Ma 6e PPT CH 06 Se New

CORNERSTONES
of Managerial Accounting, 6e
© 2016 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
Cornerstones of Managerial
Accounting, 6e
Characteristics of Process
Manufacturing
 Each product within a line passing through the
processes would receive similar ‘‘doses’’ of
materials, labor, and overhead costs.
 Process costing works well whenever
homogeneous products pass through a series of
processes and receive similar amounts of
manufacturing costs.
LO-1
Types of Processes
 Sequential processing requires that units pass
through one process before they can be worked
on in the next process in the sequence.
 Parallel processing is another processing

pattern that requires two or more sequential
processes to produce a finished good.
LO-1
Types of Processes (cont.)
 Partially completed units (e.g., two
subcomponents) can be worked on
simultaneously in different processes and then
brought together in a final process for completion.
LO-1
What’s In Common?
 No matter which processing pattern exists within
a firm, all units produced share a common
property.
 Units are homogeneous and subjected to the same
operations for a given process and each unit produced
in a period should receive the same unit cost.
 Understanding how unit costs are computed
requires insight of the manufacturing cost flows
that take place in a process-costing firm.
LO-1
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How Costs Flow through the Accounts
in Process Costing
 The manufacturing cost flows for a process-
costing system are the same as those for a job-
order system.
 As raw materials are purchased, the cost of these
materials flows into a raw materials inventory
account.
 Similarly, raw materials, direct labor, and applied
overhead costs flow into a work-in-process (WIP)
account.
LO-1
How Costs Flow through the Accounts
in Process Costing (cont.)
 When goods are completed, the cost of the
completed goods is transferred from WIP to the
finished goods account.
 Finally, as goods are sold, the cost of the finished
goods is transferred to the cost of goods sold
account.
 The journal entries generally parallel those
described in a job-order costing system.
LO-1
How Costs Flow through the Accounts in
Process Costing (cont.)
 Although job-order and process cost flows are
generally similar, some differences exist.
 In process costing, each producing department
has its own WIP account. As goods are
completed in one department, they are
transferred to the next department.
 The costs attached to the goods transferred out
are also transferred to the next department.
LO-1
How Costs Flow through the Accounts in
Process Costing (cont.)
LO-1
Accumulating Costs in the Production
Report
 In process costing, costs are accumulated by
department for a period of time.
 The production report is the document that
summarizes the manufacturing activity that takes
place in a process department for a given period
of time.
LO-1
Accumulating Costs in the Production
Report (cont.)
 A production report contains information on costs
transferred in from prior departments as well as
costs
 Added in the department such as direct materials, direct
labor, and overhead
 Similar to the job-order cost sheet
 A subsidiary to the WIP account
LO-1
Accumulating Costs in
the Production Report (cont.)
 A production report traces the flow of units through a
department, identifies the costs charged to the
department, shows the computation of unit costs, and
reveals the disposition of the department’s costs for the
reporting period.
Unit information section: The unit information Unit
section has two major subdivisions: ^^^^^^^^
• units to account for Cost
• units accounted for ^^^^^^^^
Cost information section: The cost information
section has two major subdivisions:
• costs to account for
• costs accounted for
LO-1
The Impact of Work-In-Process
Inventories on Process Costing
 Calculating the unit cost is easy—just divide total
cost by the number of units produced.
 The presence of WIP inventories causes
problems:
 Defining the units produced can be difficult, given that
some units produced during a period are complete,
while those in ending inventory are not. This is handled
through the concept of equivalent units of production.
LO-2
The Impact of Work-In-Process
Inventories on Process Costing (cont.)
 How should the costs and work of beginning
work-in-process (BWIP) be treated? Should
they be counted with the current period work and
costs or treated separately?
 Two methods have been developed to solve this
problem: the weighted average method and the
FIFO method.
LO-2
Equivalent Units of Production
 By definition, EWIP is not complete.
 Thus, a unit completed and transferred out during
the period is not identical (or equivalent) to one in
EWIP inventory, and the cost attached to the two
units should not be the same.
 In computing the unit cost, the output of the
period must be defined, a significant issue for
process costing.
LO-2
(cont.)
 The solution is to calculate equivalent units of
output.
 Equivalent units of output are the complete
