process costing

process costing is used for assigning costs to jobs or units that are NOT individually distinguishable (i.e. identical products that are mass produced).

1. assign costs to DEPARTMENTS

2. calculate an average cost per unit for each department for a given time period

3. take the number of units that move out of a given department in a given time period and multiply that by the average cost per unit to determine the cost transferred out of the department each period

what is process costing. explain the main 3 steps

getting an average cost per unit in process costing requires 2 components:

1. the total cost for the department in a given period (numerator)

2. the total number of units MADE in the department in a given period (denominator)

average cost per unit= total costs/total units

how do you calculate average cost per unit (2 steps)

total units MADE (the denominator) includes all units that were started last period and completed this period, the units that were started and finished this period, and the units started this period but not completed.

problem: units completed should be allocated more costs than the units not completed. NEED TO SET UP EU% to make process costing more accurate

what does total units made consist of? how is that a problem for distributing costs?

average cost per EU= total costs/total EU

what is the equation for average cost per EU?

EU= all products x the % they are completed

what is the equation for EU?

costs transferred out = cost per EU x # of units transferred out

what is the equation for the costs transferred out?

compute a cost per equivalent unit by cost type rather than in total.

so you would have cost per equivalent unit for direct materials, a cost per equivalent unit for direct labor, a cost per equivalent unit for overhead

if costs are incurred at different rates, or different times (ex: raw materials are 100% used in beginning, conversion costs are spread out)

what do you do??

no.only the new costs are allocated, (that is why we use EU)

do you count the costs that were incurred last period?

normal spoilage: is considered inherent in the production process- it is a part of the cost of manufacturing good units. tracked on balance sheet in inventory.

abnormal spoilage: considered avoidable. tracked on income statement as “loss from abnormal spoilage”

what is normal spoilage vs abnormal spoilage

make a t accounts! beg+started-end=transferred amount

how do you calculate the physical flow of bags through WIP

1. take beg WIP x (1-%completed) aka beg WIP x %needs to be done

2. units started during month ____ - ending WIP = units completed

3. units completed x 100%

4. ending WIP x %completed

5. add answers from steps 1,3,4 to equal total EU

(do these steps separately for direct materials and conversion, but it is the same process)

how do you calculate EU for direct materials

how do you calculate EU for conversion