CHAPTER 16 Process Costing. Cost Accounting Systems determine the costs associated with products (or services). _________ Cost System (last chapter) used.

CHAPTER 16

Process Costing

Cost Accounting Systems

determine the costs associated with products (or services).

• _________ Cost System (last chapter) used for unique or custom ordered

products• _________ Cost System (this

chapter) is used for mass produced items

Process Costing• Process costing is used to attach cost

to units produced that are Identical and low in cost Mass produced Manufactured with an automated and

continuous flow of production• _____________ is used when costs

cannot be directly traced to each individual unit

• _____________ = department or process rather than the individual job.

Flow of Costs • We must be able to understand the

flow of costs through a process costing system. Remember though The flow of costs is similar to that for a job

cost system except• Each department or process has its own WIP

inventory account The products may go through several

processing departments ________ being transferred to Finished Goods Inventory.

Job Order Cost System

Job Order and Process Cost Systems Compared

Job CostSheets

Dept. A and Dept. B

Process Cost System

Direct materials

Direct labor

Factory overhead

Finished goods

Dept. A Dept. B

Factoryoverhead

Directlabor

Directmaterials

Factoryoverhead

Directlabor

Finished goods

determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhead costs.

allocate overhead using a predetermined overhead rate (or activity-based costing).

maintain perpetual records with subsidiary ledgers for materials, work in process, and finished goods.

Both systems:

Job Costing versus Process Costing

Job order costing

The cost of goods transferred to finished goods is equal to the sum of all of the completed jobs for that period

Process costing

The cost of goods transferred to finished goods equals the number of completed units times the ______________________

Cost Categories• At its simplest, we use 2 - 3 cost

categories in the first department _____________

• added all at the beginning of the process _____________– (direct labor and overhead)

• added evenly throughout each process

• In a subsequent processing departments, we will have an additional cost category _____________

• costs attaching in all previous departments

Flow of Costs in a Process Cost System

FOH – Melting WIP – Melting Finished Goods

FOH – Casting WIP – Casting

Cost of Goods Sold

DM

DL

Actualcosts

incurred

Actualcosts

incurredDL

Direct materials used in productionDM

Direct labor used in productionDL

Flow of Costs in a Process Cost System

FOH – Melting WIP – Melting Finished Goods

FOH – Casting WIP – Casting

Cost of Goods Sold

DM

DL

FOHA

Actualcosts

incurred

Actualcosts

incurredFOHA

FOHA

FOHA

DL

Factory overhead applied to work in processFOHA

Flow of Costs in a Process Cost System

FOH – Melting WIP – Melting Finished Goods

FOH – Casting WIP – Casting

Cost of Goods Sold

DM

DL

FOHA

Actualcosts

incurred

Actualcosts

incurredFOHA

FOHA

TRANFOHA

DL

TRAN

Cost of goods transferred to WIP – CastingTRAN

Flow of Costs in a Process Cost System

FOH – Melting WIP – Melting Finished Goods

FOH – Casting WIP – Casting

Cost of Goods Sold

DM

DL

FOHA

COGMActualcosts

incurred

Actualcosts

incurredFOHA

FOHA

TRAN COGMFOHA

DL

TRAN

Cost of goods manufactured and transferred to finished goodsCOGM

Flow of Costs in a Process Cost System

FOH – Melting WIP – Melting Finished Goods

FOH – Casting WIP – Casting

Cost of Goods Sold

SOLD

DM

DL

FOHA

COGM SOLDActualcosts

incurred

Actualcosts

incurredFOHA

FOHA

TRAN COGMFOHA

DL

TRAN

Finished goods soldSOLD

Flow of Costs in a Process Cost System

FOH – Melting WIP – Melting Finished Goods

FOH – Casting WIP – Casting

Cost of Goods Sold

SOLD

DM

DL

FOHA

COGM SOLDActualcosts

incurred

Actualcosts

incurredFOHA

Summary of cost flows

FOHA

TRAN COGMFOHA

DL

TRAN

Four Step Program• To attach cost to the units worked on

during the period, we follow a five step process 1. Summarize the physical flow of

units 2. Calculate the equivalent units of

production. 3. Calculate Costs per Equivalent

Unit for each component of cost. 4. Assign costs to the units

completed and transferred out and to the WIP EI units.

• After the four steps are completed, we will prepare the production cost report.

Beginning and Ending WIP Inventories

• We need to make an assumption about how costs flow through a department. _____________ is where we will focus our

study and will be used in all of our problems.

We will not cover the FIFO method.

The Four Steps…• Step 1: Determine the physical flow of

goods. We will summarize the actual units that

were worked on during the month:Beginning Inventory (BI)+ Units Started = Total Number of Units Accounted

for Then reconcile to the actual units

transferred out to the next dept. during the month:Completed & Transferred Out (C&T Out)+ Ending Inventory (EI)= Total Number of Units Accounted for

Comments

• We make separate unit calculations for direct materials and conversion costs (DL and FOH) because They are typically added at different

times.• If direct materials are all added at the

beginning of the process, then any units left on hand will be ______% complete with respect to the materials.

Step 2: Equivalent units• Compute _________________of

Production: In accounting for the units in process during the period, we must compute the equivalent units worth of work done during the period for Material costs Conversion costs

• Direct Labor • Factory Overhead

For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period?

a. 10,000b. 11,500c. 1,500d. 15,000

For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period?

a. 10,000b. 11,500c. 1,500d. 15,000

QuestionC2

Step 3: Calculating Costs per Equivalent Unit

• Once you know how many equivalent units of material, labor and OH have been completed on all units in process during the period, you can express _________________________

• Cost incurred to date / equivalent units• Calculate cost/EU for each component of

cost direct materials and conversion costs (DL & FOH).

Step 3: Calculating Costs per Equivalent Unit (Weighted

Average)• We focus on the equivalent units of work done in the previous period and in the current period.

• The W/A method combines the Costs of Beginning Inventory in Process with Costs Incurred during the period.

Step 4: Assigning & Reconciling Costs

• Multiply these unit costs times the equivalent units worth of work done on The units completed and transferred out

during the period. The units left in ending inventory

• The total of the cost of units completed and transferred out during the period Goes out of WIP(1) and into WIP(2).

• The Cost of units left remains in ending WIP inventory

Now on to the Sample Problem