Process Costing Systems Overview

Process Costing Systems

• Process costing tracks costs through departments or processes.
• Used for homogenous mass-produced, automated, or continuous flow products.
• Costs are recorded for each department.
• Costs are assigned equally to units produced.

Learning Objective 1

• Objective 1 focuses on the basics of process costing.

Process Costing

• Production environment: homogenous units, mass produced, automated, continuous flow.
• Costing procedure: costs recorded for a department, department costs assigned equally to the produced units.

Why Process Costing Is Useful

• Help set prices.
• Evaluate production efficiency.
• Evaluate products.
• Determine balance sheet inventory.

Process Costing - The Cost Inputs

• Direct materials are a significant cost in this process costing system.
• Direct labor costs are usually smaller in comparison to other product costs in process costing systems, especially when there is high level of automation.
• Manufacturing overhead is an important indirect cost factor.

Process Costing - Conversion Costs

• Direct labor costs are often small in comparison to other costs in process costing systems with high automation.
• Direct materials and manufacturing overhead costs are often combined and called conversion costs.

Comparing Job Costing and Process Costing

• Job costing: Costs accumulated by the job, work in process has a job cost record for each job, many unique, high-cost jobs
• Process costing: Costs accumulated by department or process, work in process has a production report for each batch of products, few identical, low-cost products, units produced for inventory in an automated process
• Both systems aim to determine product costs.

Department With No Beginning or Ending WIP Inventory

• No beginning or ending work in processes.
• Common when companies are successful in just-in-time production.
• Cost per unit = Manufacturing costs for a period / Units produced.

Department With Ending WIP Inventory

• Ending work in process inventory consists of incomplete units at the end of the period.
• Need to determine the concept of equivalent units.
• Cost per equivalent unit = Manufacturing costs for a period / Equivalent units for the period.

Equivalent Units Example

• Two one-half filled cups are equivalent to one full cup.
• 10,000 units 70 percent complete are equivalent to 7,000 complete units.

Assigning Costs to Products

• Five-step process for assigning costs: Summarize physical units, compute equivalent units, summarize total costs, compute cost per equivalent unit, assign costs.

Assigning Costs to Products - The Five-step Process

• Summarize physical unit flow, compute equivalent units produced, summarize total costs, compute costs per equivalent unit, assign unit costs to completed and ending work in process.

Department With Ending WIP Inventory (Example)

• Example calculations for direct materials and conversion costs with no beginning WIP inventory to determine the manufacturing unit costs.

Department With Ending WIP Inventory-Equivalent Units (Example)

• Flow of units in December, Beginning WIP Inventory, Units started this period, Units accounted for, etc.
• Units completed and transferred out, Ending WIP inventory (etc.)
• 100% completed for Material and Conversion.

Calculating Equivalent Units

• Units completed and transferred out, Ending WIP inventory, calculating equivalent units, Material and Conversion Costs.

Assigning Costs to Products-Example

• Five-step process for assigning cost in a process costing system with no beginning or ending WIP inventory, Example: manufacturing costs for a period are 16,000and8,000unitsareproduced,Costperunitis16,000 and 8,000 units are produced, Cost per unit is 16,000and8,000unitsareproduced,Costperunitis2.00.

Department with Beginning and Ending WIP Inventory

• When there is beginning work-in-process (WIP) inventory, the determination of equivalent units becomes more complicated.
• Primary question: which units were completed first during the period?

Weighted-Average vs. FIFO

• Weighted-Average: All units and costs are considered together to determine average costs per equivalent unit, regardless of when the costs were incurred.
• FIFO: Costs are accounted for by layer, the cost per equivalent unit for the current period is computed separately from the cost per equivalent unit for the last period.

Assigning Costs Using Weighted-Average Costing

• Makes no distinction between work done in the prior period and work done in the current period.
• Blends units and costs in beginning inventory with units and costs in the current period.

Beginning and Ending Inventory Weighted-Average Costing (Example)

• Example of assigning costs to completed and incomplete units (specific calculations are given).

Costs Transferred from Prior Departments

• Multiple departments result in units and costs being transferred from a prior department to the current department, treated as direct materials added at the beginning of a production process.

• Data for the calculations with (example data given).

• Steps 1 and 2- physical units, equivalent units calculations.