1. Process Costing Systems
Process Costing Systems spread total manufacturing costs over total, homogenous, units produced on a continuous basis.
Examples : Bricks, corn flakes or papers.
Particularly used in companies that convert raw materials into homogeneous products.

2. DIFFERENCES BETWEEN JOB-ORDER
AND PROCESS COSTING

3. Product and Cost Flows Product Flows Through Departments
Cost Flows Through Accounts
Conversion Costs

4. Product Flows Through Departments

5. Cost Flows Through Accounts

6. OVERVIEW OF PROCESS COSTING
A. In process costing, costs are accumulated in processing departments.
B. A separate departmental production report is compiled for each processing department. This report provides the details of how costs are assigned to units that pass through the department.

7. Process Costing Systems
PRODUCTION REPORT has:
Quantity schedule and equivalent units:
- number of units to account for, units accounted for, and conversion to equivalent units
Unit cost data:
- beginning cost plus added cost
Cost reconciliation:
- cost to be accounted for and accounted for

8. OVERVIEW OF PROCESS COSTING
C. Costs to be accounted for in each processing department consist of:
1) Costs of the beginning work in process inventory in the department.
2) Costs added during the period.
a. Costs of units transferred in from a preceding department.
b. Costs added in the department itself.
Materials + Labor + Overhead
Conversion Costs

9. OVERVIEW OF PROCESS COSTING
D. Costs are accounted for by assigning them to:
1) Ending work in process inventory in the department.
2) Units transferred out to the next department (or to finished goods).
E. In process costing, each unit is assigned the average cost of units processed through the department.

10. OVERVIEW OF PROCESS COSTING
F. Two things must be known to compute the average cost per unit in a department:
1) The total cost.
2) The total number of units processed.
G. Partially completed units are converted to equivalent (whole) units.

11. EQUIVALENT UNITS
To compute unit costs it is first necessary to compute Equivalent Units
EQUIVALENT UNITS is the number of units that would have been completed if all work had resulted in completed units.

12. WEIGHTED AVERAGE method
WEIGHTED AVERAGE method assumes all beginning units require 100% of material and conversion costs to complete regardless of actual amount of material and conversion costs needed. Mixes some prior period costs with current period costs (Average).
I.e., beginning inventory x 100%
started & completed x 100%
ending inventory x % completed this period

13. WEIGHTED AVERAGE method
For each category of cost in each processing department the following calculations are made:
Units transferred out of the department are 100% complete with respect to the work done in the department

14. WEIGHTED AVERAGE method

15. WEIGHTED AVERAGE method
Work in process, beginning (80% complete)
15,000
units
Units started into production
180,000
Units transferred out
175,000
Work in process, ending (30% complete)
20,000
Conversion Costs:
Work in process, beginning
$24,000
Conversion costs incurred during the month
$338,000

16. WEIGHTED AVERAGE method

17. WEIGHTED AVERAGE method

18. EXAMPLE: The following data are for the first processing department at Midwest Refining, a company that reclaims petroleum products from used motor oil.
Units
Materials
Conversion
Work in process, beginning:
Units in process
10,000
Percentage completion
60%
50%
Cost of beginning inventory
$4,300
$7,600
Units started into production
190,000
Costs added in the department during the current period
$74,100
$140,400
Units completed and transferred
180,000
Work in process, ending:
20,000
80%
25%

19. Note: The quantity schedule is based on the following equation:
QUANTITY SCHEDULE AND EQUIVALENT UNITS: WEIGHTED-AVERAGE METHOD
Quantity Schedule
Units to be accounted for:
Work in process, beginning
10,000
Started into production
190,000
Total units to be accounted for
200,000
Equivalent Units (EU)
Materials
Conversion
Units accounted for as follows:
Units transferred out
180,000
Work in process, ending*
 20,000
 16,000
   5,000
Total units accounted for
196,000
185,000
Materials: 20,000 units × 80% complete = 16,000 EUs; Conversion: 20,000 units × 25% complete = 5,000 EUs
Note: The quantity schedule is based on the following equation:
Units in beginning work in process + Units started into production = Units transferred out + Units in ending work in process

20. COMPUTATION OF COSTS PER EQUIVALENT UNIT: WEIGHTED-AVERAGE METHOD
Total
Whole
Cost
Materials
Conversion
Unit
Cost to be accounted for:
Work in process, beginning
$  11,900
$  4,300
$   7,600
Costs added
 214,500
 74,100
 140,400
Total cost to be accounted for (a)
$226,400
$78,400
$148,000
Equivalent units (b)
196,000
185,000
Cost per EU (a) ÷ (b)
$0.40
+ $0.80
= $1.20

21. COST RECONCILIATION: WEIGHTED-AVERAGE METHOD
Total
Equivalent Units (EU)
Cost
Materials
Conversion
Cost accounted for as follows:
Transferred out: 180,000 $1.20 each
$216,000
180,000
Work in process, ending:
$0.40 per EU
6,400
16,000
$0.80 per EU
     4,000
5,000
Total work in process, ending
   10,400
Total cost accounted for
$226,400

22. FIFO method
FIFO method differs only in the treatment of beginning inventory. The percentage used is the ACTUAL percentage necessary to finish the units. (i.e., the complement of the actual percentage done when the period started.) Keeps all costs of each period separate.
I.e., beginning inventory x ( percentage complete)
started and completed x 100%
ending inventory x % completed this period

23. 190,000 units started – 20,000 units in ending WIP = 170,000 units
QUANTITY SCHEDULE AND EQUIVALENT UNITS: FIFO METHOD
Quantity
Schedule
Units to be accounted for:
Work in process, beginning
10,000
Started into production
190,000
Total units to be accounted for
200,000
Equivalent Units (EU)
Materials
Conversion
Units accounted for as follows:
Transferred out:
From beginning inventory*
4,000
5,000
Started and completed†
170,000
Work in process, ending
 20,000
 16,000
   5,000
Total units accounted for
180,000
Materials: 10,000 × (100% – 60%) = 4,000 EUs Conversion: 10,000 × (100% – 50%) = 5,000 EUs
190,000 units started – 20,000 units in ending WIP = 170,000 units

25. COMPUTATION OF COSTS PER EQUIVALENT UNIT: FIFO METHOD
Total
Whole
Cost
Materials
Conversion
Unit
Cost to be accounted for:
Work in process, beginning
$ 11,900
Cost added in the department (a)
 214,500
$ 74,100
$140,400
Total cost to be accounted for
$226,400
Equivalent units (b)
190,000
180,000
Cost per EU (a) ÷ (b)
$0.39
+ $0.78
= $1.17