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Process Costing: Cost Accounting: Foundations and Evolutions, 9e
Process Costing: Cost Accounting: Foundations and Evolutions, 9e
Process Costing: Cost Accounting: Foundations and Evolutions, 9e
Process Costing
Cost Accounting:
Foundations and Evolutions, 9e
Kinney ● Raiborn
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accessible website, in whole or in part.
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?
■ 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?
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accessible website, in whole or in part.
Job Order vs. Process Costing
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accessible website, in whole or in part.
Process Costing
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accessible website, in whole or in part.
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Materials Requisition Form
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accessible website, in whole or in part.
Employee Time Sheet
Employee Name _______________
Employee No. _______________ For week ending
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.
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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
© 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
■ 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
© 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
WA
Beginning WIP 100%
Started and finished 100%
Ending WIP % completed
The Difference
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
© 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
■ Direct material
❑ Added at the beginning, during, and/or at the end
of 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.
© 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
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accessible website, in whole or in part.
Cost of Production Report
Name of Department
for the period ---
Production Data:
①Units to account for
②Units accounted for * Numbers correlate to the
③EUP for each cost process costing steps in the
previous slide
Cost Data:
④Costs to account for
Cost per EUP
⑤
⑥Cost Assignment:
Transferred Out
Ending Work in Process Inventory
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accessible website, in whole or in part.
Step 1—Units to Account For
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accessible website, in whole or in part.
Step 2—Units Accounted For
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accessible website, in whole or in part.
Step 3—Compute Equivalent Units
DM Conversion
Beginning WIP inventory 5,000 5,000
Started and completed 198,000 198,000
Ending WIP inventory 2,700 2,160*
Equivalent units 205,700 205,160
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Step 4—Costs to Account For
DM Conversion Total
Beginning WIP $ 5,943 $ 16,758 $ 22,701
Current costs 321,120 660,270 981,390
To account for $327,063 $677,028 $1,004,091
WA Method
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accessible website, in whole or in part.
Step 5—Cost per Equivalent Unit
DM Conversion Total
Beginning WIP $ 5,943 $ 16,758 $ 22,701
Current costs 321,120 660,270 981,390
To account for $327,063 $677,028 $1,004,091
WA Method
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Step 6—Assign Costs to Inventories
WA Method
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accessible website, in whole or in part.
Process Costing—FIFO
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accessible website, in whole or in part.
Step 3—Compute Equivalent Units
DM Conversion
Beginning WIP/completed 0 3,000*
Started and completed 198,000 198,000
Ending WIP Inventory 2,700 2,160
Equivalent units 200,700 203,160
DM Conversion Total
Current costs $321,120 $660,270 $981,390
© 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
■ 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)
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Multidepartment Processing
Process 1 Wait
Materials
Transferred-In Process 2
Cost
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accessible website, in whole or in part.
Hybrid Costing Systems
■ Characteristics of job order and process costing
systems
■ Various product lines
❑ Different direct material—job order costing
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Appendix 1—
Alternative Cost Computation
■ There are two alternative methods to
calculate WA and FIFO EUP
■ Use alternative methods
❑ To confirm standard computation
❑ As a simplified computation
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accessible website, in whole or in part.
Appendix 1—
Traditional Cost Computation
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accessible website, in whole or in part.
Appendix 1—
Alternative Cost Computation 1
Units transferred out (whole units)
Plus: Ending work in process (equivalent units)
WA EUP
Less: Beginning work in process (equivalent units)
FIFO 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.
Appendix 1—
Alternative Cost Computation 1
Conversion Costs
Candles transferred 203,000
Ending WIP EUP 2,160
WA EUP 205,160
Beginning WIP EUP (2,000)
FIFO EUP 203,160
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Appendix 1—
Alternative Cost Computation 2
Total units to account for
Less: EUP to be completed next period
WA EUP
Less : EUP completed in prior period
FIFO 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.
Appendix 1—
Alternative Cost Computation 2
Conversion Costs
Total units to account for 205,700
EUP to be completed next period (540)
WA EUP 205,160
EUP completed in prior period (2,000)
FIFO EUP 203,160
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Appendix 2 - 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
■ 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.
Appendix 3—Spoilage
■ Continuous loss—Loss occurs fairly
uniformly through the process
■ Discrete loss—Loss occurs at a specific
point and is detectable only when a
quality check is performed
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accessible website, in whole or in part.
Appendix 3—Spoilage
■ Normal shrinkage and continuous losses
❑ Assign costs only to units that have passed the
inspection point
■ Use Method of Neglect
❑ Excludes spoiled units in the equivalent units schedule
❑ Spreads cost of lost units proportionately over the
good units transferred and those remaining in WIP
inventory
■ Abnormal losses
❑ Period expense
❑ Accounted for on an equivalent unit basis
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accessible website, in whole or in part.
Appendix 3—Spoilage
Normal Abnormal
Spoilage Spoilage
Loss in all ending
Continuous inventory and Period expense
Loss transferred-out units in EUP
on an EUP basis
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accessible website, in whole or in part.
Questions
■ What is an EUP?
■ What is the difference between the WA 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
■ 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.