Chapter 6:

Process Costing
Cost Accounting:
Foundations & Evolutions, 8e
Kinney and Raiborn
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Learning Objectives

Why are equivalent units of production used in process costing?

How are equivalent units of production, unit costs, and inventory values
determined using the weighted average (WA) method of process costing?
How are equivalent units of production, unit costs, and inventory values
determined using the first-in, first-out (FIFO) method of process costing?
How are transferred-in costs and units accounted for in a multidepartment
production setting?
How are equivalent units of production, unit costs, and inventory values
determined using the standard costing method of process costing?
Why would a company use a hybrid costing system?
(Appendix 1) What alternative methods can be used to calculate equivalent
units of production?
(Appendix 2) How are normal and abnormal spoilage losses treated in an
EUP schedule?
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Job Order vs. Process

Costing
Job Order

Small quantities of
distinct products or
service
Assign costs to job and
then to units within the
job

Process Costing

Large quantities of
homogeneous products
or services
Using an averaging
technique, assign costs
directly to units produced
during the period

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Process Costing Numerator

The Numerator - Production Costs

Accumulate costs by department

Accumulate costs by product
Direct material from material requisitions
Direct labor from time sheets and wage rates
Overhead
Actual
Predetermined application rates
Unit Cost =

Production Costs
Production Quantity

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Process Costing

Production Costs

Direct material from material requisitions

Direct labor from time sheets and wage rates
Overhead
Actual
Predetermined application rates

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Process Costing Denominator

The Denominator - Units Produced

Complicated by work in process

Units started last period and completed this

period
Units started this period and not completed

Convert partially completed units to

equivalent whole units
Unit Cost =

Production Costs
Production Quantity

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Equivalent Units of
(EUP)
Production
Approximation of the number of whole units

of output that could have been produced

from the actual effort expended
Includes units
started last period and finished this period
started and finished this period
started this period and not finished
Assumes FIFO physical flow through the
production department

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Two Process Costing

Weighted Average Method
Methods
combines
beginning work in process
current period production
FIFO Method
separates
beginning work in process

current period production

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Process Costing Methods

Weighted Average
Beginning WIP
Started and finished
THE
Ending WIP
DIFFERENCE
FIFO
Beginning WIP
Started and finished
Ending WIP

100%
100%
% completed
% completed
100%
% completed

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Process Costing

Direct material
added at the beginning, during, and/or at
the end of the process
Direct labor
added throughout the process
Overhead
added throughout the process
based on direct labor
based on other, multiple cost drivers

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Process Costing Steps

1
2
3
4
5
6

Units to account for

Units accounted for
Units
Determine equivalent units
Costs to account for
Compute cost per equivalent unit Costs
Assign costs to inventories

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Cost of Production Report

Name of Department
for the period ---

Production Data:
2
1
Units to account for
Units accounted for
EUP for each cost
Cost Data:
4
Costs to account for
5
Cost per EUP
6
Cost Assignment:
Transferred Out
Ending Work In Process Inventory
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Process Costing with

Standard Costs

Simplify costing process

Eliminate periodic cost recomputations
Same as FIFO computations

emphasize current period costs and production

Inventories are stated at standard cost

Variances are calculated for material,
labor, and overhead

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Process Costing with

Standard Costs

Assigns a normal production cost to

the equivalent units of output each
period
Allows managers to quickly recognize
and investigate significant deviations
from expected production costs
Allows benchmarking with other firms

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Hybrid Costing Systems

Characteristics of job order and process costing

systems
Various product lines
different direct materialjob order costing
different direct laborjob order costing
same processprocess costing
Hybrid costing used for furniture, clothing, jam, etc.

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Spoilage
Normal
Spoilage
Continuous
Loss

Loss in all ending

inventory and
transferred out units
on an EUP basis

Discrete
Loss

Loss in all units past

inspection point in
ending inventory and
transferred out on an
EUP basis

Abnormal
Spoilage
Period expense
in EUP

Period expense
in EUP

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Questions

What is an equivalent unit of production?

What is the difference between the weighted
average and FIFO methods of calculating
equivalent units?
Why would a company use a hybrid costing
system?

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Potential Ethical Issues

Over or underestimating completion %
for ending WIP inventory to distort results
Using outdated standard costs
Ignoring the assignment of significant
direct costs to specific jobs
Treating abnormal spoilage as normal
spoilage

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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.