Chapter 6Process CostingKey Topics:Cost flows in mass productionSteps in preparing process cost reports (FIFO and weighted average)Equivalent unitsApplying costsSpoilage in process costing Uses, Uncertainties, and limitationsChapter 6Process CostingProcess product-costing systems are used for costing inventories or services when they are mass-produced, identical units. These products differ from the custom-made or unique goods that are assigned costs under a job costing system Chapter 6Mass ProductionMany goods are produced using a continuous process.Examples:Chapter 6Overview of Process Costing Systems Chapter 6Steps for Preparing a Process Costing Report:1. Summarize total costs to account for.2. Summarize total physical and equivalent units.3. Compute cost per equivalent unit.4. Account for cost of units completed and cost of ending WIP.Chapter 6What Are Equivalent Units, and How Do They Relate to the Production Process?Equivalent Units:Measure the resources used in partially completed units relative to the resources needed to complete the units.Equivalent Units Depend on the Pattern of Cost Flow:Direct Materials:*Added at the beginning of the process*Added during the processConversion Costs:*Incurred uniformly throughout the process*Incurred non-uniformlyChapter 6How Is the Weighted Average Method Used in Process Costing?Weighted Average Method:Costs from beginning WIP (performed last period) are averaged with costs incurred during the current period and then allocated to all units completed and ending WIP.Chapter 6Summaries of Physical Units and Total Costs for Weighted Average Calculations (Assuming direct materials are added at the beginning of the process)Chapter 6Calculation of Equivalent Units Under the Weighted Average Method Chapter 6Calculation of Cost Per Equivalent Unit Under the Weighted Average MethodBeg. WIP Costs + Costs Added This PeriodWeighted Average Equivalent UnitsChapter 6Equivalent Unit CostsWeighted Average:Direct materials = $6,000+$30,500 =$3.0417 12,000Conversion costs=$4,200+$76,680=$7.0947 11,400Total cost per equivalent unit = $10.1364Chapter 6Weighted Average Process Cost ReportChapter 6Summaries of Physical Units and Total Costs for FIFO Calculations(Assuming direct materials are added at the beginning of the process)Chapter 6Calculation of Equivalent Units Under the FIFO MethodChapter 6First-in, First-out (FIFO) MethodThe current periods costs are used to allocate cost to work performed this period Chapter 6Calculation of Cost Per Equivalent Unit Current Period CostEquivalent Units for Work Performed this PeriodChapter 6Equivalent Units CostsFIFO:Direct materials = $30,500 = $3.05 10,000Conversion costs=76,680 = $7.10 10,800Total cost per equivalent unit = $10.15Chapter 6FIFO Process Cost ReportChapter 6How Is Process Costing Performed for Multiple Production Departments Transferred-in Costs:Costs of processing performed in a previous departmentTransferred-in costs are pooled separately from other costsChapter 6Chapter 6How Are Spoilage Costs Handled in Process Costing? Normal Spoilage:Defective units that arise as part of regular operationsAbnormal Spoilage:Spoilage that is not part of everyday operationsChapter 6Chapter 6Use Process Cost Information to:Measure costs of products mass-produced productsAssign costs to inventory and cost of goods sold for financial statements and income tax returnsMonitor operations and costsDevelop estimates of future costs for decision makingAnalyze the costs and benefits of quality improvementsIdentify potential areas for process improvementsChapter 6Uncertainties and Measurement Errors in Process CostingActual cost flows might not be known:* When are direct materials added?* When are conversion costs incurred?* How complete are the units in ending work in process?* What amount of spoilage is normal?Chapter 6