Chapter 6 Process Costing

1. Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn Chapter 6 Process Costing

2. 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

3. 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

4. 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

5. Job Order Assign costs to job and then to units within the job Process Costing Using an averaging technique, assign costs directly to units produced during the period Job Order vs. Process Costing

6. 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

7. Process Costing • Production Costs • Direct material from material requisitions • Direct labor from time sheets and wage rates • Overhead • Actual • Predetermined application rates

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. Appendix 2 - Spoilage Normal Spoilage Abnormal Spoilage Loss in all ending inventory and transferred out units on an EUP basis Continuous Loss Period expense in EUP Loss in all units past inspection point in ending inventory and transferred out on an EUP basis Discrete Loss Period expense in EUP

19. 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?