Management Accounting Lecture January 27

Chapter 17 Process Costing

Process Costing -> Cost per Unit

Why do you want to know the cost per unit?

• Price of product
• Profit
• Control the cost
• How efficient production is
• Helps calculate CoGS
• Ending Inventory on Balance Sheet

Cost Accumulation

• Job Order
• Easily identifiable products
• Custom units, expensive yachts
• Often require contracts before going into production
• Process Costing
• Mass production 
• Toilet paper, toothpaste

Learning Objectives:

1. Identify the situations in which process-costing systems are appropriate
2. Understand the basic concepts  of process costing and compute  average unit costs
3. Describe the five steps in process  costing and calculate equivalent  units
4. Use the weighted-average method  and the first-in, first-out (FIFO)  method of process costing
5. Apply process-costing methods to  situations with transferred-in costs
6. Understand the need for hybridcosting systems such as operation  costing

Process Costing

Calculating unit costs by assigning total costs over identical/similar units of output.

ex. $1,000,000 operating cost over 100,000 identical untis = $10 Unit cost

Process-Costing Cost Categories

Process-Costing systems separate costs into 2 cost categories

1. Direct Materials - Often accumulated at the beginning of production/work station
1. The raw materials that will eventually become the final product
2. Conversion costs - Often accumulated throughout process
1. The work required to turn raw materials into a final product
2. For simplicity, these are added evenly throughout the process

Process-Costing: Three Cases

1. No beginning or ending work-in-process inventories
2. No beginning WIP and some ending WIP
3. Both beginning and ending WIP inventories

Case #1: No beginning or ending WIP inventories

Five-Step Process-Costing Allocation

1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. Sumarize total costs to account for
4. Compute cost per equivalent unit
5. Assign total costs to units completed and to units in ending work-in-process

Equivalent Units

For now, focus on the equivalent number of units (for example, 100 units 80% complete ~ 80 equivalent units).

In case 1, in order to calculate cost per unit, you simply need to divide the total costs by the number of units.

Case #2: No beginning WIP, but some ending WIP

Because Direct Materials are counted 100% at the beginning of the process, their value is recorded entirely. However, conversion costs are calculated based on completion of the unit. If the units are 60% done, 60% of the conversion costs are recorded. This % of conversion costs are used to calculate unit costs for the time period.

Weighted-Average Process-Costing Method

Weighted Average method or the FIFO method

Calculates cost per equivalent unit of all work done to date (regardless of accounting period in which it was done)

FIFO focuses on current costs and matching revenues and expenses to time periods

Case #3: Both Beginning and ending WIP inventory

Costs from last period (in the beginning Inventory) are carried forward and mixed in with current period's costs. These total costs are divided by the total units completed and in process this period (adding the beginning inventory and work done there).

First-In, First-Out (FIFO Process-Costing Method

Assigns cost of the beginning inventory (from last period) units to the equivalent number of units completed in this period.

Work done in different periods have their costs separated.