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Process Costing: © 2012 Pearson Prentice Hall. All Rights Reserved

Process costing is a system used to assign costs to identical or similar units of production. Total costs are divided by the number of units produced to calculate a per unit cost. The five step process costing method involves tracking physical units, calculating equivalent units, summarizing costs, calculating a cost per equivalent unit, and assigning costs to completed and work-in-process units.

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95 views26 pages

Process Costing: © 2012 Pearson Prentice Hall. All Rights Reserved

Process costing is a system used to assign costs to identical or similar units of production. Total costs are divided by the number of units produced to calculate a per unit cost. The five step process costing method involves tracking physical units, calculating equivalent units, summarizing costs, calculating a cost per equivalent unit, and assigning costs to completed and work-in-process units.

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ayyazm
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Process Costing

2012 Pearson Prentice Hall. All rights reserved.

Job versus Process Costing


Job-Costing Systems Distinct, identifiable units of a product or service Examples: Custom-made machines, houses Process-Costing Systems

Masses of identical or similar units of a product or service


Examples: Food, chemical processing

2012 Pearson Prentice Hall. All rights reserved.

Process Costing
Process costing is a system where the unit cost of a

product or service is obtained by assigning total costs to many identical or similar units. Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead. Unit costs are computed by dividing total costs incurred by the number of units of output from the production process.
2012 Pearson Prentice Hall. All rights reserved.

Process-Costing Assumptions
Direct materials are added at the beginning of the

production process, or at the start of work in a subsequent department down the assembly line. Conversion costs are added equally along the production process.

2012 Pearson Prentice Hall. All rights reserved.

Five-Step Process-Costing Allocation


1. 2. 3. 4. 5.

Summarize the flow of physical units of output. Compute output in terms of equivalent units. Summarize total costs to account for . Compute cost per equivalent unit. Assign total costs to units completed and to units in ending work-in-process.

2012 Pearson Prentice Hall. All rights reserved.

Equivalent Units

A derived amount of output units that:


1. 2.

Takes the quantity of each input in units completed and in unfinished units of work in process and Converts the quantity of input into the amount of completed output units that could be produced with that quantity of input

Are calculated separately for each input (direct materials and conversion cost) When calculating equivalent units in step 2, focus on quantities and disregard dollar amounts until after the equivalent units are computed
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Steps 1 and 2 Illustrated

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Steps 3, 4, and 5, Illustrated

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General Ledger Cost Flows Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Weighted-Average Process-Costing Method


Calculates cost per equivalent unit of all work done to

date (regardless of the accounting period in which it was done) Assigns this cost to equivalent units completed and transferred out of the process, and to incomplete units in still-in-process

2012 Pearson Prentice Hall. All rights reserved.

Weighted-Average Process-Costing Method


Weighted-average costs is the total of all costs in the

work-in-process account divided by the total equivalent units of work done to date. The beginning balance of the work-in-process account (work done in a prior period) is blended in with current period costs.

2012 Pearson Prentice Hall. All rights reserved.

Steps 1 and 2 Illustrated

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Steps 3, 4, and 5 Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Result of the Process

Two critical figures arise out of step 5 of the cost allocation process:
The amount of the journal entry transferring the allocated cost of units completed and sent from workin-process inventory to finished goods inventory 2. The ending balance of the work-in-process inventory account that will appear on the balance sheet
1.

2012 Pearson Prentice Hall. All rights reserved.

First-in, First-Out Process-Costing Method


Assigns the cost of the previous accounting periods

equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to stat and complete new units, and lastly to units in ending work-in-process inventory
2012 Pearson Prentice Hall. All rights reserved.

First-in, First-Out Process-Costing Method


A distinctive feature of FIFO process-costing method

is that work done on beginning inventory is kept separate from work done in the current period.

2012 Pearson Prentice Hall. All rights reserved.

Steps 1 and 2, Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Steps 3, 4, and 5, Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Result of the Process (As Before)

Two critical figures arise out of step 5 of the costallocation process:


The amount of the journal entry transferring the allocated cost of units completed and sent from workin-process inventory to finished goods inventory 2. The ending balance of the work-in-process inventory account that will appear on the balance sheet
1.

2012 Pearson Prentice Hall. All rights reserved.

Transferred-In Costs
Are costs incurred in previous departments that are

carried forward as the products cost when it moves to a subsequent process in the production cycle. Also called previous department costs. Journal entries are made to mirror the progress in production from department to department. Transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process.

2012 Pearson Prentice Hall. All rights reserved.

Steps 1 and 2, Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Steps 3, 4, and 5, Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Steps 1 and 2, Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Steps 3, 4, and 5, Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Hybrid Costing Systems


A Hybrid-costing system blends characteristics from

both job-costing and process-costing systems. Many actual production systems are in fact hybrids. Examples include manufacturers of televisions, dishwashers, and washing machines, as well as Adidas.

2012 Pearson Prentice Hall. All rights reserved.

2012 Pearson Prentice Hall. All rights reserved.

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