1. Chapter 6 Process Costing
Key Topics:
Cost flows in mass production
Steps in preparing process cost reports (FIFO and weighted average)
Equivalent units
Applying costs
Spoilage in process costing
Uses, Uncertainties, and limitations
Chapter 6

2. Process Costing
Process product-costing systems are used for costing inventories or services when they are mass-produced, identical units.
These products differ from the custom-made or unique goods that are assigned costs under a job costing system
Chapter 6

3. Mass Production Many goods are produced using a continuous process.
Examples:
Chapter 6

4. Overview of Process Costing Systems
Chapter 6

5. Steps for Preparing a Process Costing Report:
1. Summarize total costs to account for.
2. Summarize total physical and equivalent units.
3. Compute cost per equivalent unit.
4. Account for cost of units completed and cost of ending WIP.
Chapter 6

6. What Are Equivalent Units, and How Do They Relate to the Production Process?
Measure the resources used in partially completed units relative to the resources needed to complete the units.
Equivalent Units Depend on the Pattern of Cost Flow:
Direct Materials:
* Added at the beginning of the process
* Added during the process
Conversion Costs:
* Incurred uniformly throughout the process
* Incurred non-uniformly
Chapter 6

7. How Is the Weighted Average Method Used in Process Costing?
Costs from beginning WIP (performed last period) are averaged with costs incurred during the current period and then allocated to all units completed and ending WIP.
Chapter 6

8. Summaries of Physical Units and Total Costs for Weighted Average Calculations (Assuming direct materials are added at the beginning of the process)
Chapter 6

9. Calculation of Equivalent Units Under the Weighted Average Method
Chapter 6

10. Beg. WIP Costs + Costs Added This Period
Calculation of Cost Per Equivalent Unit Under the Weighted Average Method
Beg. WIP Costs + Costs Added This Period
Weighted Average Equivalent Units
Chapter 6

11. Equivalent Unit Costs Weighted Average:
Direct materials = $6,000+$30,500 =$3.0417
12,000
Conversion costs=$4,200+$76,680=$7.0947
11,400
Total cost per equivalent unit = $
Chapter 6

12. Weighted Average Process Cost Report
Chapter 6

13. Summaries of Physical Units and Total Costs for FIFO Calculations (Assuming direct materials are added at the beginning of the process)
Chapter 6

14. Calculation of Equivalent Units Under the FIFO Method
Chapter 6

15. First-in, First-out (FIFO) Method
The current period’s costs are used to allocate cost to work performed this period
Chapter 6

16. Calculation of Cost Per Equivalent Unit
Current Period Cost
Equivalent Units for Work Performed this Period
Chapter 6

17. Equivalent Units Costs
FIFO:
Direct materials = $30,500 = $3.05
10,000
Conversion costs=76, = $7.10
10,800
Total cost per equivalent unit = $10.15
Chapter 6

18. FIFO Process Cost Report
Chapter 6

19. How Is Process Costing Performed for Multiple Production Departments
Transferred-in Costs:
Costs of processing performed in a previous department
Transferred-in costs are pooled separately from other costs
Chapter 6

20. Chapter 6

21. How Are Spoilage Costs Handled in Process Costing?
Normal Spoilage:
Defective units that arise as part of regular operations
Abnormal Spoilage:
Spoilage that is not part of everyday operations
Chapter 6

22. Chapter 6

23. Use Process Cost Information to:
Measure costs of products mass-produced products
Assign costs to inventory and cost of goods sold for financial statements and income tax returns
Monitor operations and costs
Develop estimates of future costs for decision making
Analyze the costs and benefits of quality improvements
Identify potential areas for process improvements
Chapter 6

24. Uncertainties and Measurement Errors in Process Costing
Actual cost flows might not be known:
* When are direct materials added?
* When are conversion costs incurred?
* How complete are the units in ending work in process?
* What amount of spoilage is normal?
Chapter 6