Chapter 6 Process Costing Cost Accounting Foundations and
- Slides: 43
Chapter 6: Process Costing Cost Accounting: Foundations and Evolutions, 8 e Kinney ● Raiborn
Learning Objectives n n n n 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?
Job Order vs. Process Costing Job Order n n Small quantities of distinct products or services Assign costs to job and then to units within the job Process Costing n n Large quantities of homogeneous products or services Using an averaging technique, assign costs directly to units produced during the period
Process Costing n Averaging technique to assign costs to units produced Unit Cost = Production Costs Production Quantity
Production Costs n The Numerator—Production Costs q q q Accumulate costs by department Accumulate costs by product Direct material from material requisitions Direct labor from time sheets and wage rates Overhead n n Actual Predetermined application rates Unit Cost = Production Costs Production Quantity
Materials Requisition Form Date __________ No. 341 Job No. _________ Department ________ Authorized by ______ Issued by _________ Received by _______ Inspected by ________ Item Part Unit of Quantity Unit Total No. Descrip. Measure Required Issued 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 Supervisor’s Signature
Units Produced n n The Denominator—Units Produced Complicated by work in process q q n 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
Equivalent Units of Production n n Approximation of the number of whole units of output that could have been produced from the actual effort expended Includes units q q q n Started last period and finished this period Started this period and not finished Assumes FIFO physical flow through the production department
Two Process Costing Methods n Weighted Average (WA) Method q Combines n n n beginning work in process current period production First-in, First-Out (FIFO) Method q Separates n n beginning work in process current period production
Process Costing Methods WA Beginning WIP Started and finished Ending WIP The Difference FIFO Beginning WIP Started and finished Ending WIP 100% % completed
Process Costing n Direct material q n Direct labor q n Added at the beginning, during, and/or at the end of process Added throughout the process Overhead q Added throughout the process n n Based on direct labor Based on other, multiple cost drivers
Process Costing Steps 1 2 3 4 5 6 Units to account for Units accounted for Determine equivalent units Costs to account for Costs Compute cost per equivalent unit Assign costs to inventories
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
Step 1—Units to Account For Beginning WIP Started Units to account for 5, 000 200, 700 205, 700
Step 2—Units Accounted For Beginning WIP Started Units to account for Finished and transferred Ending WIP Units accounted for 5, 000 200, 700 205, 700 must 203, 000 be equal 2, 700 205, 700
Step 3—Compute Equivalent Units Beginning WIP inventory Started and completed Ending WIP inventory Equivalent units WA Method DM Conversion 5, 000 198, 000 2, 700 2, 160* 205, 700 205, 160 * ending units * % complete 2, 700 * 80% = 2, 160
Step 4—Costs to Account For Beginning WIP Current costs To account for WA Method DM Conversion Total $ 5, 943 $ 16, 758 $ 22, 701 321, 120 660, 270 981, 390 $327, 063 $677, 028 $1, 004, 091
Step 5—Cost per Equivalent Unit Beginning WIP Current costs To account for DM Conversion Total $ 5, 943 $ 16, 758 $ 22, 701 321, 120 660, 270 981, 390 $327, 063 $677, 028 $1, 004, 091 Divide by EUP 205, 700 Cost per EUP $1. 59 WA Method 205, 160 + $3. 30 = $4. 89
Step 6—Assign Costs to Inventories Transferred (203, 000 * $4. 89) $992, 670 Ending WIP Inventory Transferred Direct Materials Out Ending (2, 700 * $1. 59) $4, 293 WIP Conversion Costs (2, 700 * 80% * $3. 30) 7, 128 11, 421 Cost accounted for $1, 004, 091* *must agree with costs to account for WA Method
Process Costing—FIFO n n Emphasizes current period costs and production Steps 1, 2, and 4 are the same
Step 3—Compute Equivalent Units DM Beginning WIP/completed Started and completed Ending WIP Inventory Equivalent units FIFO Method Conversion 0 3, 000* 198, 000 2, 700 2, 160 200, 700 203, 160 * beginning units * % complete in current period 5, 000 * 60% = 3, 000
Step 5—Cost per Equivalent Unit Current costs DM $321, 120 Divide by EUP 200, 700 Cost per EUP $1. 60 FIFO Method Conversion Total $660, 270 $981, 390 203, 160 + $3. 25 = $4. 85 * Recall that Step 4 is the same as used for the WA method
Step 6—Assign Costs to Inventories Transferred Beginning WIP Inventory Cost to complete Conversion (3, 000 * $3. 25) Started and completed (198, 000 * $4. 85) Total cost transferred Ending inventory Direct Materials (2, 700 * $1. 60) Conversion Costs (2, 7000 * 80% * $3. 25) Cost accounted for *must agree with costs to account for $22, 701 9, 750 Transferred Out $ 32, 451 960, 300 $992, 751 Ending WIP $4, 320 7, 020 11, 340 $1, 004, 091* FIFO Method
