Process Costing

Process Costing Systems Process costing is a costing system in which the product or service cost is obtained by assigning costs to masses of like units Conversion costs are costs that are applied uniformly in a department Materials costs are assumed to be applied at discrete points in the production process Transferred costs are costs transferred from one department to another department Pages 637 - 638

Process Costing System Diagram Conversion Costs Material Costs Material Costs Conversion Costs Transferred Costs Testing Department Finished Goods Inventory Assembly Department Pages 637 - 638

Process Costing The cost accounting system used by a company depends upon the nature of its products or services. Process costing is more efficient for companies that produce large quantities of homogenous product in a continuous process.

Physical Flows for a Process Manufacturer Scrap Metal Materials Melting Department Casting Department

Physical Flows for a Process Manufacturer Molten metal transferred from Melting Melting Department Casting Department To finished goods

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM Factory OH – Melting Factory OH – Casting Finished Goods Cost of Goods Sold DM Direct materials used in production

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM DL Factory OH – Melting Factory OH – Casting Finished Goods Actual costs incurred Cost of Goods Sold DL Direct labor used in production

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM IM DL Actual costs incurred Actual costs incurred Factory OH – Melting Factory OH – Casting Finished Goods Cost of Goods Sold IM Indirect materials used in production

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM IM DL Actual costs incurred FOA Factory OH – Melting Factory OH – Casting Finished Goods FOA Actual costs incurred Cost of Goods Sold FOA Factory overhead applied

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM TO TI IM DL Actual costs incurred FOA Factory OH – Melting Factory OH – Casting Finished Goods FOA Actual costs incurred Cost of Goods Sold TO/TI Cost transferred out/transferred in

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM TO TI IM DL DL Actual costs incurred FOA FOA Factory OH – Melting Factory OH – Casting Finished Goods FOA FOA Actual costs incurred Cost of Goods Sold DL Direct labor used in production FOA Factory overhead applied

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM TO TI TO TI IM DL DL Actual costs incurred FOA FOA Factory OH – Melting Factory OH – Casting Finished Goods FOA FOA Actual costs incurred Cost of Goods Sold TO/TI Cost transferred out/transferred in

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM TO TI TO IM DL DL Actual costs incurred FOA FOA Factory OH – Melting Factory OH – Casting Finished Goods FOA FOA TI COGS Actual costs incurred COGS Cost of Goods Sold COGS Cost of goods sold

Cost Flows for a Process Manufacturer Materials WIP – Melting WIP – Casting Purchases of direct and indirect materials DM DM TO TI TO IM DL DL Actual costs incurred FOA FOA Factory OH – Melting Factory OH – Casting Finished Goods FOA FOA TI COGS Actual costs incurred COGS Cost of Goods Sold COGS Cost of goods sold

Five Steps in Process Costing Process Costing Steps Equivalent units is a measure of the output of a process costing system 60 units 25% complete = 15 equivalent whole units Five Steps in Process Costing 1. Track the physical units of output 2. Determine the number of equivalent whole units 3. Compute the cost per equivalent unit 4. Measure total costs to account for 5. Assign costs to units completed and transferred out of the department and units in ending inventory Pages 640 - 642

Weighted Average and FIFO Methods Calculates the average equivalent unit cost of the work done to date regardless of when the work was done Smoothes out unit costs from month to month FIFO Costs carried forward from the previous period are assigned directly to completed goods Assumes that work required to finish incomplete units (from the previous month) is done at the beginning of the month Pages 643 - 650