ACTG 3310 Chapter 8 - Process Costing

Importance Costs used to –Set prices –For make or buy decisions –Used in transfer prices –Strategic planning Very important to know how much your products cost - part by part

Process Costing System Used for homogeneous, mass-produced products No reason to set up a job cost sheet for each product since all products are similar Costs are accumulated by department or “process”

Assigning Costs No inventories Example: 10,000 units made, Costs = DM $150,000, DL = $20,000, OH = $80,000 Cost = ? per unit Total costs = $250,000, Total units= 10,000 Cost per unit = $25

Assigning Costs Ending inventory - units left are not done Equivalent units = 1,000 units, 25% complete How many complete? None, BUT we have incurred 25% of costs SO we say that is equivalent to costs incurred for 1000 x 25% = 250 full units.

Assigning Costs Weighted Average Assume beginning inventory was started and completed this period Beginning inventory 2,000 units Started10,000 units Ending inv (25% comp) 3,000 units How many units completed and transferred? BI + TI = TO + EI ,000 = ? ; TO = ?

Assigning Costs Weighted Average 9,000 completed and transferred Equivalent units = units completed + % of ending inventory completed 9,000 full units + 3,000 x.25 = 750 (end. inv.) = 9,750 equiv. units Cost per equivalent unit = Beg. inventory + current costs / equiv. units

Cost of Production Report 1) Measure the physical flow of resources 2) Compute the equivalent units of production 3) Identify the product costs for which to account 4) Compute the costs per equivalent unit 5) Assign product costs to units completed and to ending inventory

Assigning Costs FIFO Method Cost of production report: 1) In FIFO, we must keep the Beginning inventory separate from the current costs 2) Add three items to get equivalent units: –1) Beginning inventory units x % to complete –2) Units started and completed –3) Ending inventory units x % completed

Assigning Costs FIFO Method 3) Divide current costs only by equivalent units of production to get unit cost 4) Summarize the total costs to account for 5) Add –a) beginning inventory costs from last period + costs to complete beginning inventory –b) unit costs x units started & completed –c) unit costs x ending inventory equivalent units –= Total costs accounted for

Weighted Average vs. FIFO Both acceptable for GAAP Large inventories with wide changes in prices - use FIFO FIFO - theoretically best

Transferred-in Costs When computing costs for second or third, etc. departments, you will have costs from previous department (transferred-in costs) Treat as direct materials applied 100% at the beginning of the process Responsibility for transferred-in costs lies with previous department

Operation Costing Hybrid cost accumulation system Involves process costing for some steps Includes job order costing for those steps distinguishable to each product/service