Costing Systems: Process Costing 21. The Process Costing System OBJECTIVE 1: Describe the process costing system, and identify the reasons for its use.

Costing Systems: Process Costing21

The Process Costing System

OBJECTIVE 1: Describe the process costing system, and identify the reasons for its use.


• A process costing system is used when costs to produce a product should be the same for all units.


• Managers use process costing in every stage of the management system.– Planning– Tracking– Evaluating performance– Communicating with external stakeholders

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Patterns of Product Flows and Cost Flow Methods

OBJECTIVE 2: Relate the patters of product flows to the cost flow methods in a process costing environment, and explain the role of the Work in Process Inventory accounts.

Figure 1: Production Flows in a Process Costing Environment


• In a process costing environment, production flow may include from two to a dozen or more departments, processes, or work cells.


• A process costing system maintains a separate Work in Process Inventory account for each department, process, or work cell.


• Each Work in Process Inventory account contains costs of any direct materials, direct labor, and overhead for that department, process, or work cell, as well as any costs that have been transferred in from the previous department, process, or work cell.


• At the end of every accounting period, a process cost report assigns the costs that have accumulated during the period to the units that have transferred out of the department and to the units that are still work in process.


• A process cost report may be prepared using the FIFO costing method.


Computing Equivalent Production

OBJECTIVE 3: Define equivalent production, and compute equivalent units.


• Equivalent production (equivalent units) is a measure of the number of equivalent whole units worked on during a period.– Explain why the calculation of equivalent units is

necessary.– Equivalent production applies a percentage-of-

completion factor to partially completed units to calculate the equivalent number of whole units produced in an accounting period for each type of production input.

Figure 1 Computation of Equivalent Production


• Equivalent production (equivalent units) is a measure of the number of equivalent whole units worked on during a period.– The number of equivalent units produced is the

sum of the following:• Total units started and completed during the period

• An amount representing the work done on partially completed products in both the beginning and ending work in process inventories.


• Because the costs of direct labor and overhead are often incurred uniformly throughout the production process, they may, for the sake of convenience, be combined when calculating equivalent units; these combined costs are called conversion costs.


Preparing a Process Cost Report Using the FIFO Costing Method

OBJECTIVE 4: Prepare a process cost report using the FIFO costing method.

Exhibit 1: Process Cost Report: FIFO Costing Method


• Cost flow in a process cost report that uses the FIFO costing method follows the logical physical flow of production—that is, the costs assigned to the first materials processed are the first costs transferred when those materials flow to the next process, department, or work cell.


• Preparation of a process cost report involves five steps:– Step 1 entails computing the total number of

physical units to be accounted for during the period.

– Step 2 entails computing equivalent units of production for the period for direct materials and conversion costs.


• Preparation of a process cost report involves five steps: (cont.)– In Step 3, all direct materials and conversion

costs for the period and the previous period are added to arrive at total costs.

– In Step 4, the cost per equivalent unit for both direct materials and conversion costs is computed by dividing current period costs by their respective equivalent units.



• Preparation of a process cost report involves five steps: (cont.)– In Step 5, costs are assigned to the units

completed and transferred out during the period, as well as to the ending work in process inventory.


Preparing a Process Cost Report Using the Average Costing Method

OBJECTIVE 5: Prepare a process cost report using the average costing method.


• Accounting for units– Step 1 accounts for the physical units in a

production process, department or work cell during an account period.


• Accounting for units (cont.)– Step 2 accoutns for produciotn during the

period in terms of units• Units Completed and transferred out

• Ending inventory

• Totals


• Accounting for costs– Step 3 accumulates all direct materials costs

and conversion costs for beginning inventory and the current period in the Total Costs column

– Step 4 computes the cost per equivalent unit for direct materials costs and conversion costs by dividing the total of these costs by their respective equivalent units.


• Assigning costs– Step 5 of a process cost report assigns direct

materials and conversion costs to the units transferred out and to the units still in process at the period.

• Costs of Goods Manufactured and Transferred Out

• Ending Inventory

Exhibit 2 Process Cost Report: Average Costing Method




Costing Systems: Process Costing 21. The Process Costing System OBJECTIVE 1: Describe the process costing system, and identify the reasons for its use.

Documents

process inventories

number of equivalent

process cost report

equivalent number

production flows

process inventory accounts

patterns of product

total units