units that could have been produced given the
total amount of manufacturing effort expended for
the period under consideration.
 Determining equivalent units of output for
transferred-out units is easy; a unit would not be
transferred out unless it was complete.
LO-2
(cont.)
 Every transferred-out unit is an equivalent unit.
 Units remaining in EWIP inventory are not
complete.
 Someone in production must ‘‘eyeball’’ EWIP to
estimate its degree of completion.
LO-2
Two Methods of Treating Beginning
Work-in-Process Inventory
 In computing a current-period unit cost for a
department, two approaches have evolved for
dealing with the prior-period output and prior-
period costs found in BWIP:
 The weighted average costing method and
 The FIFO costing method.
LO-2
The Weighted Average
Costing Method
 The weighted average costing method
combines beginning inventory costs and work
done with current-period costs and work to
calculate this period’s unit cost.
 Costs and work carried over from the prior period
are counted as if they belong to the current
period.
LO-2
The Weighted Average
Costing Method (cont.)
 Beginning inventory work and costs are pooled
with current work and costs, and an average unit
cost is computed and applied to both units
transferred out and units remaining in ending
inventory.
LO-2
The FIFO Costing Method
 The FIFO costing method separates work and
costs of the equivalent units in beginning
inventory from work and costs of the equivalent
units produced during the current period.
 Only current work and costs are used to calculate this
period’s unit cost.
 It is assumed that units from beginning inventory are
completed first and transferred out.
 The costs of these units include the costs of the work
done in the prior period as well as the current period
costs necessary to complete the units.
LO-2
The FIFO Costing Method
 Units started in the current period are divided into
two categories:
 units started and completed and
 units started but not finished (EWIP).
 Units in both of these categories are valued using
the current period’s cost per equivalent unit.
LO-2
Weighted Average Costing
 The weighted average costing method treats
beginning inventory costs and the accompanying
equivalent output as if they belong to the current
period.
 This is done by adding the manufacturing costs in BWIP
to the manufacturing costs incurred during the current
period.
LO-2
Weighted Average Costing (cont.)
 The total cost is treated as if it were the current
period’s total manufacturing cost.
 Beginning inventory output and current period output
are merged in the calculation of equivalent units.
 Under the weighted average method, equivalent units of
output are computed by adding units completed to
equivalent units in EWIP.
LO-2
Five Steps in Preparing
a Production Report
 The production report is subsidiary to the WIP
account for a department.
 The following five steps describe the general
pattern of a process-costing production report:
 physical flow analysis
 calculation of equivalent units
 computation of unit cost
 valuation of inventories (goods transferred out and
EWIP)
 cost reconciliation
LO-3
Evaluation of the Weighted Average
Method
Advantages Disadvantages
 Unit cost computations are  Inaccuracies in computing unit
simplified costs for current period output
 Units in BWIP are treated as and for units in BWIP
those of the current period and  If the unit cost in a process is
all equivalent units belong to stable from one period to the
the same category to calculate next, the weighted average
unit costs. method is accurate.
 If the price of manufacturing
inputs increases from one
period to the next, the unit cost
of current output is
understated, and the unit cost
of BWIP units is overstated.
LO-3
Multiple Departments
 In process manufacturing, some departments
receive partially completed goods from prior
departments.
 Treat transferred-in goods as a separate material
category when calculating equivalent units
LO-4
Multiple Departments (cont.)
 The department receiving transferred-in goods
would have three input categories:
 one for the transferred-in materials
 one for materials added
 one for conversion costs
LO-4
Appendix: Production Report-
First-In, First-Out Costing
 Under the FIFO costing method, the equivalent
units and manufacturing costs in BWIP are
excluded from the current period unit cost
calculation.
 This method recognizes that the work and costs
carried over from the prior period belong to that
period.
LO-5
Differences in First-In, First-Out and
Weighted Average Methods
FIFO Weighted Average
 More Accurate: If changes  Most firms use this

occur in the prices of the method due to simplicity.
manufacturing inputs from  FIFO has little advantage
one period to the next. over weighted average, if
 Better cost control unit costs are calculated
 Better pricing decisions for short periods.
LO-5

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CORNERSTONES

 Parallel processing is another processing

 More Accurate: If changes  Most firms use this

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