Cost Accounting

Foundations and Evolutions

Kinney, Prather, Raiborn

Chapter 6
Process Costing
 Learning Objectives (1 of 3)
• Contrast process costing and job order
costing
• Explain why equivalent units of production
are used in process costing
• Calculate equivalent units of production, unit
costs, and inventory values using weighted
average method of process costing
 Learning Objectives (2 of 3)
• Compute equivalent units of production, unit
costs, and inventory values using FIFO
method of process costing
• Explain how standard costs are used in a
process costing system
• Explain why a company would use a hybrid
costing system
 Learning Objectives (3 of 3)
• (Appendix 1) Explain the alternative
methods used to calculate equivalent units
of production
• (Appendix 2) Describe how normal and
abnormal spoilage losses are treated in an
EUP schedule
 Job Order vs. Process Costing
Job Order Process Costing
• Assign costs to job • Using an averaging
and then to units technique, assign costs
within the job directly to units
produced during the
period
 Process Costing
• 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
 Process Costing
• Production Costs
– Direct material from material requisitions
– Direct labor from time sheets and wage rates
– Overhead
• Actual
• Predetermined application rates
 Process Costing
• 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 (EUP)
• 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 Method
– combines
• beginning work in process
• current period production
• FIFO Method
– separates
• beginning work in process
• current period production
 Process Costing Methods
Weighted Average
Beginning WIP 100%
Started and finished 100%
Ending WIP THE % completed
DIFFERENCE
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
 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
 Process Costing Steps
1 Units to account for
2 Units accounted for Units
3 Determine equivalent units
4 Costs to account for
5 Compute cost per equivalent unit Costs
6 Assign costs to inventories
 Cost of Production Report
Name of Department
3
for the period ---
Production Data: 1 2
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
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
Process Costing with Standard Costs
• 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
 Hybrid Costing Systems
• 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
 Appendix 2 - Spoilage
Normal Abnormal
Spoilage Spoilage
Loss in all ending
Continuous inventory and
transferred out Period expense
Loss
units on an EUP in EUP
basis
Loss in all units
Discrete past inspection
point in ending Period expense
Loss
inventory and in EUP
transferred out on
an EUP basis
 Questions
• 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?