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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