1. Process-Costing Chapter 8 Systems

2. Process costing • Characteristics • Identical units • Continuous flow production • Never “complete” • Move from process (or department) to process • Costs are accumulated by process for a time period • Allocated to “equivalent units” of output during the period

3. Equivalent units • Amount of finished units that could have been completed, given the materials or effort involved • Three units started into production • One is completed • One is ¾ completed • One is ¼ completed • Two equivalent units are produced (1 + ¾ + ¼)

4. Equivalent units • May have different number of equivalent units for materials, labor and overhead • Using the previous example, assume • all materials are added at the beginning • 1 + 1 + 1 = 3 equivalent units for materials • conversion costs are added throughout the process • 1 + ¾ + ¼ = 2 equivalent units for conversion costs

5. Equivalent units • Try this one • At the beginning of the period • 5 units, each ½ complete, are in process • During the period • 27 more units are put into production • At the end of the period • 6 units, each ¾ complete, are still in process • How many equivalent units were produced?

6. The process • Step 1 – Summarize flow of physical units • How many were in beginning inventory? • How many were started? • How many are still in ending inventory? • Step 2 – Calculate equivalent units • Beginning inventory was completed • Of the units started • Some were completed • Some are in ending inventory

7. The process • Step 3 – Summarize costs to be accounted for • Cost in beginning inventory • Cost added during the period • Step 4 – Calculate cost per equivalent unit • Step 5 – Assign costs to completed units and ending inventory

8. Production cost report • Part 1 – Units • Summary of physical and equivalent units • Where did they come from? • Where did they go? • Part 2 – Costs • Summary of costs • Calculation of cost per equivalent units • Assignment of costs • Transferred out • Work in process

10. Example 1 • No beginning inventory • 18,000 units started • 2,000 in ending work in process inventory • 40% complete as to materials • 30% complete as to conversion cost • Current period costs • Materials - $45,360 • Conversion costs - $68,060

12. Example 2 • Beginning and ending inventories • 4,000 units in beginning work in process • 80% complete as to materials • 50% complete as to conversion costs • 25,000 units started • 3,000 units in ending work in process • 60% complete as to materials • 50% complete as to conversion costs • Costs • Materials: Beg. WIP - $7,040, current - $51,660 • Conversion: Beg. WIP - $1,500, current - $20,400

14. Example 3 • Costs transferred from prior department • Units and costs transferred out of previous department (example 2) to department 2 • Cumulative costs from prior department are treated as a separate cost category in current department • Units are 100% complete as to prior department • Transferred-in units are the “units started” in the current department

15. Example 3 • In department 2 • 1,000 units in beginning work in process • 70% complete as to materials • 60% complete as to conversion costs • 2,000 units in ending work in process • 30% complete as to materials • 20% complete as to conversion costs • Costs • Materials: Beg. WIP - $420, current - $14,940 • Conversion: Beg. WIP - $840, current - $34,720

17. First-in, first-out method • Previous examples used weighted average method • Costs in beginning inventory were combined with current period costs • First-in, first-out method separates the two • Assumes units in beginning inventory were finished first

18. First-in, first-out method • Equivalent unit calculation includes • Work done to complete the units in beginning inventory • Work done on new units started • 100% for those started and completed • <100% for those started but not completed

19. First-in, first-out method • Beginning inventory costs are only assigned to units in beginning inventory • Some current period costs are added to complete them • Units started are only assigned current period costs • Costs accounted for includes • Beginning inventory cost transferred out • Current costs added to complete beginning inventory • Current costs of units started and completed • Current costs in ending inventory

20. First-in, first-out method • Example 2 using FIFO method • 4,000 units in beginning work in process • 80% complete as to materials • 50% complete as to conversion costs • 25,000 units started • 3,000 units in ending work in process • 60% complete as to materials • 50% complete as to conversion costs • Costs • Materials: Beg. WIP - $7,040, current - $51,660 • Conversion: Beg. WIP - $1,500, current - $20,400

21. Example 2 - FIFO

22. Example 2 - FIFO

23. Accounting for spoilage • Spoiled units have incurred some cost but are not transferred to the next stage • Treated as a separate line item for • Units accounted for • Equivalent units • Costs accounted for

24. Accounting for spoilage • Example 2 with spoilage • 4,000 units in beginning work in process • 80% complete as to materials, 50% as to conversion costs • 25,000 units started • 800 units spoiled • 50% complete as to materials, 30% as to conversion costs • 2,200 units in ending work in process • 60% complete as to materials, 50% as to conversion costs • Costs • Materials: Beg. WIP - $7,040, current - $51,660 • Conversion: Beg. WIP - $1,500, current - $20,400

26. Journal entries • Same as for job-order costing • Dollar value of units transferred out represents the cost moving from WIP to the next stage in the process • Another WIP account (department) • Finished goods inventory • Dollar value of spoiled goods is debited to an expense account

27. Operation costing • Hybrid of job-order and process-costing • Products goes through a combination of common processes and individual processes • No special accounting required • Units may be transferred out of a process to become a separate job or vice-versa