Process-Costing

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					Process-Costing

   Systems

    Chapter 8
            Process costing
Characteristics
  Identical units
  Continuous flow production
    Never “complete”
  Move from process (or department) to process
  Costs are accumulated by process for a time
   period
    Allocated to “equivalent units” of output during the
     period
            Equivalent units
Amount of finished units that could have
 been completed, given the materials or
 effort involved
  Three units started into production
    One is completed
    One is ¾ completed
    One is ¼ completed
    Two equivalent units are produced (1 + ¾ + ¼)
          Equivalent units
May have different number of equivalent units
 for materials, labor and overhead
  Using the previous example, assume
     all materials are added at the beginning
        1 + 1 + 1 = 3 equivalent units for materials
     conversion costs are added throughout the
      process
        1 + ¾ + ¼ = 2 equivalent units for
         conversion costs
            Equivalent units
Try this one
  At the beginning of the period
    5 units, each ½ complete, are in process
  During the period
    27 more units are put into production
  At the end of the period
    6 units, each ¾ complete, are still in process
  How many equivalent units were produced?
               The process
Step 1 – Summarize flow of physical units
  How many were in beginning inventory?
  How many were started?
  How many are still in ending inventory?

Step 2 – Calculate equivalent units
  Beginning inventory was completed
  Of the units started
     Some were completed
     Some are in ending inventory
              The process
Step 3 – Summarize costs to be
 accounted for
  Cost in beginning inventory
  Cost added during the period

Step 4 – Calculate cost per equivalent unit
Step 5 – Assign costs to completed units
 and ending inventory
       Production cost report
Part 1 – Units
  Summary of physical and equivalent units
    Where did they come from?
    Where did they go?

Part 2 – Costs
  Summary of costs
  Calculation of cost per equivalent units
  Assignment of costs
    Transferred out
    Work in process
                                                                         (Step 2)
                                                    (Step 1)        Equivalent units
                                                    Physical    Direct          Conversion
Flow of units                                         units    materials          costs
Units to be accounted for:
  Beginning work in process inventory
  Units started this period
  Total units to be accounted for                         -

Units accounted for: (Step 3)
 Completed and transferred out
 In ending work in process inventory
 Total units accounted for                                -          -                -


Flow of costs
Costs to be accounted for:
  Cost in beginning work in process inventory
  Cost added in current period
  Total costs to be accounted for               $         -    $     -         $      -

Cost per equivalent unit (Step 4)

Costs accounted for: (Step 5)
 Cost assigned to units transferred out
 Cost in ending work in process inventory
 Total costs accounted for                      $         -
                Example 1
No beginning inventory
  18,000 units started
  2,000 in ending work in process inventory
    40% complete as to materials
    30% complete as to conversion cost
  Current period costs
    Materials - $45,360
    Conversion costs - $68,060
                                                                         (Step 2)
                                                    (Step 1)        Equivalent units
                                                    Physical    Direct          Conversion
Flow of units                                         units    materials          costs
Units to be accounted for:
  Beginning work in process inventory                    -
  Units started this period                           18,000
  Total units to be accounted for                     18,000

Units accounted for: (Step 3)
 Completed and transferred out                        16,000       16,000          16,000
 In ending work in process inventory                   2,000          800             600
 Total units accounted for                            18,000       16,800          16,600


Flow of costs
Costs to be accounted for:
  Cost in beginning work in process inventory   $     -        $      -        $      -
  Cost added in current period                    113,420          45,360          68,060
  Total costs to be accounted for               $ 113,420      $   45,360      $   68,060

Cost per equivalent unit (Step 4)                              $     2.70      $     4.10

