ACC 202 Ch 4
Authors and Copyright
Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright: © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent.
Process Costing Overview
Chapter: Process Costing
Similarities Between Job-Order and Process Costing
Both systems assign material, labor, and overhead costs to products.
Provide a mechanism for computing unit product costs.
Utilize the same manufacturing accounts:
Manufacturing Overhead
Raw Materials
Work in Process
Finished Goods
The flow of costs through manufacturing accounts is essentially the same in both systems.
Differences Between Job-Order and Process Costing
Process Costing:
Used for single products produced continuously or for long periods.
Accumulates costs by department.
Computes unit costs by department.
Job-Order Costing:
Used for many different jobs with unique production requirements.
Accumulates costs by individual jobs.
Computes unit costs on job cost sheets.
Application of Process Costing
Products Suitable for Process Costing:
Different but produced continuously.
Similar and produced continuously.
Units customized to customer specifications.
Products purchased from vendors.
Processing Departments
Defined as units in which materials, labor, or overhead are added to the product.
Activities are uniformly performed on all units of production.
Outputs must be homogeneous.
Typical product flow is sequential from one department to another.
Flow of Costs in a Process Costing System
Key Components
Cost Flow Chart:
From Work in Process to Finished Goods to Cost of Goods Sold
Costs:
Direct Materials
Direct Labor
Manufacturing Overhead
T-Account and Journal Entry Views of Process Cost Flows
Example includes two processing departments: A and B.
Flow of Raw Materials (T-account form)
T-Account Visibility:
Work in Process
Department A and B showing movement of direct materials.
Flow of Labor Costs (T-account form)
Labor Cost Structure:
Work in Process showing direct labor expenses.
Flow of Manufacturing Overhead Costs (T-account form)
Overhead Tracking:
Work in Process showing applied overhead costs.
Transfers in Process Cost Flows
Movement from Work in Process Department A to Department B.
Final transfers to Finished Goods.
Equivalent Units of Production
Definition: Equivalent units are a measure of partially completed units.
Key Idea: Half completed products are equivalent to complete products based on percentage completion.
Example Calculation of Equivalent Units
Scenario with 15,000 started units, 10,000 completed, and 5,000 at 30% completion.
Total equivalent units: 10,000 + (5,000 × 0.30) = 11,500.
Calculating Equivalent Units
Two Methods:
First-In, First-Out (FIFO)
Weighted-Average Method (covered in detail).
Weighted-Average Method Overview
Does not distinguish between prior and current period work.
Blends units and costs from previous and current periods.
Totals equivalent units by adding units transferred out and ending Work in Process Inventory.
Cost per Equivalent Unit Formula
Cost per equivalent unit = (Cost of beginning Work in Process + Costs added during the period) / Equivalent units of production.
Application of Costs in the Assembly Department
End of period assessments for equivalent units and cost breakdowns.
Detailed comparison of materials and conversion costs.
Cost Reconciliation Using FIFO vs. Weighted-Average Method
Difference: FIFO is generally seen as more accurate due to its method of accounting for inventory and cost flows.
Cost Reconciliation Example for June
Visual breakdown of costs in process cost accounting, summarizing beginning Work in Process and costs added.
Operation Costing
Hybrid approach merging job-order and process costing, used for diverse product batches in processing departments.