Costing Systems: Process Costing 21

The Process Costing System OBJECTIVE 1: Describe the process costing system, and identify the reasons for its use.

The Process Costing System A process costing system is used when costs to produce a product should be the same for all units.

The Process Costing System Managers use process costing in every stage of the management system. –Planning –Tracking –Evaluating performance –Communicating with external stakeholders

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Patterns of Product Flows and Cost Flow Methods OBJECTIVE 2: Relate the patters of product flows to the cost flow methods in a process costing environment, and explain the role of the Work in Process Inventory accounts.

Figure 1: Production Flows in a Process Costing Environment

Patterns of Product Flows and Cost Flow Methods In a process costing environment, production flow may include from two to a dozen or more departments, processes, or work cells.

Patterns of Product Flows and Cost Flow Methods A process costing system maintains a separate Work in Process Inventory account for each department, process, or work cell.

Patterns of Product Flows and Cost Flow Methods Each Work in Process Inventory account contains costs of any direct materials, direct labor, and overhead for that department, process, or work cell, as well as any costs that have been transferred in from the previous department, process, or work cell.

Patterns of Product Flows and Cost Flow Methods At the end of every accounting period, a process cost report assigns the costs that have accumulated during the period to the units that have transferred out of the department and to the units that are still work in process.

Patterns of Product Flows and Cost Flow Methods A process cost report may be prepared using the FIFO costing method.

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Computing Equivalent Production OBJECTIVE 3: Define equivalent production, and compute equivalent units.

Computing Equivalent Production Equivalent production (equivalent units) is a measure of the number of equivalent whole units worked on during a period. –Explain why the calculation of equivalent units is necessary. –Equivalent production applies a percentage-of- completion factor to partially completed units to calculate the equivalent number of whole units produced in an accounting period for each type of production input.

Figure 1 Computation of Equivalent Production

Computing Equivalent Production Equivalent production (equivalent units) is a measure of the number of equivalent whole units worked on during a period. –The number of equivalent units produced is the sum of the following: Total units started and completed during the period An amount representing the work done on partially completed products in both the beginning and ending work in process inventories.

Computing Equivalent Production Because the costs of direct labor and overhead are often incurred uniformly throughout the production process, they may, for the sake of convenience, be combined when calculating equivalent units; these combined costs are called conversion costs.

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Preparing a Process Cost Report Using the FIFO Costing Method OBJECTIVE 4: Prepare a process cost report using the FIFO costing method.

Exhibit 1: Process Cost Report: FIFO Costing Method

Preparing a Process Cost Report Using the FIFO Costing Method Cost flow in a process cost report that uses the FIFO costing method follows the logical physical flow of production—that is, the costs assigned to the first materials processed are the first costs transferred when those materials flow to the next process, department, or work cell.

Preparing a Process Cost Report Using the FIFO Costing Method Preparation of a process cost report involves five steps: –Step 1 entails computing the total number of physical units to be accounted for during the period. –Step 2 entails computing equivalent units of production for the period for direct materials and conversion costs.

Preparing a Process Cost Report Using the FIFO Costing Method Preparation of a process cost report involves five steps: (cont.) –In Step 3, all direct materials and conversion costs for the period and the previous period are added to arrive at total costs. –In Step 4, the cost per equivalent unit for both direct materials and conversion costs is computed by dividing current period costs by their respective equivalent units.

Preparing a Process Cost Report Using the FIFO Costing Method

Preparation of a process cost report involves five steps: (cont.) –In Step 5, costs are assigned to the units completed and transferred out during the period, as well as to the ending work in process inventory.

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Preparing a Process Cost Report Using the Average Costing Method OBJECTIVE 5: Prepare a process cost report using the average costing method.

Preparing a Process Cost Report Using the Average Costing Method Accounting for units –Step 1 accounts for the physical units in a production process, department or work cell during an account period.

Preparing a Process Cost Report Using the Average Costing Method Accounting for units (cont.) –Step 2 accoutns for produciotn during the period in terms of units Units Completed and transferred out Ending inventory Totals

Preparing a Process Cost Report Using the Average Costing Method Accounting for costs –Step 3 accumulates all direct materials costs and conversion costs for beginning inventory and the current period in the Total Costs column –Step 4 computes the cost per equivalent unit for direct materials costs and conversion costs by dividing the total of these costs by their respective equivalent units.

Preparing a Process Cost Report Using the Average Costing Method Assigning costs –Step 5 of a process cost report assigns direct materials and conversion costs to the units transferred out and to the units still in process at the period. Costs of Goods Manufactured and Transferred Out Ending Inventory

Exhibit 2 Process Cost Report: Average Costing Method

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