Costs accounted for: (Step 5)
 Cost assigned to units transferred out         $ 108,800      $   43,200      $   65,600
 Cost in ending work in process inventory           4,620           2,160           2,460
 Total costs accounted for                      $ 113,420      $   45,360      $   68,060
                Example 2
Beginning and ending inventories
  4,000 units in beginning work in process
    80% complete as to materials
    50% complete as to conversion costs
  25,000 units started
  3,000 units in ending work in process
    60% complete as to materials
    50% complete as to conversion costs
  Costs
    Materials: Beg. WIP - $7,040, current - $51,660
    Conversion: Beg. WIP - $1,500, current - $20,400
                                                                         (Step 2)
                                                    (Step 1)        Equivalent units
                                                    Physical    Direct          Conversion
Flow of units                                         units    materials          costs
Units to be accounted for:
  Beginning work in process inventory                  4,000
  Units started this period                           25,000
  Total units to be accounted for                     29,000

Units accounted for: (Step 3)
 Completed and transferred out                        26,000       26,000          26,000
 In ending work in process inventory                   3,000        1,800           1,500
 Total units accounted for                            29,000       27,800          27,500


Flow of costs
Costs to be accounted for:
  Cost in beginning work in process inventory   $      8,540   $    7,040      $    1,500
  Cost added in current period                        72,060       51,660          20,400
  Total costs to be accounted for               $     80,600   $   58,700      $   21,900

Cost per equivalent unit (Step 4)                              $   2.1115      $   0.7964

Costs accounted for: (Step 5)
 Cost assigned to units transferred out         $     75,605   $   54,899      $   20,705
 Cost in ending work in process inventory              4,995        3,801           1,195
 Total costs accounted for                      $     80,600   $   58,700      $   21,900
                 Example 3
Costs transferred from prior department
  Units and costs transferred out of previous
   department (example 2) to department 2
    Cumulative costs from prior department are
     treated as a separate cost category in current
     department
    Units are 100% complete as to prior department
    Transferred-in units are the “units started” in the
     current department
               Example 3
In department 2
  1,000 units in beginning work in process
     70% complete as to materials
     60% complete as to conversion costs
  2,000 units in ending work in process
     30% complete as to materials
     20% complete as to conversion costs
  Costs
    Materials: Beg. WIP - $420, current - $14,940
    Conversion: Beg. WIP - $840, current - $34,720
                                                                            (Step 2)
                                                 (Step 1)                Equivalent units
                                                 Physical      Prior         Direct         Conversion
Flow of units                                      units    department     materials          costs
Units to be accounted for:
  Beginning work in process inventory               1,000
  Units started this period                        26,000
  Total units to be accounted for                  27,000

Units accounted for: (Step 3)
 Completed and transferred out                     25,000       25,000         25,000           25,000
 In ending work in process inventory                2,000        2,000            600              400
 Total units accounted for                         27,000       27,000         25,600           25,400


Flow of costs
Costs to be accounted for:
  Cost in beginning work in process inventory   $   3,890   $    2,630     $      420       $      840
  Cost added in current period                  $ 125,265       75,605         14,940           34,720
  Total costs to be accounted for               $ 129,155   $   78,235     $   15,360       $   35,560

Cost per equivalent unit (Step 4)                           $   2.8976     $   0.6000       $   1.4000

Costs accounted for: (Step 5)
 Cost assigned to units transferred out         $ 122,440   $   72,440     $   15,000       $   35,000
 Cost in ending work in process inventory           6,715        5,795            360              560
 Total costs accounted for                      $ 129,155   $   78,235     $   15,360       $   35,560
      First-in, first-out method
Previous examples used weighted
 average method
  Costs in beginning inventory were combined
   with current period costs

First-in, first-out method separates the two
  Assumes units in beginning inventory were
   finished first
      First-in, first-out method
Equivalent unit calculation includes
  Work done to complete the units in beginning
   inventory
  Work done on new units started
     100% for those started and completed
     <100% for those started but not completed
        First-in, first-out method
 Beginning inventory costs are only assigned to
  units in beginning inventory
   Some current period costs are added to complete them
 Units started are only assigned current period costs
 Costs accounted for includes
   Beginning inventory cost transferred out
   Current costs added to complete beginning inventory
   Current costs of units started and completed
   Current costs in ending inventory
      First-in, first-out method
 Example 2 using FIFO method
   4,000 units in beginning work in process
     80% complete as to materials
     50% complete as to conversion costs
   25,000 units started
   3,000 units in ending work in process
     60% complete as to materials
     50% complete as to conversion costs
   Costs
     Materials: Beg. WIP - $7,040, current - $51,660
     Conversion: Beg. WIP - $1,500, current - $20,400
                       Example 2 - FIFO
                                                             (Step 2)
                                        (Step 1)        Equivalent units
                                        Physical    Direct          Conversion
Flow of units                             units    materials          costs
Units to be accounted for:
  Beginning work in process inventory      4,000
  Units started this period               25,000
  Total units to be accounted for         29,000

