Chapter 6:

Process Costing

Cost Accounting:
Foundations & Evolutions, 9e

Kinney and Raiborn

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 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?
 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 equivalent units of production, unit costs, and
inventory values determined using the standard costing method of process
costing?
 (Appendix 3) How are normal and abnormal spoilage losses treated in an
EUP schedule?
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Job Order vs. Process Costing

Job Order Process Costing

 Small quantities of  Large quantities of
distinct products or homogeneous products
service or services
 Assign costs to job and  Using an averaging
then to units within the technique, assign costs
job directly to units produced
during the period

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Process Costing Numerator
 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
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Process Costing Denominator
 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

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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

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Process Costing
 Direct material
 added at the beginning, during, and/or at
the end of the process
 Direct labor
 added throughout the process

 Overhead
 added throughout the process

 based on direct labor

 based on other, multiple cost drivers

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

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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

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

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Cost of Production Report
Name of Department
for the period --- 3
Production Data: 2
1
Units to account for
Units accounted for EUP for each cost
Cost Data:
Costs to account for 4
Cost per EUP 5
6
Cost Assignment:
Transferred Out
Ending Work In Process Inventory
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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, etc.

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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

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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

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Spoilage
Normal Abnormal
Spoilage Spoilage
Loss in all ending
Continuous inventory and
Loss transferred out units Period expense
on an EUP basis in EUP

Loss in all units past

Discrete inspection point in
ending inventory and Period expense
Loss
transferred out on an in EUP
EUP basis

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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?

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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

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accessible website, in whole or in part.