Cost Accounting

Domingo M. Palatino

Process Costing

Learning Objectives (1 of 2)
Contrast process costing and job order
costing
Explain why equivalent units of production
are used in process costing
Calculate equivalent units of production
using weighted average and FIFO methods
Compute unit costs and inventory values
using weighted average and FIFO methods

Learning Objectives (2 of 2)
Explain how standard costs are used in a
process costing system
Explain why a company would use a hybrid
costing system
Explain the alternative methods used to
calculate equivalent units of production

Costing Systems
Job order costing

Process costing

COLA

Process Costing Systems

Cola

Large quantity of
identical units

Process Costing
Averaging technique to assign
costs to units produced
Unit Cost = Production Costs
Production Quantity

Process Costing
The Numerator - Production Costs
Costs by department
Costs by product
Direct material from material requisitions
Direct labor from time sheets and wage rates
Overhead
Actual
Predetermined application rates

Materials Requisition Form

No. ###
Date ___________________
Job No. _________________ Department _______________
Authorized by ___________ Issued by _________________
Received by _____________ Inspected by _______________
Item Part
Unit of Quantity Quantity Unit Total
No. No. Descrip. Measure Required Issued Cost Cost

Employee Time Sheet

Employee Name _______________
Employee No. _______________
Department
_______________
Type of Work

Job No.

Employee Signature

Start
Time

For week ending

_______
Stop
Time

Day

Total
Hours

Supervisors Signature

Process Costing
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

Equivalent Units
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

Process Costing Methods

Weighted average method
combine
beginning work in process
current period production

FIFO method
separate
beginning work in process
current period production

Process Costing Methods

Weighted Average
Beginning WIP
100%
Started and finished
100%
Ending WIP
% completed
THE
DIFFERENCE
FIFO
Beginning WIP
% completed
Started and finished
100%
Ending WIP
% completed

Process Costing
Direct material
added at beginning, during, and/or end of
process

Direct labor
added throughout the process

Overhead
added throughout the process
based on direct labor
based on other, multiple cost drivers

Process Costing Steps

1
2
2
2
2
2

Units to account for

Units accounted for
Determine equivalent units
Costs to account for
Compute cost per equivalent unit
Assign costs to inventories

Units

Costs

Cost of Production Report

Name of Department
for the period ---

2
1
Production Data:
Units to account for
Units accounted for
EUP for each cost
Cost Data:
4
Costs to account for
5
Cost per EUP
6
Cost Assignment:
Transferred Out
Ending Work In Process Inventory

Step 1 - Units to Account For

Beginning WIP
25,000
Started
510,000
Units to account for
535,000

Step 2 - Units Accounted For

Beginning WIP
25,000
Started
510,000
Units to account for
535,000
Finished and transferred 523,000
Ending WIP
12,000
Units accounted for
535,000

must
be
equal

Step 3 - Compute Equivalent Units

DM
CC
Beginning WIP inventory 25,000 25,000
Started and completed 498,000 498,000
Ending WIP inventory
12,000 9,600*
Equivalent units
535,000 532,600
* ending units * % complete
12,000 * 80% = 9,600

Weighted Average Method

Step 4 - Costs to Account For

DM
CC
Total
Beginning WIP $ 42,650 $ 17,152 $ 59,802
Current costs
433,500
339,690
773,190
To account for
$476,150 $356,842 $832,992

Weighted Average Method

Step 5 - Cost per Equivalent Unit

DM
CC
Total
Beginning WIP $ 42,650 $ 17,152 $ 59,802
Current costs
433,500
339,690
773,190
To account for
$476,150 $356,842 $832,992
Divide by EUP
Cost per EUP

535,000
$.89

$.67

532,600
$1.56

Weighted Average Method

Step 6 - Assign Costs to Inventories

Transferred (523,000 * $1.56)
$815,880
Transferred
Ending WIP Inventory
Out
Ending
Direct Materials
WIP
(12,000 * $.89)
$10,680
Conversion
(12,000 * 80% * $.67)
6,432
17,112
Cost accounted for
$832,992*
*must agree with costs to account for
Weighted Average Method

Process Costing - FIFO

Emphasize current period costs and production
Steps 1 and 2 are the same
Step 3
DM
CC
Beginning WIP/completed
0 15,000*
Started and completed 498,000 498,000
Ending WIP Inventory
12,000 9,600
Equivalent units
510,000 522,600
* beginning units * % complete in current period
25,000 * 60% = 15,000

Process Costing - FIFO

Step 4 is the same
Step 5
DM
CC
Current costs $433,500
Divide by EUP
Cost per EUP

Total
$339,690

510,000
$.85

$.65

522,600
$1.50

$773,190

Step 6 Assign Costs to

Inventories - FIFO

Transferred
Beginning WIP Inventory
$59,802
Cost to complete
Conversion (15,000 * $.65) 9,750 $ 69,552
Started and completed
(498,000 * $1.50) Transferred
747,000
Ending WIP
Out
Ending
Direct Materials
WIP
(12,000 * $.85)
$10,200
Conversion
(12,000 * 80% * $.65)
6,420
16,440
Cost accounted for
$832,992*
*must agree with costs to account for

Process Costing Comparison

Weighted Average
EUP DM
535,000
EUP CC
532,600
Cost per unit DM $ .89
Cost per unit CC
.67
Total
$1.56
Transferred Out $815,880
Ending WIP
17,112
Total
$832,992

FIFO
EUP DM

510,000

EUP CC

522,600

Cost per unit DM $ .85

Cost per unit CC
Total

.65

$1.50

Transferred Out $816,552

Ending WIP

16,440

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
Successor Processing Department
Work in Process

Multidepartment Processing
Materials

Process 1

Transferred-in
Costs
Finished
Product

Process 3

Wait

Process 2

Wait

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

Hybrid Costing Systems

Characteristics of job order and process
costing systems
Various Product Lines
different direct material - job order costing
same process - process costing

Hybrid costing used for furniture, clothing,

jam

Questions
What is an equivalent unit of production?
What is the difference between the
weighted average and FIFO methods of
calculating equivalent units?
Why would a company use a hybrid costing
system?