Units accounted for: (Step 3)
 Beginning inventory completed             4,000        800             2,000
 Started and transferred out              22,000     22,000            22,000
    Total units transferred out           26,000     22,800            24,000
 In ending work in process inventory       3,000      1,800             1,500
 Total units accounted for                29,000     24,600            25,500
                        Example 2 - FIFO
Flow of costs
Costs to be accounted for:
  Cost in beginning work in process inventory    $    8,540   $    7,040   $    1,500
  Cost added in current period                       72,060       51,660       20,400
  Total costs to be accounted for                $   80,600   $   58,700   $   21,900

Cost per equivalent unit (Step 4)                             $   2.1000   $   0.8000

Costs accounted for: (Step 5)
 Cost from beginning inventory transferred out   $    8,540   $    7,040   $    1,500
 Cost to complete beginning inventory                 3,280        1,680        1,600
   Total cost for beginning inventory            $   11,820   $    8,720   $    3,100
 Cost assigned to units started and completed        63,800       46,200       17,600
   Total cost of units transferred out           $   75,620   $   54,920   $   20,700
 Cost in ending work in process inventory             4,980        3,780        1,200
 Total costs accounted for                       $   80,600   $   58,700   $   21,900
      Accounting for spoilage
Spoiled units have incurred some cost but
 are not transferred to the next stage
  Treated as a separate line item for
    Units accounted for
       Equivalent units
    Costs accounted for
      Accounting for spoilage
 Example 2 with spoilage
   4,000 units in beginning work in process
     80% complete as to materials, 50% as to conversion costs
   25,000 units started
   800 units spoiled
     50% complete as to materials, 30% as to conversion costs
   2,200 units in ending work in process
     60% complete as to materials, 50% as to conversion costs
   Costs
     Materials: Beg. WIP - $7,040, current - $51,660
     Conversion: Beg. WIP - $1,500, current - $20,400
                                                                         (Step 2)
                                                    (Step 1)        Equivalent units
                                                    Physical    Direct          Conversion
Flow of units                                         units    materials          costs
Units to be accounted for:
  Beginning work in process inventory                  4,000
  Units started this period                           25,000
  Total units to be accounted for                     29,000

Units accounted for: (Step 3)
 Completed and transferred out                        26,000       26,000          26,000
 Spoiled units                                           800          400             240
 In ending work in process inventory                   2,200        1,320           1,100
 Total units accounted for                            29,000       27,720          27,340


Flow of costs
Costs to be accounted for:
  Cost in beginning work in process inventory   $      8,540   $    7,040      $    1,500
  Cost added in current period                        72,060       51,660          20,400
  Total costs to be accounted for               $     80,600   $   58,700      $   21,900

Cost per equivalent unit (Step 4)                              $   2.1176      $   0.8010

Costs accounted for: (Step 5)
 Cost assigned to units transferred out         $     75,884   $   55,058      $   20,827
 Cost assigned to spoiled units                 $      1,039   $      847      $      192
 Cost in ending work in process inventory              3,676        2,795             881
 Total costs accounted for                      $     80,600   $   58,700      $   21,900
            Journal entries
Same as for job-order costing
Dollar value of units transferred out
 represents the cost moving from WIP to
 the next stage in the process
  Another WIP account (department)
  Finished goods inventory
Dollar value of spoiled goods is debited to
 an expense account
          Operation costing
Hybrid of job-order and process-costing
Products goes through a combination of
 common processes and individual
 processes
No special accounting required
  Units may be transferred out of a process to
   become a separate job or vice-versa