Process Costing Systems Process Costing Systems spread total manufacturing costs over total, homogenous, units produced on a continuous basis. Examples : Bricks, corn flakes or papers. Particularly used in companies that convert raw materials into homogeneous products. www.AssignmentPoint.com

DIFFERENCES BETWEEN JOB-ORDER AND PROCESS COSTING www.AssignmentPoint.com

Product and Cost Flows Product Flows Through Departments Cost Flows Through Accounts Conversion Costs www.AssignmentPoint.com

Product Flows Through Departments www.AssignmentPoint.com

Cost Flows Through Accounts www.AssignmentPoint.com

OVERVIEW OF PROCESS COSTING A. In process costing, costs are accumulated in processing departments. B. A separate departmental production report is compiled for each processing department. This report provides the details of how costs are assigned to units that pass through the department. www.AssignmentPoint.com

Process Costing Systems PRODUCTION REPORT has: Quantity schedule and equivalent units: - number of units to account for, units accounted for, and conversion to equivalent units Unit cost data: - beginning cost plus added cost Cost reconciliation: - cost to be accounted for and accounted for www.AssignmentPoint.com

OVERVIEW OF PROCESS COSTING C. Costs to be accounted for in each processing department consist of: 1) Costs of the beginning work in process inventory in the department. 2) Costs added during the period. a. Costs of units transferred in from a preceding department. b. Costs added in the department itself. Materials + Labor + Overhead Conversion Costs www.AssignmentPoint.com

OVERVIEW OF PROCESS COSTING D. Costs are accounted for by assigning them to: 1) Ending work in process inventory in the department. 2) Units transferred out to the next department (or to finished goods). E. In process costing, each unit is assigned the average cost of units processed through the department. www.AssignmentPoint.com

OVERVIEW OF PROCESS COSTING F. Two things must be known to compute the average cost per unit in a department: 1) The total cost. 2) The total number of units processed. G. Partially completed units are converted to equivalent (whole) units. www.AssignmentPoint.com

EQUIVALENT UNITS To compute unit costs it is first necessary to compute Equivalent Units EQUIVALENT UNITS is the number of units that would have been completed if all work had resulted in completed units. www.AssignmentPoint.com

WEIGHTED AVERAGE method WEIGHTED AVERAGE method assumes all beginning units require 100% of material and conversion costs to complete regardless of actual amount of material and conversion costs needed. Mixes some prior period costs with current period costs (Average). I.e., beginning inventory x 100% started & completed x 100% ending inventory x % completed this period www.AssignmentPoint.com

WEIGHTED AVERAGE method For each category of cost in each processing department the following calculations are made: Units transferred out of the department are 100% complete with respect to the work done in the department www.AssignmentPoint.com

WEIGHTED AVERAGE method www.AssignmentPoint.com

WEIGHTED AVERAGE method Work in process, beginning (80% complete) 15,000 units Units started into production 180,000 Units transferred out 175,000 Work in process, ending (30% complete) 20,000 Conversion Costs: Work in process, beginning $24,000 Conversion costs incurred during the month $338,000 www.AssignmentPoint.com

WEIGHTED AVERAGE method www.AssignmentPoint.com

WEIGHTED AVERAGE method www.AssignmentPoint.com

EXAMPLE: The following data are for the first processing department at Midwest Refining, a company that reclaims petroleum products from used motor oil. Units Materials Conversion Work in process, beginning: Units in process 10,000 Percentage completion 60% 50% Cost of beginning inventory $4,300 $7,600 Units started into production 190,000 Costs added in the department during the current period $74,100 $140,400 Units completed and transferred 180,000 Work in process, ending: 20,000 80% 25% www.AssignmentPoint.com

Note: The quantity schedule is based on the following equation: QUANTITY SCHEDULE AND EQUIVALENT UNITS: WEIGHTED-AVERAGE METHOD Quantity Schedule Units to be accounted for: Work in process, beginning 10,000 Started into production 190,000 Total units to be accounted for 200,000 Equivalent Units (EU) Materials Conversion Units accounted for as follows: Units transferred out 180,000 Work in process, ending*  20,000  16,000    5,000 Total units accounted for 196,000 185,000 Materials: 20,000 units × 80% complete = 16,000 EUs; Conversion: 20,000 units × 25% complete = 5,000 EUs Note: The quantity schedule is based on the following equation: Units in beginning work in process + Units started into production = Units transferred out + Units in ending work in process www.AssignmentPoint.com

COMPUTATION OF COSTS PER EQUIVALENT UNIT: WEIGHTED-AVERAGE METHOD Total Whole Cost Materials Conversion Unit Cost to be accounted for: Work in process, beginning $  11,900 $  4,300 $   7,600 Costs added  214,500  74,100  140,400 Total cost to be accounted for (a) $226,400 $78,400 $148,000 Equivalent units (b) 196,000 185,000 Cost per EU (a) ÷ (b) $0.40 + $0.80 = $1.20 www.AssignmentPoint.com

COST RECONCILIATION: WEIGHTED-AVERAGE METHOD Total Equivalent Units (EU) Cost Materials Conversion Cost accounted for as follows: Transferred out: 180,000 units @ $1.20 each $216,000 180,000 Work in process, ending: Materials @ $0.40 per EU 6,400 16,000 Conversion @ $0.80 per EU      4,000 5,000 Total work in process, ending    10,400 Total cost accounted for $226,400 www.AssignmentPoint.com

FIFO method FIFO method differs only in the treatment of beginning inventory. The percentage used is the ACTUAL percentage necessary to finish the units. (i.e., the complement of the actual percentage done when the period started.) Keeps all costs of each period separate. I.e., beginning inventory x (1.00 - percentage complete) started and completed x 100% ending inventory x % completed this period www.AssignmentPoint.com

190,000 units started – 20,000 units in ending WIP = 170,000 units QUANTITY SCHEDULE AND EQUIVALENT UNITS: FIFO METHOD Quantity Schedule Units to be accounted for: Work in process, beginning 10,000 Started into production 190,000 Total units to be accounted for 200,000 Equivalent Units (EU) Materials Conversion Units accounted for as follows: Transferred out: From beginning inventory* 4,000 5,000 Started and completed† 170,000 Work in process, ending  20,000  16,000    5,000 Total units accounted for 180,000 Materials: 10,000 × (100% – 60%) = 4,000 EUs Conversion: 10,000 × (100% – 50%) = 5,000 EUs 190,000 units started – 20,000 units in ending WIP = 170,000 units www.AssignmentPoint.com

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COMPUTATION OF COSTS PER EQUIVALENT UNIT: FIFO METHOD Total Whole Cost Materials Conversion Unit Cost to be accounted for: Work in process, beginning $ 11,900 Cost added in the department (a)  214,500 $ 74,100 $140,400 Total cost to be accounted for $226,400 Equivalent units (b) 190,000 180,000 Cost per EU (a) ÷ (b) $0.39 + $0.78 = $1.17 www.AssignmentPoint.com

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