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    Cost Accounting Traditions and Innovations: Process Costing

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    Bambang Haryadi
    1. Process costing is a method used to assign costs to units of identical products produced in continuous large quantities. It uses the concept of equivalent units of production to assign costs across periods. 2. There are two main methods for calculating equivalent units - weighted average and FIFO. Weighted average combines current and prior period production while FIFO separates them. 3. A hybrid costing system uses aspects of both job order and process costing to suit different product characteristics within a company. It allows for flexibility in a multi-product environment.

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    Cost Accounting Traditions and Innovations: Process Costing

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    Bambang Haryadi
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    1. Process costing is a method used to assign costs to units of identical products produced in continuous large quantities. It uses the concept of equivalent units of production to assign costs across periods. 2. There are two main methods for calculating equivalent units - weighted average and FIFO. Weighted average combines current and prior period production while FIFO separates them. 3. A hybrid costing system uses aspects of both job order and process costing to suit different product characteristics within a company. It allows for flexibility in a multi-product environment.

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    1. Process costing is a method used to assign costs to units of identical products produced in continuous large quantities. It uses the concept of equivalent units of production to assign costs across periods. 2. There are two main methods for calculating equivalent units - weighted average and FIFO. Weighted average combines current and prior period production while FIFO separates them. 3. A hybrid costing system uses aspects of both job order and process costing to suit different product characteristics within a company. It allows for flexibility in a multi-product environment.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    31 views31 pages

    Cost Accounting Traditions and Innovations: Process Costing

    Uploaded by

    Bambang Haryadi
    1. Process costing is a method used to assign costs to units of identical products produced in continuous large quantities. It uses the concept of equivalent units of production to assign costs across periods. 2. There are two main methods for calculating equivalent units - weighted average and FIFO. Weighted average combines current and prior period production while FIFO separates them. 3. A hybrid costing system uses aspects of both job order and process costing to suit different product characteristics within a company. It allows for flexibility in a multi-product environment.

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    © All Rights Reserved
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    of 31

    Cost Accounting

    Traditions and Innovations


    Barfield, Raiborn, Kinney

    Chapter 6
    Process Costing
    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
    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
    Costing Systems
    Job order costing Process costing

    COLA
    Process Costing Systems

    Large quantity of
    Cola identical units
    Process Costing
    Averaging technique to assign
    costs to units produced

    Unit Cost = Production Costs


    Production Quantity
    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
    Materials Requisition Form
    Date ___________________ No. ###
    Job No. _________________ Department _______________
    Authorized by ___________ Issued by _________________
    Received by _____________ Inspected by _______________
    Item Part Unit of Quantity Quantity Unit Total
    No. No. Descrip. Measure Required Issued Cost Cost
    Employee Time Sheet
    Employee Name _______________
    Employee No. _______________ For week ending
    Department _______________ _______

    Start Stop Total


    Type of Work Job No. Time Time Day Hours

    Employee Signature Supervisor’s Signature


    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
    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
    Process Costing Methods
    • Weighted average method
    – combine
    • beginning work in process
    • current period production
    • FIFO method
    – separate
    • beginning work in process
    • current period production
    Process Costing Methods
    Weighted Average
    Beginning WIP 100%
    Started and finished 100%
    Ending WIP % completed
    THE
    FIFO DIFFERENCE
    Beginning WIP % completed
    Started and finished 100%
    Ending WIP % completed
    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
    Process Costing Steps
    1 Units to account for
    2 Units accounted for Units
    3 Determine equivalent units
    4 Costs to account for
    5 Compute cost per equivalent unit Costs
    6 Assign costs to inventories
    Cost of Production Report
    Name of Department
    for the period --- 3

    Production Data: 1 2
    Units to account for
    Units accounted for EUP for each cost
    Cost Data:
    Costs to account for 4
    Cost per EUP 5
    6
    Cost Assignment:
    Transferred Out
    Ending Work In Process Inventory
    Step 1 - Units to Account For
    Beginning WIP 25,000
    Started 510,000
    Units to account for 535,000
    Step 2 - Units Accounted For
    Beginning WIP 25,000
    Started 510,000
    Units to account for 535,000
    must
    Finished and transferred 523,000 be
    Ending WIP 12,000 equal
    Units accounted for 535,000
    Step 3 - Compute Equivalent Units
    DM CC
    Beginning WIP inventory 25,000 25,000
    Started and completed 498,000 498,000
    Ending WIP inventory 12,000 9,600*
    Equivalent units 535,000 532,600

    * ending units * % complete


    12,000 * 80% = 9,600
    Weighted Average Method
    Step 4 - Costs to Account For
    DM CC Total
    Beginning WIP $ 42,650 $ 17,152 $ 59,802
    Current costs 433,500 339,690 773,190
    To account for $476,150 $356,842 $832,992

    Weighted Average Method


    Step 5 - Cost per Equivalent Unit
    DM CC Total
    Beginning WIP $ 42,650 $ 17,152 $ 59,802
    Current costs 433,500 339,690 773,190
    To 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
    Step 6 - Assign Costs to Inventories
    Transferred (523,000 * $1.56) $815,880
    Ending WIP Inventory Transferred
    Direct Materials Out Ending
    (12,000 * $.89) $10,680 WIP
    Conversion
    (12,000 * 80% * $.67) 6,432 17,112
    Cost accounted for $832,992*
    *must agree with costs to account for
    Weighted Average Method
    Process Costing - FIFO
    • Emphasize current period costs and production
    • Steps 1 and 2 are the same
    • Step 3

    DM CC
    Beginning WIP/completed 0 15,000*
    Started and completed 498,000 498,000
    Ending WIP Inventory 12,000 9,600
    Equivalent units 510,000 522,600
    * beginning units * % complete in current period
    25,000 * 60% = 15,000
    Process Costing - FIFO
    • Step 4 is the same
    • Step 5

    DM CC Total
    Current costs $433,500 $339,690 $773,190

    Divide by EUP 510,000 522,600

    Cost per EUP $.85 $.65 $1.50


    Step 6 Assign Costs to
    Transferred
    Inventories - FIFO
    Beginning WIP Inventory $59,802
    Cost to complete
    Conversion (15,000 * $.65) 9,750 $ 69,552
    Started and completed
    (498,000 * $1.50) Transferred 747,000
    Ending WIP Out Ending
    Direct Materials
    WIP
    (12,000 * $.85) $10,200
    Conversion
    (12,000 * 80% * $.65) 6,420 16,440
    Cost accounted for $832,992*
    *must agree with costs to account for
    Process Costing Comparison
    Weighted Average FIFO
    • EUP DM 535,000 • EUP DM 510,000
    • EUP CC 532,600 • EUP CC 522,600
    • Cost per unit DM $ .85
    • Cost per unit DM $ .89
    • Cost per unit CC .65
    • Cost per unit CC .67
    • Total $1.50
    • Total $1.56
    • Transferred Out $816,552
    • Transferred Out $815,880 • Ending WIP 16,440
    • Ending WIP 17,112 • Total $832,992
    • Total $832,992
    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
    Multidepartment Processing

    Process 1 Wait
    Materials

    Transferred-in Process 2
    Costs

    Finished
    Product Process 3
    Wait
    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
    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
    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?

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