Process Costing
Chapter 17
2009 Foster School of Business
Cost Accounting L.DuCharme
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Quote for today
• When I was a boy of fourteen, my father
was so ignorant I could hardly stand to have
the old man around. But when I got to be
twenty-one I was astonished at how much
the old man had learned in seven years.
--Mark Twain
2009 Foster School of Business
Cost Accounting L.DuCharme
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Overview—Process Costing
•
•
•
•
When to use
Accounting issue
Equivalent Units (EUs)
Mechanics of process costing
– w/o TI costs
– with TI costs
• Accounting for Spoilage (chapter 18)
2009 Foster School of Business
Cost Accounting L.DuCharme
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When is it appropriate to use
process costing?
• Or what companies use process costing?
• Which companies would not use process
costing?
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Cost Accounting L.DuCharme
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Illustrating Process Costing
Direct Materials, Direct Labor
Indirect Manufacturing Costs
Department
A
Department
B
Finished Goods
Cost of Goods Sold
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Cost Accounting L.DuCharme
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What is the BIG accounting
issue?
The task is to divide the total costs in WIP
between ending WIP and inventory
completed and transferred out (CTO).
This is no big deal until you consider that
E.WIP is partially completed and CTO by
definition is 100% complete (for each step
of production)! What do we do?
2009 Foster School of Business
Cost Accounting L.DuCharme
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Equivalent Units
• 15 half-time (50%) professors is equivalent
to 7.5 full-time professors. Often for people
we refer to FTEs.
• 100 teddy bears that are (on average) 45%
complete are equivalent to 45 completed
bears = 45 equivalent units.
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Cost Accounting L.DuCharme
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EU—when to use
• Not all organizations that use process
costing have to calculate EUs!
• You only have to calculate/use EUs when
ending WIP inventories are material.
– No (or little) ending WIP—what companies?
– Material ending WIP—what companies?
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Cost Accounting L.DuCharme
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Assumed flow of costs
• Process costing is combined with the
assumed flow of costs:
– Standard cost
– Weighted average (we will focus on this)
– FIFO (least used)
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Cost Accounting L.DuCharme
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Three Equations/steps
• At the core of calculations are 3 equations:
– Physical unit calculations (in units)—
• B.WIP + units started this period = CTO + E.WIP
– EU calculations (in EU)—
• B.WIP + work done this period = CTO + E.WIP
– Costs (in $)—
• B.WIP + period’s costs = CTO + E.WIP
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Timing of added costs
• Whenever a factor of production is added at
a different time (beginning, middle, end,
etc.) in production, a separate EU
computation is required (for that factor)!
• For example if DM is added at a different
time than CC, each has to have a separate
EU calculation (see example in class)
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Cost Accounting L.DuCharme
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Transferred –In Costs
CTO from one department is TI to the next
department.
TI does not equal direct materials.
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Cost Accounting L.DuCharme
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The BIG Picture
The goal is to assign costs to CTO units. In
order to do this you need costs per unit.
(1) When costs change from period to period, you
have to make a cost-flow assumption.
(2) When incomplete units are present in E.WIP,
you have to adjust via EU calculations.
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Cost Accounting L.DuCharme
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Process Costing Examples
(1) Without TI costs
(2) With TI costs
My format****
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Cost Accounting L.DuCharme
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Process Costing--WA method
P.U.
$DM
$CC
300
$7,500
$2,125
$70,000
$42,500
Apr. 1, % complete
100%
40%
Apr. 30, % complete
100%
25%
WIP, Apr.1
Started in Apr.
(or work done)
CTO Apr.
500
WIP, Apr.30
Cost added in Apr.
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2,200
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WA-- solution
P.U.
300
WIP, Apr.1
Started in Apr.
(or work done)
CTO Apr.
WIP, Apr.30
$DM
$7,500
EU-DM
300
$CC
$2,125
120
2,200
2,000
2,000
2,000
500
500
125
Cost added in Apr.
