Prepared by Diane Tanner University of North Florida Chapter 17 1 Process Costing

Assigning Costs to Cost Objects  Direct materials –Traced  Direct labor – Traced  Manufacturing overhead - Allocated  Direct materials –Traced  Direct labor – Traced  Manufacturing overhead - Allocated 2  Direct materials – Allocated  Direct labor – Allocated  Manufacturing overhead - Allocated  Direct materials – Allocated  Direct labor – Allocated  Manufacturing overhead - Allocated Unique Homogeneous

The Use of Process Costing  Used in environments where  Production passes through multiple cost centers  A single product is produced on a continuing basis or for a long period of time  Computes unit costs by department  Determines the cost of ending work in process account and the cost transferred out of each work in process account 3 Cost flows are the same as job order costing: RM  WIP  FG  CGS Cost flows are the same as job order costing: RM  WIP  FG  CGS

Equivalent Units  Estimates are made about the percentage of completion of unfinished units  How many full units could have been completed if all efforts had been put forth to only start and complete units rather than leaving some units partially finished? 4 Why equivalent units? Each department will have some partially completed units in beginning and ending inventory Partially completed units complicate the output and the unit cost to assign to that output Why equivalent units? Each department will have some partially completed units in beginning and ending inventory Partially completed units complicate the output and the unit cost to assign to that output

Process Costing Methods  Two methods to calculate equivalent units  Weighted-average method  Averages current period production costs with beginning inventory costs  Blends units and costs from prior and current periods  FIFO method  Segregates current period production costs from the production costs in beginning work-in-process  Considered more accurate than the weighted- average method 5

Production Cost Report  A separate report is created for each department, usually monthly  Identifies the total cost transferred out of each WIP account into FG, and the cost of ending WIP  Contains 5 sections 1: Summarizes the flow of physical units of output 2: Computes equivalent units 3: Summarizes total costs to account for 4: Computes the cost per equivalent unit 5: Assigns total costs to units completed and to units in ending work-in-process 6

Cost Categories on Production Cost Report Costs are separately tracked in three categories:  Direct materials  Conversion costs  Assumes overhead is assigned at the same rate direct labor is incurred  Transferred-in costs  Costs associated with units completed in the previous department 7

8 The End