1. Kinney ● Raiborn Cost Accounting: Foundations and Evolutions, 8e © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 6: Process Costing

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives Why are equivalent units of production used in process costing? How are equivalent units of production, unit costs, and inventory values determined using the weighted average (WA) method of process costing? How are equivalent units of production, unit costs, and inventory values determined using the first-in, first-out (FIFO) method of process costing? How are transferred-in costs and units accounted for in a multidepartment production setting? How are equivalent units of production, unit costs, and inventory values determined using the standard costing method of process costing? Why would a company use a hybrid costing system? (Appendix 1) What alternative methods can be used to calculate equivalent units of production? (Appendix 2) How are normal and abnormal spoilage losses treated in an EUP schedule?

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Job Order vs. Process Costing Job Order Small quantities of distinct products or services Assign costs to job and then to units within the job Process Costing Large quantities of homogeneous products or services Using an averaging technique, assign costs directly to units produced during the period

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Costing Averaging technique to assign costs to units produced Unit Cost =Production Costs Production Quantity

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Production Costs The Numerator—Production Costs  Accumulate costs by department  Accumulate costs by product  Direct material from material requisitions  Direct labor from time sheets and wage rates  Overhead Actual Predetermined application rates Unit Cost =Production Costs Production Quantity

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Materials Requisition Form Date ___________________No. 341 Job No. _________________ Authorized by ___________ Department _______________ Issued by _________________ Inspected by _______________ Item Part Unit of Quantity Quantity Unit Total No. No. Descrip. Measure Required Issued Cost Cost Received by _____________

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Employee Time Sheet Employee Name _______________ Employee No. _______________ Department _______________ For week ending _______ Start Stop Total Type of Work Job No. Time Time Day Hours Employee Signature Supervisor’s Signature

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Units Produced The Denominator—Units Produced Complicated by work in process  Units started last period and completed this period  Units started this period and not completed Convert partially completed units to equivalent whole units Unit Cost =Production Costs Production Quantity

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Equivalent Units of Production Approximation of the number of whole units of output that could have been produced from the actual effort expended Includes units  Started last period and finished this period  Started and finished this period  Started this period and not finished Assumes FIFO physical flow through the production department

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Two Process Costing Methods Weighted Average (WA) Method  Combines beginning work in process current period production First-in, First-Out (FIFO) Method  Separates beginning work in process current period production

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Costing Methods WA Beginning WIP 100% Started and finished 100% Ending WIP % completed FIFO Beginning WIP % completed Started and finished100% Ending WIP% completed The Difference

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Costing Direct material  Added at the beginning, during, and/or at the end of process Direct labor  Added throughout the process Overhead  Added throughout the process Based on direct labor Based on other, multiple cost drivers

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Process Costing Steps 1Units to account for 2Units accounted for 3Determine equivalent units 4Costs to account for 5Compute cost per equivalent unit 6Assign costs to inventories Units Costs

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Production Report Name of Department for the period --- Production Data: Units to account for Units accounted for EUP for each cost Cost Data: Costs to account for Cost per EUP Cost Assignment: Transferred Out Ending Work in Process Inventory     * Numbers correlate to the process costing steps in the previous slide

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Step 1—Units to Account For Beginning WIP 5,000 Started 200,700 Units to account for205,700

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Step 2 — Units Accounted For Finished and transferred203,000 Ending WIP 2,700 Units accounted for205,700 Beginning WIP 5,000 Started 200,700 Units to account for205,700 must be equal

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Step 3 — Compute Equivalent Units DM Conversion Beginning WIP inventory 5,000 5,000 Started and completed 198,000 198,000 Ending WIP inventory 2,700 2,160* Equivalent units 205,700 205,160 * ending units * % complete 2,700 * 80% = 2,160 WA Method

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Step 4 — Costs to Account For DM Conversion Total Beginning WIP $ 5,943 $ 16,758 $ 22,701 Current costs 321,120 660,270 981,390 To account for $327,063 $677,028 $1,004,091 WA Method

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Step 5 — Cost per Equivalent Unit Divide by EUP 205,700 205,160 Cost per EUP $1.59 + $3.30 = $4.89 DM Conversion Total Beginning WIP $ 5,943 $ 16,758 $ 22,701 Current costs 321,120 660,270 981,390 To account for $327,063 $677,028 $1,004,091 WA Method

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Step 6 — Assign Costs to Inventories Transferred (203,000 * $4.89)$992,670 Ending WIP Inventory Direct Materials (2,700 * $1.59)$4,293 Conversion Costs (2,700 * 80% * $3.30) 7,128 11,421 Cost accounted for $1,004,091* *must agree with costs to account for Transferred Out Ending WIP WA Method

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Costing—FIFO Emphasizes current period costs and production Steps 1, 2, and 4 are the same

