Process Costing

Chapter 17

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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

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 OverviewProcess 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)
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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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 Illustrating Process Costing

Direct Materials, Direct Labor

Indirect Manufacturing Costs

Department Department
A B

Finished Goods Cost of Goods Sold

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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?

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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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 EUwhen 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 WIPwhat companies?
Material ending WIPwhat companies?

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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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 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 + periods 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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 Transferred In Costs

CTO from one department is TI to the next

department.

TI does not equal direct materials.

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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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 Process Costing Examples

(1) Without TI costs

(2) With TI costs

My format****

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Process Costing--WA method

P.U. $DM $CC

WIP, Apr.1 300 $7,500 $2,125

Started in Apr. 2,200

(or work done)
CTO Apr.
WIP, Apr.30 500

Cost added in Apr. $70,000 $42,500

Apr. 1, % complete 100% 40%
Apr. 30, % complete 100% 25%

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 WA-- solution

P.U. $DM EU-DM $CC EU-cc

WIP, Apr.1 300 $7,500 300 $2,125 120

Started in Apr. 2,200

(or work done)
CTO Apr. 2,000 2,000 2,000

WIP, Apr.30 500 500 125

Cost added in Apr. $70,000 $42,500

Total Cost $77,500 $44,625
WA $/EU $31 / EU $21 /EU

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 WA--solution

DM CC Total

CTO 2,000 eu * $31/eu 2,000 eu * $21/eu $104,000

(2,000 EU) $62,000 $42,000
E.WIP 500 eu * $31/eu 125 eu * $21/eu $18,125
(500 : 125 EU) $15,500 $2,625
Total = $77,500 $44,625 $122,125

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 Todays Quote

I have no use for bodyguards, but I have

very specific use for two highly trained
certified public accountants.
--Elvis Presley

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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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 Data for problem

P.U. TI $ TI-eu DM $ DM-eu CC $ CC-eu

B.WIP 500 $17,750 100% $0 0% $7,250 60%

Started 2,000
(or work
done)

CTO 2,100

E.WIP 400 100% 0% 30%

Costs $104,000 $23,100 $38,400

Added
Total $ $121,750 $23,100 $45,650

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 WA with TI costs--solution

P.U. TI $ DM $ CC $
B.WIP 500 $17,750 $0 $7,250

Started 2,000
(or work
done)

CTO 2,100

E.WIP 400

Total $ $121,750 $23,100 $45,650

WA
$/EU

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 WA with TI costs--solution

TI DM CC Total

WA: $/EU $48.700 $11.000 $20.563

CTO $102,270 $23,100 $43,182 $168,552

2,100 eu

E.WIP $19,480 $0 $2,468 $21,948

400 : 0 : 120

Total $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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 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.
Scrapmaterial left over with min. or zero sales
value.
Wastecan be toxic and very costly to dispose of.
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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.

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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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 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.

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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
Common to all Add to cost of Add equally to all
all via MOH units passing
inspection point

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 End of Chapter 17 &
18

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