Process Costing
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?
Job Order vs. Process Costing
Job Order


Small quantities of
distinct products or
services
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
Process Costing

Averaging technique to assign costs to units
produced
Unit Cost =
Production Costs
Production Quantity
Production Costs

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
Materials Requisition Form
Date ___________________
No. 341
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
Units Produced


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
Equivalent Units of Production


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
Two Process Costing Methods

Weighted Average (WA) Method

Combines



beginning work in process
current period production
First-in, First-Out (FIFO) Method

Separates


beginning work in process
current period production
Process Costing Methods
WA
Beginning WIP
Started and finished
Ending WIP
The Difference
FIFO
Beginning WIP
Started and finished
Ending WIP
100%
100%
% completed
% completed
100%
% completed
Process Costing

Direct material


Direct labor


Added at the beginning, during, and/or at the end
of process
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
Units accounted for
Determine equivalent units
Costs to account for
Costs
Compute cost per equivalent unit
Assign costs to inventories
Cost of Production Report
Name of Department
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
* Numbers correlate to the
process costing steps in the
previous slide
Step 1—Units to Account For
Beginning WIP
Started
Units to account for
5,000
200,700
205,700
Step 2—Units Accounted For
Beginning WIP
Started
Units to account for
Finished and transferred
Ending WIP
Units accounted for
5,000
200,700
205,700
must
203,000 be
2,700 equal
205,700
Step 3—Compute Equivalent Units
Beginning WIP inventory
Started and completed
Ending WIP inventory
Equivalent units
WA Method
DM Conversion
5,000
5,000
198,000
198,000
2,700
2,160*
205,700
205,160
* ending units * % complete
2,700 * 80% = 2,160
Step 4—Costs to Account For
Beginning WIP
Current costs
To account for
DM
Conversion
Total
$ 5,943 $ 16,758 $ 22,701
321,120 660,270 981,390
$327,063 $677,028 $1,004,091
WA Method
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Step 5—Cost per Equivalent Unit
Beginning WIP
Current costs
To account for
DM
$ 5,943
321,120
$327,063
Divide by EUP
205,700
Cost per EUP
$1.59
WA Method
Conversion Total
$ 16,758 $ 22,701
660,270
981,390
$677,028 $1,004,091
205,160
+ $3.30
= $4.89
Step 6—Assign Costs to Inventories
Transferred (203,000 * $4.89)
$992,670
Ending WIP Inventory
Transferred
Direct Materials
Out
Ending
(2,700 * $1.59)
$4,293
WIP
Conversion Costs
(2,700 * 80% * $3.30)
7,128
11,421
Cost accounted for
$1,004,091*
*must agree with costs to account for
WA Method
Process Costing—FIFO


Emphasizes current period costs and
production
Steps 1, 2, and 4 are the same
Step 3—Compute Equivalent Units
DM
Beginning WIP/completed
Started and completed
Ending WIP Inventory
Equivalent units
FIFO Method
0
198,000
2,700
200,700
Conversion
3,000*
198,000
2,160
203,160
* beginning units * % complete in current period
5,000 * 60% = 3,000
Step 5—Cost per Equivalent Unit
Current costs
DM
$321,120
Divide by EUP
200,700
Cost per EUP
$1.60
FIFO Method
Conversion
Total
$660,270 $981,390
203,160
+
$3.25 = $4.85
* Recall that Step 4 is the same
as used for the WA method
Step 6—Assign Costs to Inventories
Transferred
Beginning WIP Inventory
Cost to complete
Conversion (3,000 * $3.25)
Started and completed
(198,000 * $4.85)
Total cost transferred
Ending inventory
Direct Materials
(2,700 * $1.60)
Conversion Costs
(2,7000 * 80% * $3.25)
Cost accounted for
*must agree with costs to account for
$22,701
9,750
Transferred
Out
$ 32,451
960,300
$992,751
Ending
WIP
$4,320
7,020
11,340
$1,004,091*
FIFO Method
Process Costing Comparison
WA
FIFO
 EUP DM
205,700  EUP DM
200,700
 EUP Conversion 205,160
 EUP Conversion 203,160
 Cost per unit DM
$1.59  Cost per unit DM $1.60
 Cost per unit Conv. 3.30
 Cost per unit Conv. 3.25
 Total
$4.89  Total
$4.85
 Transferred Out $992,670  Transferred Out $992,751
 Ending WIP
11,421  Ending WIP
11,340
 Total
$1,004,091  Total
$1,004,091
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
Transferred-In Cost (successor department)
Work in Process (current department)
Cost Allocation
Cost allocation is the process of assigning
common costs to two or more cost objects.
Allocation Bases for Service
Department Costs

Rational and systematic base





Benefit received by revenue-producing department
Causal relationship
Fairness or equity of the allocations
Ability of revenue-producing department to bear the
allocated cost
Methods


Direct method
Step method


Benefits-provided ranking
Algebraic method

Simultaneous equations
Direct Method
Assigns costs straight to revenue-producing areas
Revenue
Service
1
2
A
B
Step 1 $
Step 2
$
Does not recognize service provided
to other service departments
C
Service Method
Partially recognizes relationships
among service departments
Revenue
Service
1
2
A
B
C
Step 1 $
Step 2
$
Does not recognize the two-way exchange of
services between service departments
Algebraic Method
Provides the best
allocation
information
Revenue
Service
1
At the
same
time
2
A
B
C
$
$
Recognizes all interrelationships among departments
The End