Chapter 6 Process Costing

1
Chapter 6 - Process Costing
2
Chapter 6 - Learning Objectives

• Describe the basic characteristics and cost flows
  associated with process manufacturing.
• Define equivalent units and explain their role in
  process costing. Explain the differences between
  the weighted average method and the FIFO method
  of accounting for process costs.

3
Learning Objectives (continued)

• Prepare a departmental production report using
  the weighted average method.
• Explain how process costing is affected by
  nonuniform application of manufacturing inputs
  and the existence of multiple processing
  departments.
• Prepare a departmental production report using
  the FIFO method. (Appendix)

4
Cost Assignment and Cost Measurement (Again)
Issue One
Issue Two
How to measure costs?
How to assign costs?
Used for financial reporting
Used for effective decision making
Unit Cost
5
Process Costing This Time
Issue One
Issue Two
How to measure costs?
How to assign Costs?
Job Order Cost System
Unit Cost
Process Cost System

6
Cost Assignment with ProcessCosting
Accounting Information System
Job order (Actual)
Job order (Normal)
Cost Assignment Objective
Process (Actual)
Process (Normal)
Some manufacturing settings may need to use a
blend of job and process costing. Job order
procedures could be used to assign material costs
while a process approach may be used to assign
conversion costs. The blending of the two
methods is known as operational accounting.
7
Process Costing Cost Flow
Direct Materials
Cost of Process
Mfg.. Process
Traceable
Direct Labour
Unit Cost for Finished Goods
Mfg.. Process (Work-in- Process)
Mfg.. Overhead
Sequential Processing
or Parallel Processing
Costs must be assigned using an activity base and
predetermined overhead rate
8
Characteristics of Process Costing

• Homogeneous units pass through a series of
  similar processes.
• Each unit in each process receives a similar dose
  of manufacturing costs.
• Manufacturing costs are accumulated for a process
  for a given period of time.
• Manufacturing cost flows and the associated
  journal entries are generally similar to
  job-order costing.

9
Characteristics of Process Costing (Continued)

• The departmental production report is the key
  document for tracking manufacturing activity and
  costs.
• Unit costs are computed by dividing the
  departmental costs of the period by the output
  for the period.

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The Concept of Equivalent Units
1,000 units - 20 materials added 60 conversion
costs added
1,500 units - 1/3 materials added 50
conversion costs added
Units in EWIP
Units in BWIP
Work in Process
Units Completed
Units Started
10,000 units
9,500 units
Units of Input
Units of Output Units in BWIP Units Started
Units in EWIP Units Completed
1,000 10,000 1,500 9,500
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The Concept of Equivalent Units (Continued)

Equivalent Units Calculation
Direct Materials
Conversion Costs Units Completed
9,500 9,500 Ending WIP
500
750 Total Units Processed 10,000
10,250 Processed
This Period 9,800
9,650 Equivalent units for weighted
average (total units worked on) Equivalent
units for FIFO (units worked on this period)

Beg. WIP Inventory (200)
(600)
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A Cost Analysis
1,500 units
1,000 units - 5,000 materials added 10,000
conversion costs added
Cost added to BWIP
Costs added to EWIP
Work in Process
Cost of Units Started
Cost of Units Completed
10,000 units 23,000 matl added 120,175
conversion cost added
9,500 units
Input Costs Output
Costs 158,175
158,175
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Steps For Costing out Production in Process
Costing

• 1. Analysis of the flow of Physical units
• 2. Calculation of equivalent units
• 3. Computation of unit cost
• 4. Valuation inventory
• 5. Cost reconciliation

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Weighted Average Costing
Step 1- Inputs/Outputs in Units Inputs
Outputs BWIP
1,000 EWIP
1,500 Started 10,000
Completed 9,500 Total 11,000
Total 11,000
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Weighted Average Costing(Continued)
Step 2 - Equivalent Units
Materials Conversion Costs EWIP
500
750 Completed 9,500
9,500 Units Worked On 10,000
10,250 BWIP (200)
(600) Units This Period 9,800
9,650
Weighted Average
FIFO
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Weighted Average Costing(Continued)
Step 3 - Unit Cost Calculation
BWIP Added This Period Total Unit
Cost Matl 5,000 23,000
28,000 2.80 C. Costs 10,000
120,175 130,175 12.70 Total
15,000 143,175 158,175
15.50 Total Input
Cost Divide total cost added to the system by
the weighted average equivalent units.

