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# Chapter 6:

Process Costing

Cost Accounting:
Foundations & Evolutions, 9e

## 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?
 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 equivalent units of production, unit costs, and
inventory values determined using the standard costing method of process
costing?
 (Appendix 3) How are normal and abnormal spoilage losses treated in an
EUP schedule?
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Job Order vs. Process Costing

## Job Order Process Costing

 Small quantities of  Large quantities of
distinct products or homogeneous products
service or services
 Assign costs to job and  Using an averaging
then to units within the technique, assign costs
job 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
 Actual

## Unit Cost = Production Costs

Production Quantity
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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 Production (EUP)
 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

##  Assumes FIFO physical flow through the

production department

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Process Costing
 Direct material
 added at the beginning, during, and/or at
the end of the process
 Direct labor

##  based on other, multiple cost drivers

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Process Costing Steps
1 Units to account for
2 Units accounted for Units
3 Determine equivalent units
4 Costs to account for
5 Compute cost per equivalent unit Costs
6 Assign costs to inventories

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Two Process Costing Methods
 Weighted Average Method
 combines

 FIFO Method
 separates

##  current period production

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Process Costing Methods
Weighted Average
Beginning WIP 100%
Started and finished 100%
Ending WIP THE % completed
DIFFERENCE
FIFO
Beginning WIP % completed
Started and finished 100%
Ending WIP % completed

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Cost of Production Report
Name of Department
for the period --- 3
Production Data: 2
1
Units to account for
Units accounted for EUP for each cost
Cost Data:
Costs to account for 4
Cost per EUP 5
6
Cost Assignment:
Transferred Out
Ending Work In Process Inventory
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Hybrid Costing Systems
 Characteristics of job order and process costing
systems
 Various product lines
 different direct material—job order costing

##  Hybrid costing used for furniture, clothing, jam, etc.

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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,

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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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Spoilage
Normal Abnormal
Spoilage Spoilage
Loss in all ending
Continuous inventory and
Loss transferred out units Period expense
on an EUP basis in EUP

## Loss in all units past

Discrete inspection point in
ending inventory and Period expense
Loss
transferred out on an in EUP
EUP basis

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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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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