Process Costing

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Chapter18
PROCESS COSTING
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Process Costing

• Used for production of small, identical,
  low-cost items.
• Mass produced in automated continuous
  production process.
• Costs cannot be directly traced to each unit
  of product.

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Comparing Job and Process Costing

• Job Costing
• Custom orders
• Unique products
• Low production volume
• High product flexibility
• Low to medium standardization of labor and
  material

• Process Costing
• Repetitive operations
• Identical products
• High production volume
• Low product flexibility
• High standardization of labor and material

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Job and Process Costing
The Work in Process account consists of
individual jobs in job costing.
DirectMaterials
FinishedGoods
DirectLabor
Jobs
FactoryOverhead
Cost per unit for each job
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Job and Process Costing
The Work in Process account consists of specific
processes in process costing.
DirectMaterials
FinishedGoods
DirectLabor
Processes
FactoryOverhead
Cost per unit processed
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Job and ProcessCosting Similarities
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Work in Process Accounts The Key to Process
Costing
Direct
Materials
Work in ProcessAssembly
Indirect
Work in ProcessPackaging
FinishedGoods
FactoryOverhead
AppliedOverhead
Indirect
DeliveredtoCustomers
Direct
Labor
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Computing Unit Cost

• Costs are accumulated for a period of time by
  process or department.

Unit cost is computed by dividing the
accumulated costs by the number of units
produced in the period.
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Computing Unit Cost
Costs are accumulated for a period of time by
process or department.
Unit cost is computed by dividing the
accumulated costs by the number of units
produced in the period.
If partially complete units remain in process,
we must use equivalent units as the divisor to
obtain unit costs.
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Process Costing and Equivalent Units

• Equivalent units is a concept expressing a
  number of partially completed units as a smaller
  number of fully completed units.

Two one-half full pitchers are equivalent to one
full pitcher.
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Process Costing and Equivalent Units
For the current period, PencilCo started
15,000 units and completed 10,000 units, leaving
5,000 units in process 30 percent complete. How
many equivalent units of production did PencilCo
have for the period? a. 10,000 b. 11,500 c.
1,500 d. 15,000
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Process Costing and Equivalent Units
For the current period, PencilCo started
15,000 units and completed 10,000 units, leaving
5,000 units in process 30 percent complete. How
many equivalent units of production did PencilCo
have for the period? a. 10,000 b. 11,500 c.
1,500 d. 15,000
10,000 units (5,000 units .30) 11,500
equivalent units
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Cost Per Equivalent Unit
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Cost Per Equivalent Unit
Now assume that PencilCo incurred 27,600 in
production costs. What was PencilCos cost per
unit for the period? a. 1.84 b. 2.40 c. 2.76
d. 2.90
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Cost Per Equivalent Unit
Now assume that PencilCo incurred 27,600 in
production costs. What was PencilCos cost per
unit for the period? a. 1.84 b. 2.40 c. 2.76
d. 2.90
27,600 11,500 equivalent units 2.40 per
equivalent unit
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Process Costing and Equivalent Units
40 ofMaterial
Equivalent units may be different for material
and labor and overhead at different stages of a
process.
Stage 1
25 ofLabor andOverhead
At completion of Stage 1 of the process,
materialis 40 complete, but labor and overhead
are only25 complete.
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Process Costing and Equivalent Units
60 ofMaterial
40 ofMaterial


100
Stage 2
Stage 1
25 ofLabor andOverhead
25 ofLabor andOverhead


50
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Process Costing and Equivalent Units
60 ofMaterial
40 ofMaterial
Stage 3
Stage 2
Stage 1
50 ofLabor andOverhead
25 ofLabor andOverhead
25 ofLabor andOverhead
The process is now complete.
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Process Costing andEquivalent Units
Owl Inc uses FIFO process costing in its
Fabrication Department where a product called
Strata is made.
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Process Costing andEquivalent Units
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Process Costing andEquivalent Units
Material is added at thebeginning of the process
soit is always 100 complete.
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Process Costing andEquivalent Units
Overhead is applied on the basis of labor, so
both are at thesame percentage of completion.
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Physical Flow of Units
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Computing EquivalentUnits of Production
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Computing EquivalentUnits of Production
Since materials are added at the beginning of the
process, no additional materials are necessary to
complete the beginning inventory.
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Computing EquivalentUnits of Production
100,000 units completed and transferred.

100,000
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Computing EquivalentUnits of Production
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Computing EquivalentUnits of Production
Since labor and overhead were 40 percent complete
in the beginning inventory, 60 percent of the
work must be completed in April.
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Computing EquivalentUnits of Production

100,000Transferred
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Computing EquivalentUnits of Production
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Process Costing andEquivalent Units
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Cost per Equivalent Unit
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Cost Reconciliation
We will account for all costs incurredby
assigning unit costs to the A. 100,000 units
completed and transferred. B. 20,000 units
remaining in ending work in process inventory.
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0.12 0.48 0.50 1.10
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End of Chapter 18