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Process-CostingSystems

7

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Process Costing

• Accumulate costs by departments and allocate costs to products based on broad, average costs

• Process costing systems are usually simpler and less expensive than job-order costing systems

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Equivalent Units

• Basic unit of measurement to convert work on "units started in previous period" and "units not completed" to equivalent whole units

• 100 units 40% complete = 40 units 100% complete

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Five Steps in Process Costing

1. Track the flow of physical units2. Determine number of equivalent whole

units 3. Summarize relevant costs4. Determine cost per equivalent unit5. Allocate costs to units completed and

to units in ending work in process

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Job-Order versus Process Costing

Direct materials

Direct labour

Factory overhead

Direct materials

Direct labour

Factory overhead

Job 100

Job 101

Job 102

FinishedGoods

Inventory

Cost of GoodsSold

Process A

FinishedGoods

Inventory

Cost of GoodsSold

Process B

Process C

Process Costing

Job-Order Costing

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Process Costing TerminologyDirect materials• Materials applied to the production process at specific points in time Conversion costs• Labour and overhead costs which are assumed to be applied

uniformly throughout the production process Transferred-In costs• Value of materials and conversion costs carried forward to

subsequent departments

To FinishedGoods Inventory

DirectMaterial

DirectMaterialTransferred-In

Costs

Conversion Costs Conversion Costs

FormingDepartment

FinishingDepartment

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FIFO and Weighted Average Methods

Weighted Average

• Underlying assumption of weighted average is that goods produced in different time periods are indistinguishable

• Combine the cost of all work done in the current period with work done in the preceding period on goods carried forward on work in process

• Divide total costs by total work done regardless of when the work was performed

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FIFO ( First-in, First-out )

• Underlying assumption of FIFO is that all goods in beginning work in process must now have left the department

• Equivalent units are determined considering work done this period only

• Only current costs are considered in determining the cost per equivalent unit

• Costs carried forward from the previous period (in beginning work in process) are assigned directly to completed goods

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Backflush Costing• As companies achieve JIT inventory control and Total Quality

Management, less costs are carried in inventory• Less attention is given to systems which sequentially track the flow of

product costs from material inventory to work in process and finished goods

• Use backflush costing when• Levels of inventory are minimal• Production process / technology is relatively stable • Standard costs are clear

• When finished goods inventory is minimal, it is possible to eliminate this account and transfer costs directly to cost of goods sold

Materials

Cost ofGoods Sold

Finished GoodsInventory

Conversion Costs

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Operation Costing• Operation Costing is a hybrid costing system combining

aspects of job-order and process costing• Products are usually produced in batches• While many of the products share common characteristics

each batch has its own unique features

Wool Blazers Polyester Blazers

Direct materials $2,500 $3,100Conversion costs:Cutting cloth 600 1,200Checking edges 300Sewing body 500 1,000Checking seams 600Machine sewing 800Hand sewing 700Total costs $5,200 $6,100