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Process Costing

Terms in this set (68)

Process costing
is used to assign product costs in a mass manufacturing environment where a large number of similar items are produced.
A discrete process
Two types of processes
1) A discrete process
2) A continuous process
A discrete process
occurs when individual units or products are identifiable from the beginning of the process.
For example: BIC pens or Texas Instruments calculators
A continuous process
process occurs when individual units cannot be distinguished until the end of the process.
For example: Chip 'Ahoy Cookies or Nantucket Nectars.
Process costing collects costs
for each production process.
Production Cost Report
This report assigns production costs to the units completed and transferred to the next department.
This report also assigns production costs to the units
in ending Work In Process Inventory.
Each production department produces
monthly production cost reports.
Each production department has its own
Work In Process Inventory (WIP) account.
Product costs are transferred from one WIP account to the next
as units are transferred from one production department to the next.
In a mass manufacturing environment what is reduced
automation often reduces direct labor to a very low level.
If direct labor becomes immaterial
it is often added to manufacturing overhead to become conversion costs.
Accounting for conversion costs reduces
clerical costs by reducing the number of accounts to be maintained.
Preparation of a production cost report steps
5
Production cost report: First step
Summarizing physical units
2nd step
Calculating equivalent units
3rd step
Summarizing costs to be accounted for
4th step
Calculating unit costs for each cost category
5th step
Assigning costs to units
Assigning costs to units
1) Units completed and transferred out
2) Units in ending Work In Process Inventory
Cost assignments may
differ for each cost category
Physical Units
1) Units to be accounted for =
2) Units accounted for
Units to be accounted for
These are the sources (or inputs) of units to the process.
Units started or transferred-in from a prior department.
Units in beginning Work In Process Inventory.
Unfinished units leftover from the previous month.
Units accounted for
These are the destinations (or outputs) of units.
Units completed and transferred out
Units in ending Work In Process Inventory.
These units become next month's beginning WIP.
Equivalent Units
Physical units are at various degrees of completion.
To find unit costs,
it is necessary to put all of these units on the same basis.
The equivalent units measure
converts units at various degrees of completion to the equivalent number of completed units.
400 physical units that are 75% complete have received the same work as
300 units that are 100% complete.
Equivalent units are determined
for each cost category.
Direct material may be added to the production process at
various points during production.
Commonly, material is added
at the beginning of the process.
Once the process has begun, 100% of material has been added.
Sometimes, material is added at the end of the process.
Zero material is added until the process nears completion
Sometimes, material is added evenly throughout the process.
If the process is 75% complete, the units have received 75% of the required material.
Conversion costs are generally
evenly throughout the process.
Transferred-in costs
are product costs transferred from prior departments in the manufacturing process.
Transferred-in costs will not occur in the first department,
but will be accompany units transferred in for all other departments.
Transferred-in costs are always
100% complete since nothing done in a given department will change the accumulated costs from prior departments.
Costs To Be Accounted For
will be provided
The costs to be accounted for are presented
in a table
Beginning WIP inventory
Direct material, conversion costs, and trans-in costs.
Costs added during the month:
Direct material, conversion costs, and trans-in costs.
Beginning WIP inventory and costs added during the month are each totaled
on the right-hand side of the table.
Total cost to be accounted for is determined as the sum of
beginning WIP and costs added during the month.
Unit Costs
Costs to be accounted are also totaled for each cost category: Direct material, conversion costs, trans-in costs.
Direct materials costs are
divided by the equivalent units for direct materials to determine direct materials unit cost.
Conversion costs are divided
by the equivalent units for conversion cost to determine conversion unit cost.
Transferred-in costs are divided by
the equivalent units for transferred-in cost to determine transferred-in unit cost.
Total unit cost
is the sum of the unit cost for the cost components.
Costs are assigned to
the units completed and to units in ending WIP inventory.
The units completed and transferred out are finished units
Completed unit cost = equivalent units x total cost per unit.
Since the units in ending WIP are not complete,
they may vary in degree of completion for each cost component.
Direct materials =
equivalent units x material unit cost.
Conversion costs =
equivalent units x conversion unit cost.
Trans-in cost =
equivalent units x trans-in unit cost.
Total cost accounted for =
Total costs to be accounted for
First-In, First-Out Method
FIFO isolates costs for a single month by calculating beginning WIP separately from costs added in the period.
There are actually two methods for preparing a process cost report:
weighted average and first-in, first-out.
the weighted average method adds
the beginning WIP inventory costs with costs added during the period and assigns total cost to units.
FIFO is the favored method
in Europe.
The weighted average method is
computationally simpler than FIFO and has traditionally been favored in the U.S.
However, the weighted average method blends cost from this period with the previous period.
Process cost report FIFO
The physical units section is the same as before
Equivalent units differ from the weighted average method.
FIFO process cost report:
The line for units completed is divided into 2 lines:
units started and completed and beginning WIP.
Units started and completed =
units completed - beginning WIP
Units to complete beginning WIP =
beginning WIP(1 - % complete)
Cost to be accounted for section
is the same as before.
Unit costs for each cost category represent
the costs added in the month and not total costs.
Unit costs =
= costs added in the month / equivalent units
FIFO Costs to be accounted for
Costs started and completed = equivalent units x total unit cost
Beginning WIP inventory:
Prior period costs are the costs in Beginning WIP.
Costs added to complete beginning WIP will differ by category.
Direct materials = equivalent units x material unit cost.
Conversion costs = equivalent units x conversion unit cost.
Trans-in cost = equivalent units x trans-in unit cost.
Ending WIP inventory:
Direct materials = equivalent units x material unit cost.
Conversion costs = equivalent units x conversion unit cost.
Trans-in cost = equivalent units x trans-in unit cost.
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