. Standard costing eliminates such recomputations, although standards do need to be reviewed at least once a year to keep the amounts current.
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Comparison of WA and FIFO Methods
Cost assignment is easier for WA method FIFO method reflects actual physical flow of goods through production When period costs fluctuate, FIFO method gives managers better information with which to control costs and on which to base decisions because it does not combine costs of different periods FIFO method focuses on current period costs – managerial performance is evaluated on basis of costs incurred only in the current period
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Multiple Departments: Succeeding Departments
EUP_____ TI DM CC Beginning Inventory ### 100% Transferred In ### 100% To account for ### Completed ### Ending Inventory ### 100% Accounted for ###
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Method of Neglect Under the method of neglect:
Spoiled units are simply excluded from the equivalent unit production schedule. The total cost of producing both good and spoiled units is assigned solely to the good units, raising the cost of those units.
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Implementing Quality Processes
Managers who are aware of spoilage costs can make better decisions as to whether to ignore the causes of spoilage or try to correct them. Impediments to such awareness include using the method of neglect and “burying” the cost of spoilage in predetermined overhead rates rather than accounting for the spoilage separately.
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Continuing . . . Implementing Quality Processes
Many companies now build quality into their processes, which reduces the need for quality control inspections. Often, these companies use statistical process control (SPC) to reduce spoilage. SPC relies on the idea that natural variations occur in a process over time due to random factors and are to be expected.
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