1. Chapter 10
Process Costing

2. Learning Objectives
1. How does process costing differ from job order product costing?
2. Why are equivalent units of production used in process costing? C1

3. Continuing . . . Learning Objectives
3. How are equivalent units of production computed using the weighted average and FIFO methods of process costing?
4. How are unit costs and inventory values calculated using the weighted average and FIFO methods of process costing? C1

4. Continuing . . . Learning Objectives
5. How is a cost of production report prepared?
6. What use do standard costs have in a process costing system? C1

5. Continuing . . . Learning Objectives
7. What is the effect of multi-department processing on the computation of equivalent units of production?
8. How can quality control minimize spoilage?
9. How are journal entries prepared for a process costing system? (Appendix) C1

6. Costing Systems
Process
Hybrid
Job
order

7. Differences Between Job Order and Process Costing
Quantity of production for which costs are being accumulated at any one time
Cost object to which the costs are assigned
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8. Flow of Product Through System
Process 1
Materials
Conversion Costs
Process 2
Finished
Product
Process 3
Note: Raw materials can be added in all departments.

9. Assigning Costs to Production
Production costs = Material + Labor + Overhead
Costs assigned to each process during period
Unit costs determined for each cost component and each process
Cost of completed unit = Sum of costs per unit for all processes through which product passes

10. Production Costs
Direct material cost measured from material requisition slips and invoiced prices
Direct labor cost determined from employee time sheets and wage rates
Overhead costs assigned through use of predetermined rates or actual costs
Actual overhead costs can be used if relatively constant each period and production volume is relatively steady
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11. Quantity of Production
Process costing assigns costs to both fully and
partially completed units by converting partially
completed units to equivalent whole units or
to equivalent units of production.

12. Equivalent Units of Production+ OR
and

13. Two Process Costing Methods
Weighted average (WA) method
Computes average cost per unit of production
Focuses on units completed during period and units that remain in ending WIP
FIFO method
Keeps beginning inventory and current period production and costs separated
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14. Steps in Processing Costing
1. Calculate the total physical units for which the department is responsible
2. Determine what happened to the units
Where are they at the end of the period?
Completed and transferred
Partially completed and remaining in ending WIP
3. Use either weighted average or FIFO method to determine EUP for each cost component
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15. Continuing . . . Steps in Processing Costing
4. Find the total cost to account for
Beginning WIP costs
All current costs
5. Compute cost per EUP for each cost component using either WA or FIFO EUP
6. Assign costs
Units completed and transferred
Units remaining in ending WIP
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16. Material added at start of production Labor and overhead added evenly
Exhibit 10-5 Example
Material added at start of production
Labor and overhead added evenly
Complete as to
Conversion Costs Units
Beginning inventory 30% 12,000
Cards started during the month 115,500
Cards completed during the month 120,700
Ending inventory 80% ,800

17. Exhibit 10-5 Example Cost of beginning inventory:
Direct material $ 45,000.00
Direct labor and OH , $ 49,678.60
Current period costs:
Direct material $334,950.00
Direct labor and OH , ,141.00

18. Weighted Average: Steps 1 and 2
Beginning inventory ,000
Units started ,500
Units to account for 127,500
======
Units completed
and transferred out ,700
Units in ending WIP inventory 6,800
Total units accounted for 127,500
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19. WA: Determining EUP for Material
Completed: DM CC
From Beginning WIP 12, ,000
Started & Completed 108, ,700
Total Completed 120,700
Ending Inventory 6, ,800
Accounted for 127, ,500
====== ======
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20. WA: Determining EUP for Conversion Costs
Completed: DM CC
From Beginning WIP 12, , ,000
Started & Completed 108, , ,700
Total Completed 120,700
Ending Inventory 6, , ,440
Accounted for 127, , ,140
====== ====== ======

21. WA: Determining Total Costs to Account for
DM CC Total
Beginning WIP $ 45, $ 4, $ 49,678.60
Current Period , , ,141.00
Total Cost
to Account
For $379, $206, $586,819.60
========= ========= =========

22. WA: Calculate Cost per EUP
DM CC Total
Beginning WIP $ 45, $ 4, $ 49,678.60
Current Period , , ,141.00
Total Cost
to Account
For $379, $206, $586,819.60
EUP  127,  126,140
Cost per EUP $ $ $4.62
==== ==== ====

23. WA: Assign Costs Cost of goods transferred
(120,700 x $4.62) $557,634.00
Ending Inventory: (6,800 units)
Material (6,800 x $2.98) $20,264.00
Conversion Costs (5,440 x $1.64) 8, ,185.60
Total Costs Accounted for $586,819.60
=========

24. FIFO: Determining EUP for Material
Completed: DM CC
From Beginning WIP 12,
Started & Completed 108, ,700
Total Completed 120,700
Ending Inventory 6, ,800
Accounted for 127, ,500
====== ======

25. FIFO: Determining EUP for Conversion Costs
Completed: DM CC
From Beginning WIP 12, ,400
Started & Completed 108, , ,700
Total Completed 120,700
Ending Inventory 6, , ,440
Accounted for 127, , ,540
====== ====== ======

26. FIFO: Calculate Cost per EUP
DM CC Total
Beginning WIP $ 49,678.60
Current Period $334, $202, ,141.00
Total Cost
to Account For $586,819.60
=========
EUP  115,  122,540
Cost per EUP $ $ $4.55
==== ==== ====

27. FIFO: Assign Costs Cost of goods transferred:
Beginning inventory costs $ 49,678.60
Costs to complete:
Conversion costs (8,400 x $1.65) ,860.00
Total cost of BI transferred $ 63,538.60
Started and completed (108,700 x $4.55) 494, $558,123.60
Ending Inventory: (6,800 units)
Material (6,800 x $2.90) $19,720.00
Conversion Costs (5,440 x $1.65) 8, ,696.00
Total Costs Accounted for $586,819.60
=========

28. Process Costing with Standard Costs
Actual costing requires that a new production cost be computed each production period.
Standard costing eliminates such recomputations, although standards do need to be reviewed at least once a year to keep the amounts current.

29. Comparison of WA and FIFO Methods
Cost assignment is easier for WA method
FIFO method reflects actual physical flow of goods through production
When period costs fluctuate, FIFO method gives managers better information with which to control costs and on which to base decisions because it does not combine costs of different periods
FIFO method focuses on current period costs – managerial performance is evaluated on basis of costs incurred only in the current period

30. Multiple Departments: Succeeding Departments
EUP_____
TI DM CC
Beginning Inventory ### 100%
Transferred In ### 100%
To account for ###
Completed ###
Ending Inventory ### 100%
Accounted for ###

31. Method of Neglect Under the method of neglect:
Spoiled units are simply excluded from the equivalent unit production schedule.
The total cost of producing both good and spoiled units is assigned solely to the good units, raising the cost of those units.

32. Implementing Quality Processes
Managers who are aware of spoilage costs can make better decisions as to whether to ignore the causes of spoilage or try to correct them.
Impediments to such awareness include using the method of neglect and “burying” the cost of spoilage in predetermined overhead rates rather than accounting for the spoilage separately.

33. Continuing . . . Implementing Quality Processes
Many companies now build quality into their processes, which reduces the need for quality control inspections.
Often, these companies use statistical process control (SPC) to reduce spoilage.
SPC relies on the idea that natural variations occur in a process over time due to random factors and are to be expected.