chapter 6 process costing cost accounting traditions and innovations barfield, raiborn, kinney
TRANSCRIPT
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Chapter 6
Process Costing
Cost AccountingTraditions and Innovations
Barfield, Raiborn, Kinney
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Learning Objectives (1 of 2)
• Contrast process costing and job order costing
• Explain why equivalent units of production are used in process costing
• Calculate equivalent units of production using weighted average and FIFO methods
• Compute unit costs and inventory values using weighted average and FIFO methods
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Learning Objectives (2 of 2)
• Explain how standard costs are used in a process costing system
• Explain why a company would use a hybrid costing system
• (Appendix) Explain the alternative methods used to calculate equivalent units of production
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Job order costing Process costing
COLA
Costing Systems
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Process Costing Systems
Large quantity of identical unitsCola
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Process Costing
Averaging technique to assign
costs to units produced
Unit Cost = Production Costs Production Quantity
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Process Costing
• The Numerator - Production Costs– Costs by department– Costs by product– Direct material from material requisitions– Direct labor from time sheets and wage rates– Overhead
• Actual • Predetermined application rates
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Materials Requisition Form
Date ___________________ No. ###
Job No. _________________
Authorized by ___________
Department _______________Issued by _________________Inspected by _______________
Item Part Unit of Quantity Quantity Unit Total
No. No. Descrip. Measure Required Issued Cost Cost
Received by _____________
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Employee Time SheetEmployee Name _______________
Employee No. _______________
Department _______________
For week ending
_______
Start Stop Total Type of Work Job No. Time Time Day Hours
Employee Signature Supervisor’s Signature
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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
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Equivalent Units
• 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
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Process Costing Methods
• Weighted average method– combine
• beginning work in process • current period production
• FIFO method– separate
• beginning work in process• current period production
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Process Costing MethodsWeighted Average
Beginning WIP 100%
Started and finished 100%
Ending WIP % completed
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed
THEDIFFERENCE
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Process Costing• Direct material
– added at beginning, during, and/or end of 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
3 Determine equivalent units
4 Costs to account for
5 Compute cost per equivalent unit
6 Assign costs to inventories
Units
Costs
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Cost of Production ReportName of Department
for the period ---
Production Data:Units to account forUnits accounted for EUP for each cost
Cost Data:Costs to account forCost per EUP
Cost Assignment:Transferred OutEnding Work In Process Inventory
1 2
3
4
56
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Step 1 - Units to Account For
Beginning WIP 25,000
Started 510,000
Units to account for 535,000
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Step 2 - Units Accounted For
Finished and transferred 523,000
Ending WIP 12,000
Units accounted for 535,000
Beginning WIP 25,000Started 510,000Units to account for 535,000
mustbeequal
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Step 3 - Compute Equivalent Units
DM CCBeginning WIP inventory 25,000 25,000Started and completed 498,000 498,000Ending WIP inventory 12,000 9,600* Equivalent units 535,000 532,600
* ending units * % complete12,000 * 80% = 9,600
Weighted Average Method
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Step 4 - Costs to Account For
DM CC TotalBeginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500 339,690 773,190To account for $476,150 $356,842 $832,992
Weighted Average Method
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Step 5 - Cost per Equivalent Unit
DM CC TotalBeginning WIP $ 42,650 $ 17,152 $ 59,802 Current costs 433,500 339,690 773,190To account for $476,150 $356,842 $832,992
Divide by EUP 535,000 532,600
Cost per EUP $.89 $.67 $1.56
Weighted Average Method
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Step 6 - Assign Costs to Inventories
Transferred (523,000 * $1.56) $815,880Ending WIP Inventory Direct Materials (12,000 * $.89) $10,680 Conversion (12,000 * 80% * $.67) 6,432 17,112Cost accounted for $832,992**must agree with costs to account for
Weighted Average Method
TransferredOut Ending
WIP
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Process Costing - FIFO• Emphasize current period costs and production• Steps 1 and 2 are the same• Step 3
DM CCBeginning WIP/completed 0 15,000*Started and completed 498,000 498,000Ending WIP Inventory 12,000 9,600 Equivalent units 510,000 522,600
* beginning units * % complete in current period25,000 * 60% = 15,000
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Process Costing - FIFO• Step 4 is the same
• Step 5
DM CC TotalCurrent costs $433,500 $339,690 $773,190
Divide by EUP 510,000 522,600
Cost per EUP $.85 $.65 $1.50
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Step 6 Assign Costs to Inventories - FIFO
Transferred Beginning WIP Inventory $59,802 Cost to complete Conversion (15,000 * $.65) 9,750 $ 69,552 Started and completed (498,000 * $1.50) 747,000Ending WIP Direct Materials (12,000 * $.85) $10,200 Conversion (12,000 * 80% * $.65) 6,420 16,440Cost accounted for $832,992**must agree with costs to account for
TransferredOut Ending
WIP
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Process Costing ComparisonWeighted Average• EUP DM 535,000• EUP CC 532,600• Cost per unit DM $ .89• Cost per unit CC .67• Total $1.56• Transferred Out $815,880• Ending WIP 17,112• Total $832,992
FIFO• EUP DM 510,000• EUP CC 522,600• Cost per unit DM $ .85• Cost per unit CC .65• Total $1.50• Transferred Out $816,552• Ending WIP 16,440• Total $832,992
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Process Costing• The purpose of the six steps
– Assign a value to ending work in process– Assign a value to items transferred out– Prepare this journal entry
Finished Goods
Work in Process
or
Successor Processing Department
Work in Process
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Multidepartment Processing
Process 1
Process 3
Process 2
FinishedProduct
MaterialsWait
Wait
Transferred-inCosts
Transferred-inCosts
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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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Hybrid Costing Systems
• Characteristics of job order and process costing systems
• Various Product Lines– different direct material - job order costing– same process - process costing
• Hybrid costing used for furniture, clothing, jam
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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?