Chapter 6 Process Costing

1. Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney Chapter 6 Process Costing

2. Learning Objectives (1 of 2) • Contrast process costing and job order costing • Explain why equivalent units of production are used in process costing • Calculate equivalent units of production using weighted average and FIFO methods • Compute unit costs and inventory values using weighted average and FIFO methods

3. Learning Objectives (2 of 2) • Explain how standard costs are used in a process costing system • Explain why a company would use a hybrid costing system • (Appendix) Explain the alternative methods used to calculate equivalent units of production

4. COLA Costing Systems Job order costing Process costing

5. Cola Process Costing Systems Large quantity of identical units

6. Process Costing Averaging technique to assign costs to units produced Unit Cost =Production Costs Production Quantity

7. Process Costing • The Numerator - Production Costs • Costs by department • Costs by product • Direct material from material requisitions • Direct labor from time sheets and wage rates • Overhead • Actual • Predetermined application rates

8. Materials Requisition Form No. ### Date ___________________ Department _______________ Job No. _________________ Issued by _________________ Authorized by ___________ Inspected by _______________ Received by _____________ Item Part Unit of Quantity Quantity Unit Total No. No. Descrip. Measure Required Issued Cost Cost

9. Employee Time Sheet Employee Name _______________ Employee No. _______________ Department _______________ For week ending _______ Start Stop Total Type of Work Job No. Time Time Day Hours Employee Signature Supervisor’s Signature

10. 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

11. Equivalent Units • 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

12. Process Costing Methods • Weighted average method • combine • beginning work in process • current period production • FIFO method • separate • beginning work in process • current period production

13. THE DIFFERENCE Process Costing Methods Weighted Average Beginning WIP 100% Started and finished 100% Ending WIP % completed FIFO Beginning WIP % completed Started and finished 100% Ending WIP % completed

14. Process Costing • Direct material • added at beginning, during, and/or end of process • Direct labor • added throughout the process • Overhead • added throughout the process • based on direct labor • based on other, multiple cost drivers

15. Units Costs Process Costing Steps • Units to account for • Units accounted for • Determine equivalent units • Costs to account for • Compute cost per equivalent unit • Assign costs to inventories

16. Cost of Production Report Name of Department 3 for the period --- 2 1 Production Data: Units to account for Units accounted for EUP for each cost Cost Data: Costs to account for Cost per EUP Cost Assignment: Transferred Out Ending Work In Process Inventory 4 5 6

17. Step 1 - Units to Account For Beginning WIP 25,000 Started 510,000 Units to account for 535,000

18. must be equal Step 2 - Units Accounted For Beginning WIP 25,000 Started 510,000 Units to account for 535,000 Finished and transferred 523,000 Ending WIP 12,000 Units accounted for 535,000

19. Step 3 - Compute Equivalent Units DM CC Beginning WIP inventory 25,000 25,000 Started and completed 498,000 498,000 Ending WIP inventory 12,000 9,600*Equivalent units 535,000 532,600 * ending units * % complete 12,000 * 80% = 9,600 Weighted Average Method

20. Step 4 - Costs to Account For DM CC Total Beginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500339,690 773,190 To account for $476,150 $356,842 $832,992 Weighted Average Method

21. Step 5 - Cost per Equivalent Unit DM CC Total Beginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500339,690 773,190 To account for $476,150 $356,842 $832,992 Divide by EUP 535,000 532,600 Cost per EUP $.89 $.67 $1.56 Weighted Average Method

22. Step 6 - Assign Costs to Inventories Transferred (523,000 * $1.56) $815,880 Ending WIP Inventory Direct Materials (12,000 * $.89) $10,680 Conversion (12,000 * 80% * $.67) 6,432 17,112 Cost accounted for $832,992* *must agree with costs to account for Transferred Out Ending WIP Weighted Average Method

23. Process Costing - FIFO • Emphasize current period costs and production • Steps 1 and 2 are the same • Step 3 DM CC Beginning WIP/completed 0 15,000* Started and completed 498,000 498,000 Ending WIP Inventory 12,000 9,600Equivalent units 510,000 522,600 * beginning units * % complete in current period 25,000 * 60% = 15,000

24. Process Costing - FIFO • Step 4 is the same • Step 5 DM CC Total Current costs $433,500 $339,690 $773,190 Divide by EUP 510,000 522,600 Cost per EUP $.85 $.65 $1.50

25. Transferred Out Step 6 Assign Costs to Inventories - FIFO Transferred Beginning WIP Inventory $59,802 Cost to complete Conversion (15,000 * $.65) 9,750 $ 69,552 Started and completed (498,000 * $1.50) 747,000 Ending WIP Direct Materials (12,000 * $.85) $10,200 Conversion (12,000 * 80% * $.65) 6,420 16,440 Cost accounted for $832,992* *must agree with costs to account for Ending WIP

26. Weighted Average EUP DM 535,000 EUP CC 532,600 Cost per unit DM $ .89 Cost per unit CC .67 Total $1.56 Transferred Out $815,880 Ending WIP 17,112 Total $832,992 FIFO EUP DM 510,000 EUP CC 522,600 Cost per unit DM $ .85 Cost per unit CC .65 Total $1.50 Transferred Out $816,552 Ending WIP 16,440 Total $832,992 Process Costing Comparison

27. 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 Successor Processing Department Work in Process

28. Multidepartment Processing Wait Process 1 Materials Transferred-in Costs Transferred-in Costs Process 2 Finished Product Process 3 Wait

29. 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

30. Hybrid Costing Systems • Characteristics of job order and process costing systems • Various Product Lines • different direct material - job order costing • same process - process costing • Hybrid costing used for furniture, clothing, jam

31. 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?