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
No. ###
Date ___________________
Job No. _________________ Department _______________
Authorized by ___________ Issued by _________________
Received by _____________ Inspected 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
_______________
Type of Work
Job No.
Employee Signature
Start
Time
For week ending
_______
Stop
Time
Day
Total
Hours
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
• beginning work in process
• current period production
Process Costing Methods
Weighted Average
Beginning WIP
Started and finished
THE
Ending WIP
DIFFERENCE
FIFO
Beginning WIP
Started and finished
Ending WIP
100%
100%
% completed
% completed
100%
% completed
Process Costing
• Direct material
– added at beginning, during, and/or end 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
2
3
4
5
6
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 --Production Data:
2
1
Units to account for
Units accounted for
EUP for each cost
Cost Data:
4
Costs to account for
5
Cost per EUP
6
Cost Assignment:
Transferred Out
Ending Work In Process Inventory
Step 1 - Units to Account For
Beginning WIP
Started
Units to account for
25,000
510,000
535,000
Step 2 - Units Accounted For
Beginning WIP
Started
Units to account for
Finished and transferred
Ending WIP
Units accounted for
25,000
510,000
535,000
must
523,000 be
12,000 equal
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
Beginning WIP
Current costs
To account for
DM
CC
Total
$ 42,650 $ 17,152 $ 59,802
433,500 339,690 773,190
$476,150 $356,842 $832,992
Weighted Average Method
Step 5 - Cost per Equivalent Unit
Beginning WIP
Current costs
To account for
Divide by EUP
Cost per EUP
DM
CC
Total
$ 42,650 $ 17,152 $ 59,802
433,500 339,690 773,190
$476,150 $356,842 $832,992
535,000
532,600
$.89
$.67
Weighted Average Method
$1.56
Step 6 - Assign Costs to Inventories
Transferred (523,000 * $1.56)
$815,880
Transferred
Ending WIP Inventory
Out
Ending
Direct Materials
WIP
(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
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
Current costs
Divide by EUP
Cost per EUP
DM
$433,500
CC
$339,690
510,000
522,600
$.85
$.65
Total
$773,190
$1.50
Step 6 Assign Costs to
Inventories - FIFO
Transferred
Beginning WIP Inventory
$59,802
Cost to complete
Conversion (15,000 * $.65)
9,750
Started and completed
(498,000 * $1.50) Transferred
Ending WIP
Out
Direct Materials
(12,000 * $.85)
$10,200
Conversion
(12,000 * 80% * $.65)
6,420
Cost accounted for
*must agree with costs to account for
$ 69,552
747,000
Ending
WIP
16,440
$832,992*
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
Work in Process
Multidepartment Processing
Materials
Process 1
Transferred-in
Costs
Finished
Product
Process 3
Wait
Process 2
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?