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DM Conversion Beginning WIP/completed 0 3,000* Started and completed198,000198,000 Ending WIP Inventory2,700 2,160 Equivalent units 200,700203,160 * beginning units * % complete in current period 5,000 * 60% = 3,000 Step 3 — Compute Equivalent Units FIFO Method

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DM Conversion Total Current costs $321,120 $660,270 $981,390 Divide by EUP 200,700 203,160 Cost per EUP $1.60 + $3.25 = $4.85 Step 5 — Cost per Equivalent Unit * Recall that Step 4 is the same as used for the WA method FIFO Method

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Transferred Beginning WIP Inventory $22,701 Cost to complete Conversion (3,000 * $3.25) 9,750 $ 32,451 Started and completed (198,000 * $4.85) 960,300 Total cost transferred$992,751 Ending inventory Direct Materials (2,700 * $1.60) $4,320 Conversion Costs (2,7000 * 80% * $3.25) 7,020 11,340 Cost accounted for $1,004,091* *must agree with costs to account for Step 6 — Assign Costs to Inventories Transferred Out Ending WIP FIFO Method

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Costing Comparison WA EUP DM 205,700 EUP Conversion 205,160 Cost per unit DM $1.59 Cost per unit Conv. 3.30 Total $4.89 Transferred Out $992,670 Ending WIP 11,421 Total $1,004,091 FIFO EUP DM 200,700 EUP Conversion 203,160 Cost per unit DM $1.60 Cost per unit Conv. 3.25 Total $4.85 Transferred Out $992,751 Ending WIP 11,340 Total $1,004,091

29. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Costing The purpose of the six steps  Assign a value to ending work in process  Assign a value to items transferred out  Prepare this journal entry Finished Goods Work in Process or Transferred-In Cost (successor department) Work in Process (current department)

30. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Multidepartment Processing Process 1 Process 3 Process 2 Materials Wait Transferred-In Cost Finished Product

31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Process Costing with Standard Costs Simplify costing process Eliminate periodic cost recomputations Same as FIFO computations  Emphasize current period costs and production Inventories are stated at standard cost Variances are calculated for material, labor, and overhead Assigns a “normal” production cost to the equivalent units of output each period Allows managers to quickly recognize and investigate significant deviations from expected production costs Allows benchmarking with other firms

32. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Hybrid Costing Systems Characteristics of job order and process costing systems Various product lines  Different direct material — job order costing  Different direct labor — job order costing  Same process — process costing Hybrid costing used for furniture, clothing, jam

33. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Appendix 1— Alternative Cost Computation There are two alternative methods to calculate WA and FIFO EUP Use alternative methods  To confirm standard computation  As a simplified computation

34. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Appendix 1— Traditional Cost Computation Conversion Costs WA FIFO Beginning WIP inventory 5,000 3,000 Started and completed198,000198,000 Ending WIP inventory 2,160 2,160 Equivalent units 205,160203,160

35. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Units transferred out (whole units) Plus: Ending work in process (equivalent units) WA EUP Less: Beginning work in process (equivalent units) FIFO EUP Appendix 1— Alternative Cost Computation 1

36. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Conversion Costs Candles transferred203,000 Ending WIP EUP 2,160 WA EUP205,160 Beginning WIP EUP (2,000) FIFO EUP 203,160 Appendix 1— Alternative Cost Computation 1

37. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Total units to account for Less: EUP to be completed next period WA EUP Less: EUP completed in prior period FIFO EUP Appendix 1— Alternative Cost Computation 2

38. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Conversion Costs Total units to account for 205,700 EUP to be completed next period (540) WA EUP 205,160 EUP completed in prior period (2,000) FIFO EUP 203,160 Appendix 1— Alternative Cost Computation 2

39. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Appendix 2—Spoilage Continuous loss—Loss occurs fairly uniformly through the process Discrete loss—Loss occurs at a specific point and is detectable only when a quality check is performed

40. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Appendix 2—Spoilage Normal shrinkage and continuous losses  Assign costs only to units that have passed the inspection point Use Method of Neglect  Excludes spoiled units in the equivalent units schedule  Spreads cost of lost units proportionately over the good units transferred and those remaining in WIP inventory Abnormal losses  Period expense  Accounted for on an equivalent unit basis

41. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Normal Spoilage Abnormal Spoilage Continuous Loss Discrete Loss Loss in all ending inventory and transferred-out units on an EUP basis Period expense in EUP Period expense in EUP Loss in all units past inspection point in ending inventory and transferred out on an EUP basis Appendix 2—Spoilage

42. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Questions What is an EUP? What is the difference between the WA and FIFO methods of calculating equivalent units? Why would a company use a hybrid costing system?

43. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Potential Ethical Issues Over- or underestimating completion % for ending WIP inventory to distort results Using outdated standard costs Ignoring the assignment of significant direct costs to specific jobs Treating abnormal spoilage as normal spoilage