Chapter 6:
Process Costing
Cost Accounting Principles, 9e
Raiborn ● Kinney
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accessible website, in whole or in part.
Learning Objectives
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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?
Why would a company use a hybrid costing system?
(Appendix 1) What alternative methods can be used to calculate equivalent
units of production?
(Appendix 2) How are equivalent units of production, unit costs, and
inventory values determined using the standard costing method of process
costing?
(Appendix 3) How are normal and abnormal spoilage losses treated in an
EUP schedule?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Job Order vs. Process Costing
Job Order
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Small quantities of
distinct products or
service
Assign costs to job and
then to units within the
job
Process Costing
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Large quantities of
homogeneous products
or services
Using an averaging
technique, assign costs
directly to units produced
during the period
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accessible website, in whole or in part.
Process Costing Numerator
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The Numerator - Production Costs
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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
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accessible website, in whole or in part.
Process Costing Denominator
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The Denominator - Units Produced
Complicated by work in process
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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
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accessible website, in whole or in part.
Equivalent Units of Production (EUP)
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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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing
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Direct material
 added at the beginning, during, and/or at
the end of the process
Direct labor
 added throughout the process
Overhead
 added throughout the process
 based on direct labor
 based on other, multiple cost drivers
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing Steps
1
2
3
4
5
6
Units to account for
Units accounted for
Units
Determine equivalent units
Costs to account for
Compute cost per equivalent unit Costs
Assign costs to inventories
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Two Process Costing Methods
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Weighted Average Method
 combines
 beginning work in process
 current period production
FIFO Method
 separates
 beginning work in process
 current period production
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
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
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accessible website, in whole or in part.
Cost of Production Report
Name of Department
for the period ---
3
Production Data:
2
1
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
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accessible website, in whole or in part.
Hybrid Costing Systems
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Characteristics of job order and process costing
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, jam, etc.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Process Costing with Standard Costs
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Simplify costing process
Eliminate periodic cost recomputations
Same as FIFO computations
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emphasize current period costs and production
Inventories are stated at standard cost
Variances are calculated for material,
labor, and overhead
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accessible website, in whole or in part.
Process Costing with Standard Costs
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Assigns a “normal” production cost to
the equivalent units of output each
period
Allows managers to quickly recognize
and investigate significant deviations
from expected production costs
Allows benchmarking with other firms
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accessible website, in whole or in part.
Spoilage
Normal
Spoilage
Continuous
Loss
Loss in all ending
inventory and
transferred out units
on an EUP basis
Discrete
Loss
Loss in all units past
inspection point in
ending inventory and
transferred out on an
EUP basis
Abnormal
Spoilage
Period expense
in EUP
Period expense
in EUP
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Questions
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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?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Potential Ethical Issues
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Over or underestimating completion %
for ending WIP inventory to distort results
Using outdated standard costs
Ignoring the assignment of significant
direct costs to specific jobs
Treating abnormal spoilage as normal
spoilage
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.