Chapter 4: Process Costing and Hybrid Product-Costing Systems

Job order costing: costs are accumulated and assigned to discrete products and jobs. Process costing: cost are accumulated and averaged in departments and applied to batches/flow of products on equivalent units (assuming labor and overhead are uniformly applied).
WIP Inv. Production Department A Direct Material WIP Inv. Production Department B Finished Goods Inv. Cost of Goods Sold

Direct Labor
Manufacturing Overhead

More Process Costing Definitions

Equivalent Units: a measure of the amount or production effort applied to a physical unit of production. For example, if there are 100 units that are 75% complete, there are 750 equivalent fully complete units. Transferred-in Costs: costs that are assigned to in-process parts that are transferred from one production department to another. Weighted -Average Method: method of process costing where the costs assigned to the beginning WIP inventory are added to the current period production costs. The cost per equivalent unit is a weighted average of the beginning WIP and the current cost.

Process Costing at Balas Cookie Factory

Direct Materials: Flour Eggs Sugar Sprinkles Batter/Baking (0% Stage) DM Input (80% of DM) Flour Eggs Sugar QC (30% Stage) Defect rate = 1% Cookie making is performed in a single stage production facility (Balas kitchen). DM transferred in at 0% completion for Batter/Baking QC to remove burnt, broken, and malformed cookies is performed at 30% completion. Taste samples are also taken form this 30%

Direct Labor and MOHA are applied uniformly throughout cookie making process.

Icing (40% Stage) DM Input (10% DM) Sugar

Additional DM added at 40% complete to enhance taste and physical characteristics of cookie. Additional DM added at 80% complete for decoration.

Decoration (80% Stage) DM Input (10% DM) Sprinkles

COOKIES FOR D39, Section 69!

Weighted Average Method of Process Costing Steps to Prepare Departmental Production Report
Step 1: Analysis of Physical Flow of Units (Physical units in beginning work in process) + (Physical units started) - (Physical units completed and transferred out) Physical units in ending work in process. Calculation of Equivalent Units (Eq. units of activity in units completed/transferred out) + (Eq. Units of activity in ending work in process) Total equivalent units of activity

Step 2:

Weighted Average Method of Process Costing Steps to Prepare Departmental Production Report
Step 3: Computation of Unit Costs Work in process + Costs incurred during March Total costs to account for

Total costs to account for = Cost per equivalent unit Equivalent Units
Step 4: Analysis of Total Costs Calculate cost of goods complete and transferred out of department. Calculate costs remaining in WIP and then the conversion.