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Hansen, Mowen, Elias & Senkow (ITP, 1998)
Chapter 6 - Process Costing
Chapter 6-1
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Chapter 6 - Learning Objectives
Describe the basic characteristics and cost
flows associated with process manufacturing.
Define equivalent units and explain their role
in process costing. Explain the differences
between the weighted average method and
the FIFO method of accounting for process
costs.
Chapter 6-2
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Learning Objectives
(continued)
Prepare a departmental production report
using the weighted average method.
Explain how process costing is affected by
nonuniform application of manufacturing
inputs and the existence of multiple
processing departments.
Prepare a departmental production report
using the FIFO method. (Appendix)
Chapter 6-3
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Cost Assignment and Cost
Measurement (Again)
Issue One Issue Two
How to measure How to assign
costs? costs?
Used for Used for
Unit Cost financial
effective
decision making reporting
Chapter 6-4
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Process Costing This Time
Issue One Issue Two
How to measure How to assign
costs? Costs?
Job Order Unit Cost Process
Cost System
Cost System
Chapter 6-5
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Cost Assignment with Process
Costing
Accounting Information System
* Job order Job order
(Actual) (Normal)
Cost Assignment
* Process
Objective
Process
(Actual) (Normal)
* Some manufacturing settings may need to use a blend of job and
process costing. Job order procedures could be used to assign
material costs while a process approach may be used to assign
conversion costs. The blending of the two methods is known as
operational accounting.
Chapter 6-6
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Process Costing Cost Flow
Direct
Materials Cost of Process
Mfg.. Process
Traceable
Direct Unit Cost
Mfg.. Process
Labour for Finished
(Work-in-
Goods
Process)
Mfg..
Overhead Sequential Processing
or
Parallel Processing
Costs must be assigned using
an activity base and predetermined
overhead rate
Chapter 6-7
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Characteristics of Process
Costing
Homogeneous units pass through a series of
similar processes.
Each unit in each process receives a similar
dose of manufacturing costs.
Manufacturing costs are accumulated for a
process for a given period of time.
Manufacturing cost flows and the associated
journal entries are generally similar to job-
order costing.
Chapter 6-8
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Characteristics of Process
Costing (Continued)
The departmental production report is the key
document for tracking manufacturing activity
and costs.
Unit costs are computed by dividing the
departmental costs of the period by the output
for the period.
Chapter 6-9
Hansen, Mowen, Elias & Senkow (ITP, 1998)
The Concept of Equivalent
Units
1,000 units - 20% materials added; 1,500 units - 1/3 materials added;
60% conversion costs added 50% conversion costs added
Units in Units in
BWIP Work in EWIP
Process
Units Units
Starte Completed
d
10,000 units; 9,500 units
Units of Input = Units of Output
Units in BWIP + Units Started = Units in EWIP + Units Completed
1,000 + 10,000 = 1,500 + 9,500
Chapter 6-10
Hansen, Mowen, Elias & Senkow (ITP, 1998)
The Concept of Equivalent Units
(Continued)
Equivalent Units Calculation:
Direct Materials Conversion Costs
Units Completed 9,500 9,500
Ending WIP 500 750
Total Units Processed *10,000 *10,250
Beg. WIP Inventory (200) (600)
Processed This Period **9,800 **9,650
*Equivalent units for weighted average (total units worked on)
** Equivalent units for FIFO (units worked on this period)
Chapter 6-11
Hansen, Mowen, Elias & Senkow (ITP, 1998)
A Cost Analysis
1,500 units
1,000 units - $5,000 materials added;
$10,000 conversion costs added
Cost added Costs added
to BWIP Work in to EWIP
Process
Cost of Cost of Units
Units Started Completed
10,000 units; $23,000 9,500 units
mat’l added; $120,175
conversion cost added
Input Costs = Output Costs
$158,175 = $158,175
Chapter 6-12
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Steps For Costing out
Production in Process Costing
1. Analysis of the flow of Physical units
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation inventory
5. Cost reconciliation
Chapter 6-13
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Weighted Average Costing
Step 1- Inputs/Outputs in Units
Inputs: Outputs:
BWIP 1,000 EWIP 1,500
Started 10,000 Completed 9,500
Total 11,000 Total 11,000
Chapter 6-14
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Weighted Average Costing
(Continued)
Step 2 - Equivalent Units
Weighted Materials Conversion Costs
Average EWIP 500 750
Completed 9,500 9,500
Units Worked On 10,000 10,250
BWIP (200) (600)
Units This Period 9,800 9,650
FIFO
Chapter 6-15
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Weighted Average Costing
(Continued)
Step 3 - Unit Cost Calculation
BWIP Added This Period Total Unit Cost
Mat’l $ 5,000 $ 23,000 *$ 28,000 $ 2.80
C. Costs 10,000 120,175 *130,175 12.70
Total $15,000 $143,175 *$158,175 $15.50
Total Input Cost
*Divide total cost added to the system by the
weighted average equivalent units.