$70,000
$42,500
Total Cost
$77,500
$44,625
WA $/EU
$31 / EU
$21 /EU
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EU-cc
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WA--solution
DM
CC
Total
2,000 eu * $31/eu
2,000 eu * $21/eu
$104,000
$62,000
$42,000
500 eu * $31/eu
125 eu * $21/eu
(500 : 125 EU)
$15,500
$2,625
Total =
$77,500
$44,625
CTO
(2,000 EU)
E.WIP
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Cost Accounting L.DuCharme
$18,125
$122,125
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Today’s Quote
• “I have no use for bodyguards, but I have
very specific use for two highly trained
certified public accountants.”
--Elvis Presley
2009 Foster School of Business
Cost Accounting L.DuCharme
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WA with TI costs--example
• Finishing department (assume that):
– TI costs are added at the beginning
– DM are added at the end
– CC are added evenly throughout
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Cost Accounting L.DuCharme
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Data for problem
P.U.
B.WIP
500
Started
2,000
TI $
$17,750
TI-eu
100%
DM $ DM-eu CC $ CC-eu
$0
0%
$7,250
60%
(or work
done)
CTO
E.WIP
2,100
400
100%
0%
30%
Costs
Added
$104,000
$23,100
$38,400
Total $
$121,750
$23,100
$45,650
2009 Foster School of Business
Cost Accounting L.DuCharme
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WA with TI costs--solution
P.U.
B.WIP
500
Started
2,000
TI $
DM $
CC $
$17,750
$0
$7,250
$121,750
$23,100
$45,650
(or work
done)
CTO
E.WIP
2,100
400
Total $
WA
$/EU
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Cost Accounting L.DuCharme
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WA with TI costs--solution
WA: $/EU
CTO
TI
DM
CC
Total
$48.700
$11.000
$20.563
$102,270
$23,100
$43,182
$168,552
$19,480
$0
$2,468
$21,948
2,100 eu
E.WIP
400 : 0 : 120
Total
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$190,500
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Chapter 18
This chapter focuses on accounting for
Spoilage (flip side of product quality).
You are responsible for the first 3 pages of the
chapter and what is covered in class.
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Cost Accounting L.DuCharme
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Terminology
• Spoilage
– Unacceptable product discarded or sold for disposal
value (e.g., “Seconds”).
• Reworked units
– Unacceptable product that is reworked and sold as good
product.
• Scrap—material left over with min. or zero sales
value.
• Waste—can be toxic and very costly to dispose of.
2009 Foster School of Business
Cost Accounting L.DuCharme
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Goal of most operations
• Reduction of S/R/S/W
– Consistent with increased quality
– R&D and design play key roles in reducing
S/R/S/W.
2009 Foster School of Business
Cost Accounting L.DuCharme
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“Types” of spoilage
• Normal spoilage
– Expected spoilage with efficient operations.
(“normal spoilage rates” = units of normal spoilage / total good units)
• Abnormal spoilage
– Unexpected (greater than expected) spoilage
under efficient operations. Considered
avoidable & controllable. Some companies
treat all spoilage as abnormal!
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Cost Accounting L.DuCharme
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Why do we care?
• Because we account for the two types
differently!!
• Abnormal spoilage is expensed in the
period it is discovered.
• Normal spoilage is added to job cost, or
under process costing added equally to all
units passing the inspection point.
2009 Foster School of Business
Cost Accounting L.DuCharme
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Accounting for Spoilage
Job Costing
Process Costing
Abnormal
Expense
Expense
Spoilage
Normal Spoil. : Add to job cost
N/A
Due to this job
Add equally to all
Common to all Add to cost of
units passing
all via MOH
inspection point
2009 Foster School of Business
Cost Accounting L.DuCharme
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End of Chapter 17 & 18
2009 Foster School of Business
Cost Accounting L.DuCharme
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