Cost Accounting

Foundations and Evolutions

Kinney, Prather, Raiborn

Chapter 6
Process Costing
 Learning Objectives (1 of 3)
• Contrast process costing and job order costin
g
• Explain why equivalent units of production ar
e used in process costing
• Calculate equivalent units of production, unit
costs, and inventory values using weighted av
erage method of process costing
 Learning Objectives (2 of 3)
• Compute equivalent units of production, unit
costs, and inventory values using FIFO meth
od of process costing
• Explain how standard costs are used in a proc
ess costing system
• Explain why a company would use a hybrid c
osting system
 Learning Objectives (3 of 3)
• (Appendix 1) Explain the alternative metho
ds used to calculate equivalent units of prod
uction
• (Appendix 2) Describe how normal and abn
ormal spoilage losses are treated in an EUP
schedule
 Job Order vs. Process Costing

Job Order Process Costing

• Assign costs to job an • Using an averaging tec
d then to units within t hnique, assign costs di
he job rectly to units produce
d during the period
 Process Costing
• 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
 Process Costing
• Production Costs
– Direct material from material requisitions
– Direct labor from time sheets and wage rates
– Overhead
• Actual
• Predetermined application rates
 Process Costing
• The Denominator - Units Produced
• Complicated by work in process
– Units started last period and completed this peri
od
– Units started this period and not completed
• Convert partially completed units to equival
ent whole units

Unit Cost = Production Costs

Production Quantity
 Equivalent Units of Production (EUP)
• Approximation of the number of whole unit
s of output that could have been produced fr
om 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 pr
oduction department
 Two Process Costing Methods
• Weighted Average Method
– combines
• beginning work in process
• current period production
• FIFO Method
– separates
• beginning work in process
• current period production
 Process Costing Methods
Weighted Average
Beginning WIP 100%
Started and finished 100%
Ending WIP THE % completed
DIFFERENCE
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
 Process Costing
• Direct material
– added at the beginning, during, and/or at the en
d of process
• Direct labor
– added throughout the process
• Overhead
– added throughout the process
• based on direct labor
• based on other, multiple cost drivers
 Process Costing Steps

1 Units to account for

2 Units accounted for Units
3 Determine equivalent units
4 Costs to account for
5 Compute cost per equivalent unit Costs
6 Assign costs to inventories
 Cost of Production Report
Name of Department
3
for the period ---
Production Data: 1 2
Units to account for
Units accounted for EUP for each cost
Cost Data:
Costs to account for 4
Cost per EUP 5
6
Cost Assignment:
Transferred Out
Ending Work In Process Inventory
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
Process Costing with Standard Costs
• Assigns a “normal” production cost to the e
quivalent units of output each period
• Allows managers to quickly recognize and i
nvestigate significant deviations from expec
ted production costs
• Allows benchmarking with other firms
 Hybrid Costing Systems

• Characteristics of job order and process cost

ing 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, j
am
 Appendix 2 - Spoilage
Normal Abnormal
Spoilage Spoilage
Loss in all ending i
Continuous nventory and tran
sferred out units Period expense
Loss
on an EUP basis in EUP

Loss in all units pas

Discrete t inspection point i
n ending inventory Period expense
Loss
and transferred ou in EUP
t on an EUP basis
 Questions

• What is an equivalent unit of production?

• What is the difference between the weighte
d average and FIFO methods of calculating
equivalent units?
• Why would a company use a hybrid costing
system?