chapter 6: process costing - gradebuddy

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Chapter 6:Process Costing

Cornerstones of Managerial Accounting, 4e


Learning Objectives

1. Describe the basic characteristics and cost flows associated with process manufacturing.

2. Define equivalent units and explain their role in process costing. Explain the differences between the weighted average method and the FIFO method of accounting for process costs.

3. Prepare a departmental production report using the weighted average method.

4. Explain how nonuniform inputs and multiple processing departments affect process costing.

5. (Appendix 6A) Prepare a departmental production report using the FIFO method.


Characteristics of Process Manufacturing

►Since each product within a product line passing through the processes would receive similar ‘‘doses’’ of materials, labor, and overhead, costs are accumulated by process.

►Process costing works well whenever relatively homogeneous products pass through a series of processes and receive similar amounts of manufacturing costs.

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Types of Processes

► Sequential processing requires that units pass through one process before they can be worked on in the next process in the sequence.

► Parallel processing is another processing pattern that requires two or more sequential processes to produce a finished good.

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Types of Processes (continued)

► Partially completed units (e.g., two subcomponents) can be worked on simultaneously in different processes and then brought together in a final process for completion.

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3Cornerstone 6-4

Measuring Output and Assigning Costs: Weighted Average Method

(continued)


Five Steps in Preparing a Production Report

► The production report is subsidiary to the WIP account for a department.

► The following five steps describe the general pattern of a process-costing production report:1. physical flow analysis

2. calculation of equivalent units

3. computation of unit cost

4. valuation of inventories (goods transferred out and EWIP)

5. cost reconciliation

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Step 1: Physical Flow Analysis

► The purpose of the physical flow analysis is to trace the physical units of production.

► Physical units are not equivalent units.

►They are units that may be in any stage of completion.

► Two calculations are needed to construct a physical flow schedule:

► ‘‘Total units to account for’’ must equal the ‘‘Total units accounted for.’’

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Step 4: Valuation of Inventories

► Cornerstone 6-9 shows FIFO values for EWIP and goods transferred out.

► Since all equivalent units in ending work in process are current period units, the cost of EWIP is simply $0.27 X 2,500, or $675, the same value that the weighted average method would produce.

► However, when it comes to valuing goods transferred out, a significant difference emerges between the weighted average method and FIFO.

► Under weighted average, the cost of goods transferred out is simply the unit cost times the units completed. Under FIFO, however, there are two categories of completed units: units started and completed and Units from beginning inventory. The cost of each category must be calculated separately and then summed to obtain the total cost of goods transferred out.

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5Cornerstone 6-10

Preparing a Production Report: First-In, First Out Method


5Cornerstone 6-10

Preparing a Production Report: First-In, First Out Method (continued)


Step 5: Cost Reconciliation

►In Step 5, the costs assigned to production are reconciled to the total manufacturing costs to account for.

►With the completion of Step 5, the production report can be prepared.

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chapter 6: process costing - gradebuddy

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