Transcript Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn Chapter 6 Process Costing Learning Objectives (1 of 3) • Contrast process costing and job order costing • Explain.

Cost Accounting
Foundations and Evolutions
Kinney, Prather, Raiborn
Chapter 6
Process Costing
Learning Objectives (1 of 3)
• Contrast process costing and job order
costing
• Explain why equivalent units of production
are used in process costing
• Calculate equivalent units of production, unit
costs, and inventory values using weighted
average method of process costing
Learning Objectives (2 of 3)
• Compute equivalent units of production, unit
costs, and inventory values using FIFO
method of process costing
• Explain how standard costs are used in a
process costing system
• Explain why a company would use a hybrid
costing system
Learning Objectives (3 of 3)
• (Appendix 1) Explain the alternative
methods used to calculate equivalent units
of production
• (Appendix 2) Describe how normal and
abnormal spoilage losses are treated in an
EUP schedule
Job Order vs. Process Costing
Job Order
• Assign costs to job
and then to units
within the job
Process Costing
• Using an averaging
technique, assign costs
directly to units
produced during the
period
Process Costing
• 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
Process Costing
• Production Costs
– Direct material from material requisitions
– Direct labor from time sheets and wage rates
– Overhead
• Actual
• Predetermined application rates
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
Unit Cost =
Production Costs
Production Quantity
Equivalent Units of Production (EUP)
• 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
Two Process Costing Methods
• Weighted Average Method
– combines
• beginning work in process
• current period production
• FIFO Method
– separates
• beginning work in process
• current period production
Process Costing Methods
Weighted Average
Beginning WIP
Started and finished
THE
Ending WIP
DIFFERENCE
FIFO
Beginning WIP
Started and finished
Ending WIP
100%
100%
% completed
% completed
100%
% completed
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
Process Costing Steps
1
2
3
4
5
6
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
3
for the period --Production Data:
2
1
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
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
Process Costing with Standard Costs
• 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
• 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
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
• 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?