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Weighted Average Costing(Continued)
Step 4 Value of Goods Completed and
EWIP (Reconciliation of input and output
costs) Cost of Goods Transferred 9,500 x 15.50
147,250 EWIP
Materials 500 x 2.80 1,400 C. Cost
750 x 12.70 9,525 10,925 Total

158,175
Total Output Cost
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Nonuniform inputs An illustrative example

• Materials are added at the beginning of the
  process.
• Units in process, May 1, 60 complete 2,000
• Units completed and transferred out
  10,000
• Units in Process, May 31, 40 Complete 1,000
• Costs
• BWIP Cost Added
• Materials 300 3,000
• Conversion Costs 600 4,600
• Step I - Physical Flow
• Units to account for Units accounted for
• Units, BWIP 2,000 Units completed
  10,000
• Units started 9,000 Units, EWIP
  1,000
• Total 11,000 Total
  11,000

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Nonuniform inputs example contd

• Step II - Equivalent Units (Weighted Average)
• Material Conversion
• Units completed 10,000 10,000
• EWIP 1.000 400
• Total equivalent 11,000 10,400
• Step III - Unit Cost
• Unit Cost 3,300/11,000 5,200/10,400
• 0.30 (materials) 0.50 (conversion)
• 0.80
• Step IV - Valuation of Inventories
• Goods transferred out
• 0.80 X 10,000 8,000
• EWIP (0.30 X 1,000) (0.50 X 400) 500

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Nonuniform inputs example contd

• Step V - Cost Reconciliation
• Costs assigned
• Goods transferred 8,000
• EWIP 500
• 8,500
• Cost to account for
• BWIP 900
• Costs added 7,600
• Total 8,500

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FIFO Costing
Step 1- Inputs/Outputs in Units Inputs
Outputs BWIP
1,000 EWIP
1,500 Started 10,000
Completed 9,500 Total 11,000
Total 11,000
Step one is the same for weighted average and
FIFO
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FIFO Costing (Continued)
Step 2 - Equivalent Units
Materials Conversion Costs EWIP
500
750 Completed 9,500
9,500 Units Worked On 10,000
10,250 BWIP (200)
(600) Units This Period 9,800
9,650
Weighted Average
This step is the same for weighted average and
FIFO
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FIFO Costing (Continued)
Step 3 - Unit Cost Calculation
BWIP Added This Period Total Unit
Cost Matl 5,000 23,000
28,000 2.35 C. Costs 10,000
120,175 130,175 12.45 Total
15,000 143,175 158,175
14.80 Total Input
Cost Divide total cost added this period by the
equivalent units worked on this period (FIFO
units).
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FIFO Costing (Continued)
Step 4 - Value of Goods Completed and
EWIP (Short-cut method) Total Input Costs
158,175.00 Less EWIP
Materials 500 x 2.35 1,175.00 C.
Cost 750 x 12.45 9,337.50
10,512.50 Cost of Goods Completed
147,662.50
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FIFO Costing (Continued)
Step 4a - Reconciliation of Costs
Beginning WIP Added last period
15,000 Added this period Materials
800 x 2.35 1,880
Conversion costs 400 x 12.45 4,980
21,860 Started and Completed 8,500 x 14.80
125,800 Ending WIP Materials 500 x
2.35 1,175 Conversion
Costs 750 X 12.45 9,337.50 10,512.5

158,175
Total Output Cost
Rounding error
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Numerical Questions from the Back of Chapters 5
and 6

• W5-3, E5-5, E5-13, P5-3
• E6-1, E6-9, E6-15, E6-19

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Question E5-5

• Please go to your text and read this question.

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Question E5-13

• Please go to your text and read this question.

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Question P5-3

• Please go to your text and read this question.

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Question E6-1

• Please go to your text and read this question.

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Question E6-9

• Please go to your text and read this question.

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Question E6-15

• Please go to your text and read this question.

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Question E6-19

• Please go to your text and read this question.

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The End