Process Costing Comparison WA FIFO n EUP DM 205, 700 n EUP DM 200, 700 n EUP Conversion 205, 160 n EUP Conversion 203, 160 n Cost per unit DM $1. 59 n Cost per unit DM $1. 60 n Cost per unit Conv. 3. 30 n Cost per unit Conv. 3. 25 n Total $4. 89 n Total $4. 85 n Transferred Out $992, 670 n Transferred Out $992, 751 n Ending WIP 11, 421 n Ending WIP 11, 340 n Total $1, 004, 091
Process Costing n The purpose of the six steps q q q 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)
Multidepartment Processing Materials Process 1 Process 2 Transferred-In Cost Finished Product Wait Process 3 Wait
Process Costing with Standard Costs n n n Simplify costing process Eliminate periodic cost recomputations Same as FIFO computations q n n n 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
Hybrid Costing Systems n n n Characteristics of job order and process costing systems Various product lines q Different direct material—job order costing q Different direct labor—job order costing q Same process—process costing Hybrid costing used for furniture, clothing, jam
Appendix 1— Alternative Cost Computation n n There are two alternative methods to calculate WA and FIFO EUP Use alternative methods q q To confirm standard computation As a simplified computation
Appendix 1— Traditional Cost Computation Conversion Costs Beginning WIP inventory Started and completed Ending WIP inventory Equivalent units WA 5, 000 198, 000 2, 160 205, 160 FIFO 3, 000 198, 000 2, 160 203, 160
Appendix 1— Alternative Cost Computation 1 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 Conversion Costs Candles transferred Ending WIP EUP WA EUP Beginning WIP EUP FIFO EUP 203, 000 2, 160 205, 160 (2, 000) 203, 160
Appendix 1— Alternative Cost Computation 2 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 Conversion Costs Total units to account for EUP to be completed next period WA EUP 205, 160 EUP completed in prior period FIFO EUP 205, 700 (540) (2, 000) 203, 160
Appendix 2—Spoilage Continuous loss—Loss occurs fairly uniformly through the process n Discrete loss—Loss occurs at a specific point and is detectable only when a quality check is performed n
Appendix 2—Spoilage n Normal shrinkage and continuous losses q n Use Method of Neglect q q n Assign costs only to units that have passed the inspection point 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 q q Period expense Accounted for on an equivalent unit basis
Appendix 2—Spoilage Normal Spoilage Continuous Loss Discrete Loss Abnormal Spoilage Loss in all ending inventory and transferred-out units on an EUP basis Period expense in EUP Loss in all units past inspection point in ending inventory and transferred out on an EUP basis Period expense in EUP
Questions n n n 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?
Potential Ethical Issues Over- or underestimating completion % for ending WIP inventory to distort results n Using outdated standard costs n Ignoring the assignment of significant direct costs to specific jobs n Treating abnormal spoilage as normal spoilage n
- Job order costing
- Difference between job order costing and process costing
- Job order costing vs process costing
- Process costing and hybrid product-costing systems
- Wip control account
- Hybrid costing system examples
- Cost of production report example
- Job order costing and process costing are
- Job order costing vs process costing
- Process costing vs job costing
- Companies that use job order costing
- Job order cost accounting
- Job costing vs process costing
- Difference between actual cost and standard cost
- Service costing examples
- Difference between job costing and contract costing
- General model for variance analysis
- Marginal costing and absorption costing
- Chapter 4 activity-based costing solutions
- Absorption costing vs marginal costing
- Variable costing vs absorption costing
- Assumptions of cvp analysis
- Activity based costing formula
- Objectives of activity based costing
- Activity based costing vs job costing
- Perbedaan full costing dan variable costing
- Job costing vs batch costing
- Metode full costing dan variable costing
- Fivestep
- Cost and management accounting chapter 1
- Managerial accounting and cost concepts
- Chapter 1 managerial accounting and cost concepts
- Equivalent units fifo and weighted average
- Eup cost accounting
- Intermediate accounting chapter 1
- Cost accounting chapter 9
- Examples of process cost system
- Cost accounting chapter 5
- Cost plus pricing vs target costing
- Benefits of job order costing
- Process costing problems and solutions doc
- Cost accumulation and cost assignment
- Cost accumulation and cost assignment
- Cost pools