1. Process-Costing Systems
Chapter 8

2. Process costing Characteristics Identical units
Continuous flow production
Never “complete”
Move from process (or department) to process
Costs are accumulated by process for a time period
Allocated to “equivalent units” of output during the period

3. Equivalent units
Amount of finished units that could have been completed, given the materials or effort involved
Three units started into production
One is completed
One is ¾ completed
One is ¼ completed
Two equivalent units are produced (1 + ¾ + ¼)

4. Equivalent units
May have different number of equivalent units for materials, labor and overhead
Using the previous example, assume
all materials are added at the beginning
= 3 equivalent units for materials
conversion costs are added throughout the process
1 + ¾ + ¼ = 2 equivalent units for conversion costs

5. Equivalent units Try this one At the beginning of the period
5 units, each ½ complete, are in process
During the period
27 more units are put into production
At the end of the period
6 units, each ¾ complete, are still in process
How many equivalent units were produced?

6. The process Step 1 – Summarize flow of physical units
How many were in beginning inventory?
How many were started?
How many are still in ending inventory?
Step 2 – Calculate equivalent units
Beginning inventory was completed
Of the units started
Some were completed
Some are in ending inventory

7. The process Step 3 – Summarize costs to be accounted for
Cost in beginning inventory
Cost added during the period
Step 4 – Calculate cost per equivalent unit
Step 5 – Assign costs to completed units and ending inventory

8. Production cost report
Part 1 – Units
Summary of physical and equivalent units
Where did they come from?
Where did they go?
Part 2 – Costs
Summary of costs
Calculation of cost per equivalent units
Assignment of costs
Transferred out
Work in process

10. Example 1 No beginning inventory 18,000 units started
2,000 in ending work in process inventory
40% complete as to materials
30% complete as to conversion cost
Current period costs
Materials - $45,360
Conversion costs - $68,060

12. Example 2 Beginning and ending inventories
4,000 units in beginning work in process
80% complete as to materials
50% complete as to conversion costs
25,000 units started
3,000 units in ending work in process
60% complete as to materials
Costs
Materials: Beg. WIP - $7,040, current - $51,660
Conversion: Beg. WIP - $1,500, current - $20,400

14. Example 3 Costs transferred from prior department
Units and costs transferred out of previous department (example 2) to department 2
Cumulative costs from prior department are treated as a separate cost category in current department
Units are 100% complete as to prior department
Transferred-in units are the “units started” in the current department

15. Example 3 In department 2 1,000 units in beginning work in process
70% complete as to materials
60% complete as to conversion costs
2,000 units in ending work in process
30% complete as to materials
20% complete as to conversion costs
Costs
Materials: Beg. WIP - $420, current - $14,940
Conversion: Beg. WIP - $840, current - $34,720

17. First-in, first-out method
Previous examples used weighted average method
Costs in beginning inventory were combined with current period costs
First-in, first-out method separates the two
Assumes units in beginning inventory were finished first

18. First-in, first-out method
Equivalent unit calculation includes
Work done to complete the units in beginning inventory
Work done on new units started
100% for those started and completed
<100% for those started but not completed

19. First-in, first-out method
Beginning inventory costs are only assigned to units in beginning inventory
Some current period costs are added to complete them
Units started are only assigned current period costs
Costs accounted for includes
Beginning inventory cost transferred out
Current costs added to complete beginning inventory
Current costs of units started and completed
Current costs in ending inventory

20. First-in, first-out method
Example 2 using FIFO method
4,000 units in beginning work in process
80% complete as to materials
50% complete as to conversion costs
25,000 units started
3,000 units in ending work in process
60% complete as to materials
Costs
Materials: Beg. WIP - $7,040, current - $51,660
Conversion: Beg. WIP - $1,500, current - $20,400

21. Example 2 - FIFO

22. Example 2 - FIFO

23. Accounting for spoilage
Spoiled units have incurred some cost but are not transferred to the next stage
Treated as a separate line item for
Units accounted for
Equivalent units
Costs accounted for

24. Accounting for spoilage
Example 2 with spoilage
4,000 units in beginning work in process
80% complete as to materials, 50% as to conversion costs
25,000 units started
800 units spoiled
50% complete as to materials, 30% as to conversion costs
2,200 units in ending work in process
60% complete as to materials, 50% as to conversion costs
Costs
Materials: Beg. WIP - $7,040, current - $51,660
Conversion: Beg. WIP - $1,500, current - $20,400

26. Journal entries Same as for job-order costing
Dollar value of units transferred out represents the cost moving from WIP to the next stage in the process
Another WIP account (department)
Finished goods inventory
Dollar value of spoiled goods is debited to an expense account

27. Operation costing Hybrid of job-order and process-costing
Products goes through a combination of common processes and individual processes
No special accounting required
Units may be transferred out of a process to become a separate job or vice-versa