1. CHAPTER 17
Process Costing
Spoilage, Rework, and Scrap

2. Job versus Process Costing
Job-Costing Systems
Distinct, identifiable
units of a product
or service
Examples:
Custom-made
machines,
houses
Process-Costing
Systems
Masses of identical
or similar units of a
product or service
Examples:
Food,
chemical processing

3. Process Costing
Process costing is a system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units.
Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead.
Unit costs are computed by dividing total costs incurred by the number of units of output from the production process. 3

4. General Ledger Cost Flows Illustrated

5. Process-Costing Assumptions
Direct materials are added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line.
Conversion costs are added equally along the production process.

6. Five-Step Process-Costing Allocation
Summarize the flow of physical units of output.
Compute output in terms of equivalent units.
Summarize total costs to account for .
Compute cost per equivalent unit.
Assign total costs to units completed and to units in ending work-in-process.

7. Equivalent Units A derived amount of output units that:
Takes the quantity of each input in units completed and in unfinished units of work in process and
Converts the quantity of input into the amount of completed output units that could be produced with that quantity of input
Are calculated separately for each input (direct materials and conversion cost)
When calculating equivalent units in step 2, focus on quantities and disregard dollar amounts until after the equivalent units are computed

8. Steps 1 and 2 Illustrated

9. Steps 3, 4, and 5, Illustrated

10. Weighted-Average Process-Costing Method
Calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done)
Assigns this cost to equivalent units completed and transferred out of the process, and to incomplete units in still-in-process

11. Weighted-Average Process-Costing Method
Weighted-average costs is the total of all costs in the work-in-process account divided by the total equivalent units of work done to date.
The beginning balance of the work-in-process account (work done in a prior period) is blended in with current period costs.

12. Steps 1 and 2 Illustrated

13. Steps 3, 4, and 5 Illustrated

14. Result of the Process
Two critical figures arise out of step 5 of the cost allocation process:
The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory
The ending balance of the work-in-process inventory account that will appear on the balance sheet

15. First-in, First-Out Process-Costing Method
Assigns the cost of the previous accounting period’s equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process
Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to stat and complete new units, and lastly to units in ending work-in-process inventory

16. First-in, First-Out Process-Costing Method
A distinctive feature of FIFO process-costing method is that work done on beginning inventory is kept separate from work done in the current period.

17. Steps 1 and 2, Illustrated

18. Steps 3, 4, and 5, Illustrated

19. Result of the Process (As Before)
Two critical figures arise out of step 5 of the cost-allocation process:
The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory
The ending balance of the work-in-process inventory account that will appear on the balance sheet

20. Transferred-In Costs
Are costs incurred in previous departments that are carried forward as the products cost when it moves to a subsequent process in the production cycle.
Also called previous department costs.
Journal entries are made to mirror the progress in production from department to department.
Transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process.

21. Steps 1 and 2, Illustrated

22. Steps 3, 4, and 5, Illustrated

23. Steps 1 and 2, Illustrated

24. Steps 3, 4, and 5, Illustrated

25. Hybrid Costing Systems
A Hybrid-costing system blends characteristics from both job-costing and process-costing systems.
Many actual production systems are in fact hybrids.
Examples include manufacturers of televisions, dishwashers, and washing machines, as well as Adidas.

26. Spoilage, Rework, and Scrap
CHAPTER 18
Spoilage, Rework, and Scrap

27. Basic Terminology
Spoilage—units of production, either fully or partially completed, that do not meet the specifications required by customers for good units and that are discarded or sold for reduced prices

28. Basic Terminology
Rework—units of production that do not meet the specifications required by customers but which are subsequently repaired and sold as good finished goods.
Scrap—residual material that results from manufacturing a product. Scrap has low total sales value compared with the total sales value of the product.

29. Accounting for Spoilage
Accounting for spoilage aims to determine the magnitude of spoilage costs and to distinguish between costs of normal and abnormal spoilage.
To manage, control, and reduce spoilage costs, they should be highlighted, not simply folded into production costs.

30. Types of Spoilage
Normal spoilage is spoilage inherent in a particular production process that arises under efficient operating conditions.
Costs of normal spoilage are typically included as a component of the costs of good units manufactured because good units cannot be made without also making some units that are spoiled.
Management makes a conscious decision about the production rate per hour which will generate a certain level of normal spoilage.

31. Types of Spoilage
Abnormal spoilage is spoilage that is not inherent in a particular production process and would not arise under normal operating conditions.
Abnormal spoilage is considered avoidable and controllable.
Units of abnormal spoilage are calculated and recorded in the loss from abnormal spoilage account, which appears as a separate line item no the income statement.

32. Process Costing and Spoilage
Units of normal spoilage can be counted or not counted when computing output units (physical or equivalent) in a process costing system.
Counting all spoilage is considered preferable.

33. Inspection Points and Spoilage
Inspection point—the stage of the production process at which products are examined to determine whether they are acceptable or unacceptable units.
Spoilage is typically assumed to occur at the stage of completion where inspection takes place.

34. The Five-Step Procedure for Process Costing with Spoilage
Step 1: Summarize the flow of physical units of output—identify both normal and abnormal spoilage.
Step 2: Compute output in terms of equivalent units. Spoiled units are included in the computation of output units.

35. The Five-Step Procedure for Process Costing with Spoilage
Step 3: Summarize total costs to account for .
Step 4: Compute cost per equivalent unit.
Step 5: Assign total costs to:
Units completed
Spoiled units
Units in ending work-in-process

36. Steps 1 and 2 Illustrated

37. Steps 3, 4, and 5 Illustrated

38. Steps 1 and 2, Illustrated

39. Steps 3, 4, and 5, Illustrated

40. Number of Units of Normal and Abnormal Spoilage Changes, Depending on When Inspection Occurs40