Chapter 6-16
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Weighted Average Costing
(Continued)
Step 4 Value of Goods Completed and EWIP
(Reconciliation of input and output costs)
Cost of Goods Transferred
9,500 x 15.50 = $147,250
EWIP
Materials 500 x $2.80 = $1,400
C. Cost 750 x $12.70 = $9,525 $ 10,925
Total $158,175
Total Output Cost
Chapter 6-17
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Nonuniform inputs: An illustrative
example
Materials are added at the beginning of the process.
Units in process, May 1, 60% complete 2,000
Units completed and transferred out 10,000
Units in Process, May 31, 40% Complete 1,000
Costs:
BWIP Cost Added
Materials $300 $3,000
Conversion Costs 600 4,600
Step I - Physical Flow:
Units to account for Units accounted for
Units, BWIP 2,000 Units completed 10,000
Units started 9,000 Units, EWIP 1,000
Total 11,000 Total 11,000
Chapter 6-18
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Nonuniform inputs example cont’d
Step II - Equivalent Units (Weighted Average):
Material Conversion
Units completed 10,000 10,000
EWIP 1.000 400
Total equivalent 11,000 10,400
Step III - Unit Cost
Unit Cost = $3,300/11,000 + $5,200/10,400
= $0.30 (materials) + $0.50 (conversion)
= $0.80
Step IV - Valuation of Inventories
Goods transferred out
$0.80 X 10,000 = $8,000
EWIP: ($0.30 X 1,000) + ($0.50 X 400) = $500
Chapter 6-19
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Nonuniform inputs example cont’d
Step V - Cost Reconciliation
Costs assigned
Goods transferred $8,000
EWIP 500
8,500
Cost to account for
BWIP $ 900
Costs added 7,600
Total 8,500
Chapter 6-20
Hansen, Mowen, Elias & Senkow (ITP, 1998)
FIFO Costing
Step 1- Inputs/Outputs in Units
Inputs: Outputs:
BWIP 1,000 EWIP 1,500
Started 10,000 Completed 9,500
Total 11,000 Total 11,000
*Step one is the same for weighted average and FIFO
Chapter 6-21
Hansen, Mowen, Elias & Senkow (ITP, 1998)
FIFO Costing (Continued)
Step 2 - Equivalent Units
Weighted Materials Conversion Costs
Average EWIP 500 750
Completed 9,500 9,500
Units Worked On 10,000 10,250
BWIP (200) (600)
Units This Period 9,800 9,650
FIFO
*This step is the same for weighted average and FIFO
Chapter 6-22
Hansen, Mowen, Elias & Senkow (ITP, 1998)
FIFO Costing (Continued)
Step 3 - Unit Cost Calculation
BWIP Added This Period Total Unit Cost
Mat’l $ 5,000 *$ 23,000 $ 28,000 $ 2.35
C. Costs 10,000 *120,175 130,175 12.45
Total $15,000 *$143,175 $158,175 $14.80
Total Input Cost
*Divide total cost added this period by the
equivalent units worked on this period (FIFO units).
Chapter 6-23
Hansen, Mowen, Elias & Senkow (ITP, 1998)
FIFO Costing (Continued)
Step 4 - Value of Goods Completed and EWIP
(Short-cut method)
Total Input Costs = $158,175.00
Less: EWIP
Materials 500 x $2.35 = $1,175.00
C. Cost 750 x $12.45 = 9,337.50 10,512.50
Cost of Goods Completed $147,662.50
Chapter 6-24
Hansen, Mowen, Elias & Senkow (ITP, 1998)
FIFO Costing (Continued)
Step 4a - Reconciliation of Costs
Beginning WIP
Added last period = $15,000
Added this period:
Materials 800 x $2.35 = $1,880
Conversion costs 400 x $12.45 = $4,980 $21,860
Started and Completed 8,500 x $14.80 125,800
Ending WIP
Materials 500 x $2.35 = $1,175
Conversion Costs 750 X $12.45 = 9,337.50 10,512.5
*$158,175
*Rounding error Total Output Cost
Chapter 6-25
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Numerical Questions from the
Back of Chapters 5 and 6
W5-3, E5-5, E5-13, P5-3
E6-1, E6-9, E6-15, E6-19
Chapter 6-26
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Question E5-5
Please go to your text and read this question.
Chapter 6-27
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Question E5-13
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Chapter 6-28
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Question P5-3
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Chapter 6-29
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Question E6-1
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Chapter 6-30
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Question E6-9
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Chapter 6-31
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Question E6-15
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Chapter 6-32
Hansen, Mowen, Elias & Senkow (ITP, 1998)
Question E6-19
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Chapter 6-33
Hansen, Mowen, Elias & Senkow (ITP, 1998)
The End
Chapter 6-34
