process costing key topics: –cost flows in mass production –steps in preparing process cost...
TRANSCRIPT
Process Costing
Key Topics:–Cost flows in mass production–Steps in preparing process cost reports (FIFO and weighted average)
•Equivalent units•Applying costs
–Spoilage in process costing– Uses, Uncertainties, and limitations
Chapter 6
Process Costing
Process product-costing systems are used for costing inventories or services when they are mass-produced, identical units.
These products differ from the custom-made or unique goods that are assigned costs under a job costing system
Chapter 6
Mass Production
Many goods are produced using a continuous process.
Examples:
Chapter 6
Overview of Process Costing Systems
Chapter 6
Steps for Preparing a Process Costing Report:
1. Summarize total costs to account for.2. Summarize total physical and equivalent
units.3. Compute cost per equivalent unit.4. Account for cost of units completed and cost
of ending WIP.
Chapter 6
What Are Equivalent Units, and How Do They Relate to the Production Process?
Equivalent Units:• Measure the resources used in partially completed units
relative to the resources needed to complete the units.
Equivalent Units Depend on the Pattern of Cost Flow:Direct Materials:* Added at the beginning of the process* Added during the processConversion Costs:* Incurred uniformly throughout the process* Incurred non-uniformly
Chapter 6
How Is the Weighted Average Method Used in Process Costing?
Weighted Average Method:Costs from beginning WIP (performed last period) are averaged with costs incurred during the current period and then allocated to all units completed and ending WIP.
Chapter 6
Summaries of Physical Units and Total Costs for Weighted Average Calculations
(Assuming direct materials are added at the beginning of the process)
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Calculation of Equivalent Units Under the Weighted Average Method
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Calculation of Cost Per Equivalent Unit Under the Weighted Average Method
Beg. WIP Costs + Costs Added This PeriodWeighted Average Equivalent Units
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Equivalent Unit Costs
Weighted Average:Direct materials = $6,000+$30,500 =$3.0417 12,000Conversion costs=$4,200+$76,680=$7.0947 11,400Total cost per equivalent unit = $10.1364
Chapter 6
Weighted Average Process Cost Report
Weighted Average Computation Units Costs
Total units completed and transferred out
(2,000+9,000)x$10.1364 11,000 $111,500
Ending WIP: 1,000
Direct materials 1,000x$3.0417 3,042 Conversion costs 400x$7.0947 2,838
Total ending WIP cost
_____ 5,880
Total Accounted For
12,000 $117,380
Chapter 6
Summaries of Physical Units and Total Costs for FIFO Calculations
(Assuming direct materials are added at the beginning of the process)
Chapter 6
Calculation of Equivalent Units Under the FIFO Method
Chapter 6
First-in, First-out (FIFO) Method
The current period’s costs are used to allocate cost to work performed this period
Chapter 6
Calculation of Cost Per Equivalent Unit
Chapter 6
Current Period Cost
Equivalent Units for Work Performed this Period
Equivalent Units Costs
FIFO:Direct materials = $30,500 = $3.05 10,000Conversion costs=76,680 = $7.10 10,800Total cost per equivalent unit = $10.15
Chapter 6
FIFO Process Cost Report First-in, First-Out
Computation Units Costs Beginning WIP 2,000 $ 10,200 Costs to complete beginning WIP:
Direct materials 0x$3.05 0 Conversion costs 1,400x$7.10 9,940
Total costs added this period _____ 9,940 Total cost of beginning WIP transferred out
2,000 20,140
New units started, completed, and transferred out
9,000x$10.15 9,000 91,350
Total units completed and transferred out 11,000 111,490 Ending WIP: 1,000
Direct materials 1,000x$3.05 3,050 Conversion costs 400x$7.10 2,840
Total ending WIP cost _____ 5,890 Total Accounted For 12,000 $117,380
Chapter 6
How Is Process Costing Performed for Multiple Production Departments
Transferred-in Costs:• Costs of processing performed in a previous
department
• Transferred-in costs are pooled separately from other costs
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Chapter 6
Cost Flows in Process Costing With Costs Transferred from Another Department Costs Assigned to Costs Allocated Department WIP to Individual Units Allocate Allocate Trace Allocate Trace Trace Allocate or Allocate
Direct Materials
Overhead Indirect materials, indirect labor, direct department costs such as supervisor salary and equipment depreciation, and other costs such as rent and plant insurance
Direct Labor
Individual Units of
Product or Service
Department Work in Process
Direct
Materials
Conversion Costs
Transferred-in
Costs Previous
Department WIP
How Are Spoilage Costs Handled in Process Costing?
Normal Spoilage:Defective units that arise as part of regular operations
Abnormal Spoilage:Spoilage that is not part of everyday operations
Chapter 6
Chapter 6
Cost Flows with Spoilage in a Process Costing System Costs Assigned to Costs Allocated Department WIP to Individual Units Trace Trace Trace or Allocate
Direct Materials
Overhead Indirect materials, indirect labor, direct department costs such as supervisor salary and equipment depreciation, and other costs such as rent and plant insurance
Direct Labor
Direct
Materials
Conversion Costs
Abnormal
Spoilage Loss
Allocate Cost of Good Units and Normal Spoilage
Allocate Cost of Abnormal Spoilage
Use Process Cost Information to:
• Measure costs of products mass-produced products• Assign costs to inventory and cost of goods sold for
financial statements and income tax returns• Monitor operations and costs• Develop estimates of future costs for decision
making• Analyze the costs and benefits of quality
improvements• Identify potential areas for process improvements
Chapter 6
Uncertainties and Measurement Errors in Process Costing
Actual cost flows might not be known:* When are direct materials added?* When are conversion costs incurred?* How complete are the units in ending work in process?* What amount of spoilage is normal?
Chapter 6