Process Costing Notes

Process Costing

Learning Objectives

C1: Explain process costing and contrast it with job order costing.
C2: Appendix 20A - Compute process activity costs and prepare a production cost report using FIFO.
A1: Illustrate a hybrid costing system and analyze process system yield.
P1: Compute process activity costs using weighted average.
P2: Prepare a production cost report using weighted average.
P3: Record the flow of production costs in process costing.
P4: Record the transfer of goods across departments, to Finished Goods Inventory, and to Cost of Goods Sold.

Process Operations (C1)

Used for mass production of similar items.
Continuous flow of sequential processes.
Standardized process to make large volumes of similar products.
Each process is a separate production department.
Each process applies direct labor, overhead, and direct materials to move product to completion.
The final process in the series finishes goods and makes them ready for sale.

Comparing Process and Job Order Costing Systems (C1)

Exhibit 20.2 provides a detailed comparison of these two costing systems.

Process Costing with Weighted Average (P1)

The following four steps demonstrate process costing using the weighted average method:

Determine the physical flow of units.
Compute equivalent units of production.
Compute the cost per equivalent unit of production.
Assign and reconcile costs.

Step 1: Determine Physical Flow of Units

Refer to Exhibits 20.3 & 20.4.

Step 2: Compute Equivalent Units of Production

Refer to Exhibits 20.5, 20.6 and 20.7.

Step 3: Compute Cost Per Equivalent Unit

Refer to Exhibits 20.8 and 20.9

Step 4: Assign and Reconcile Costs

Refer to Exhibit 20.10.

Using Process Cost Information (P1)

Control costs: compare to prior months and take necessary corrective action.
Evaluate performance: evaluate department managers based on their control of costs.
Evaluate process improvements: examine how costs per EUP change after process improvements.
Prepare financial statements: the cost of goods sold and ending inventory are reported on the income statement and balance sheet.

Process Cost Report (P2)

Exhibit 20.11 illustrates the process cost report.

Accounting for Process Costing (P3)

Exhibit 20.12 illustrates accounting for process costing.

Accounting for Production Costs (P3)

Exhibit 20.13 illustrates accounting for production costs.

Accounting for Factory Overhead (P3)

Exhibit 20.14 illustrates accounting for factory overhead.

Transfers Across Departments (P4)

Exhibit 20.15 illustrates transfers across departments.

Accounting for Transfer to Finished Goods (P4)

Exhibit 20.16 illustrates accounting for transfer to finished goods.

Accounting for Cost of Goods Sold (P4)

Exhibit 20.16 illustrates accounting for the cost of goods sold.

Financial Statement Reporting (P4)

Related to Finished Goods Inventory and Cost of Goods Sold.

Trends in Process Operations (P4)

Process design
Just-in-time production
Robotics & Automation
Services
Customer orientation
Continuous Processing

Hybrid Costing System (A1)

A hybrid system (operation costing system) contains features of both process and job order operations.
Requires a hybrid costing system to determine the cost of products/services.
Companies try to standardize processes while also meeting customer needs.
Important to monitor and control costs.

FIFO Method of Process Costing (C2)

The following four steps demonstrate process costing using the FIFO method:

Determine the physical flow of units.
Compute equivalent units of production.
Compute the cost per equivalent unit of production.
Assign and reconcile costs.

Step 1: Determine Physical Flow of Units – FIFO

Refer to Exhibits 20A.1, 20A.2 and 20A.3

Step 2: Compute Equivalent Units of Production – FIFO

Refer to Exhibits 20A.4, 20A.5 and 20A.6

Step 3: Compute Cost Per Equivalent Unit – FIFO

Refer to Exhibits 20A.7 and 20A.8

Step 4: Assign and Reconcile Costs – FIFO

Refer to Exhibit 20A.9