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Chapter 6:

Process Costing

Cost Accounting:

Foundations & Evolutions, 8e

$inney and Raiborn

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Learning Objectives %hy are e&uivalent units o! production used in process costing'

(ow are e&uivalent units o! production, unit costs, and inventory valuesdeter"ined using the weighted average )%A* "ethod o! process costing'

(ow are e&uivalent units o! production, unit costs, and inventory values

deter"ined using the !irst#in, !irst#out )++-* "ethod o! process costing'

(ow are trans!erred#in costs and units accounted !or in a "ultidepart"ent

production setting' (ow are e&uivalent units o! production, unit costs, and inventory values

deter"ined using the standard costing "ethod o! process costing'

%hy would a co"pany use a hybrid costing syste"'

) Appendix 1* %hat alternative "ethods can be used to calculate e&uivalent

units o! production'

) Appendix 2 * (ow are nor"al and abnor"al spoilage losses treated in an

/ schedule'

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 Job Order vs. Process

Costingob -rder 

"all &uantities o!

distinct products orservice

 Assign costs to 3ob and

then to units within the

 3ob

rocess Costing

Large &uantities o!

ho"ogeneous productsor services

/sing an averaging

techni&ue, assign costs

directly to units producedduring the period

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Process Costing Numerator 4he 5u"erator  # roduction Costs

 Accu"ulate costs by depart"ent

 Accu"ulate costs by product

6irect "aterial !ro" "aterial re&uisitions

6irect labor !ro" ti"e sheets and wage rates -verhead

 Actual

redeter"ined application rates

Unit Cost = Production Costs

  Production Quantity

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Process Costing

roduction Costs 6irect "aterial !ro" "aterial re&uisitions

6irect labor !ro" ti"e sheets and wage rates

-verhead  Actual

redeter"ined application rates

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Process Costing Denominator

4he 6eno"inator # /nits roduced Co"plicated by wor7 in process

/nits started last period and co"pleted this

period

/nits started this period and not co"pleted

Convert partially co"pleted units to

e&uivalent whole units

Unit Cost = Production Costs

  Production Quantity

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Equivalent Units ofProduction (EUP

 Approi"ation o! the nu"ber o! whole unitso! output that could have been produced!ro" the actual e!!ort epended

ncludes units started last period and !inished this period started and !inished this period started this period and not !inished

 Assu"es ++- physical !low through theproduction depart"ent

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!"o Process Costing

#et$ods

%eighted Average Method co"bines

beginning wor7 in process

current period production ++- Method

separates

beginning wor7 in process current period production

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Process Costing #et$ods

%eighted Average8eginning % 1009

tarted and !inished 1009

nding % 9 co"pleted++-

8eginning % 9 co"pleted

tarted and !inished 1009nding % 9 co"pleted

THEDIFFERENCE

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Process Costing

6irect "aterial added at the beginning, during, and:or at

the end o! the process

6irect labor 

added throughout the process

-verhead

added throughout the process based on direct labor 

based on other, "ultiple cost drivers

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Process Costing %te&s

1 /nits to account !or 2 /nits accounted !or 

; 6eter"ine e&uivalent units

< Costs to account !or = Co"pute cost per e&uivalent unit

>  Assign costs to inventories

Units

Costs

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Cost of Production 'e&ort

5a"e o! 6epart"ent!or the period ###

roduction 6ata?

/nits to account !or 

/nits accounted !or / !or each costCost 6ata?

Costs to account !or 

Cost per /Cost Assign"ent?

4rans!erred -ut

nding %or7 n rocess nventory

1 2

3

4

56

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Process Costing "it$

%tandard Costs i"pli!y costing process li"inate periodic cost reco"putations

a"e as ++- co"putations e"phasi@e current period costs and production

nventories are stated at standard cost

ariances are calculated !or "aterial,

labor, and overhead

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Process Costing "it$

%tandard Costs Assigns a Bnor"al production cost tothe e&uivalent units o! output eachperiod

 Allows "anagers to &uic7ly recogni@eand investigate signi!icant deviations!ro" epected production costs

 Allows bench"ar7ing with other !ir"s

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)brid Costing %)stems

Characteristics o! 3ob order and process costingsyste"s

arious product lines

di!!erent direct "aterialD 3ob order costing di!!erent direct labor D 3ob order costing

sa"e processDprocess costing

(ybrid costing used !or !urniture, clothing, 3a", etc.

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license distributed with a certain product or service or otherwise on a password#protected website !or classroo" use.

5or"al

poilage

 Abnor"al

poilage

Continuous

Loss

6iscrete

Loss

Loss in all endinginventory and

transferred out units

on an EUP basis

Period expense

in EUP

Period expensein EUP

%&oilage

Loss in all units pastinspection point in

ending inventory andtransferred out on an

EUP basis

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license distributed with a certain product or service or otherwise on a password#protected website !or classroo" use.

*uestions

%hat is an e&uivalent unit o! production'

%hat is the di!!erence between the weighted

average and ++- "ethods o! calculating

e&uivalent units'

%hy would a co"pany use a hybrid costing

syste"'

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license distributed with a certain product or service or otherwise on a password#protected website !or classroo" use.

Potential Et$ical +ssues

-ver or underesti"ating co"pletion 9!or ending % inventory to distort results

/sing outdated standard costs

gnoring the assign"ent o! signi!icant

direct costs to speci!ic 3obs

4reating abnor"al spoilage as nor"al

spoilage