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Process Costing
I. Overview
Process costing
- Applies to homogeneous products that go through the same processes and are assigned similar amounts of costs.
- Uses a general ledger work-in-process account for each production department and averages costs for all units.
- A process costing system calculates equivalent units of production (EUP).
Job-order costing
- Job-order costing accounts for products that are not subject to the same processes.
- Uses a subsidiary ledger for each job and attaches specific costs to each product.
- It is used for identifiable batches of production.
They are restated as equivalent units of production (EUP).
- To determine the equivalent units based on the percentage of completion.
- To determine the per-unit cost separately for materials and conversion costs.
- Conversion costs are assumed to be uniformly incurred.
- Transferred-in costs are always 100% complete.
Weight-average: (Cost incurred during period + Costs in BWIP)/(EUP transferred out + EUP in EWIP)
FIFO: Costs incurred during period/EUP transferred out + EUP in EWIP - EUP in BWIP
- When similar products are produced in different models or styles or otherwise have distinctive traits.
- When different materials are processed through the same basic operations.
- Accumulates total conversion costs and determines a unit conversion cost for each operation.
- Direct materials costs are charged specifically to products as job-order systems.
- More work-in-process accounts are needed because one is required for each operation.
- Used by firms that produce batches of similar units that are subject to selected processing steps or operations.
- Different batches may pass through different sets of operations, but all units are processed identically within a given operation.
II. Basic Process Costing
Equivalent units.
To minimize the effect of fluctuating overhead from period to period.
Current costs plus the cost of beginning work-in-process inventory.
Current costs only.
Numerator: Estimated factory overhead.
Denominator: Estimated machine hours.
Increase in work-in-process inventory.
Increase in factory overhead control.
III. Operation Costing
Job-order costing.
Operation costing.
Operation costing system.
As in process costing, a single average unit conversion cost is applied to units passing through an operation.
Direct materials costs are applied to the individual batches.
IV. Transferred-in Costs
Transferred-in costs.
More units are available to absorb the direct labor and overhead costs. Accordingly, the labor and overhead cost percentages are reduced.
Increase in total unit cost.
Direct materials are added at a point during the process.
- Reduction in the costs of spoilage, reworked units, and scrap.
- Increase flexibility.
- Shorter manufacturing lead time.
- Quicker development of new products.
- Better product delivery and service.
- Faster response to market changes.
- Improved competitiveness.
- Translate a production schedule into requirements for each component needed to meet the schedule.
- Implemented in the form of a computer-based information system designed to plan and control materials used in production.
- Output based on forecasted demand is pushed through to the next department or to inventory.
- It assumes that forecasted demand is reasonably accurate and that suppliers can deliver based on this schedule.
V. Equivalent Units of Production (EUP)
Provide a means of assigning costs to partially complete units.
Direct materials and conversion costs.
VI. FIFO vs. Weighted-Average Assumption for EUP
FIFO method.
Weighted-average method.
Because the FIFO method is based only on the work completed in the current period versus the weighted average method tends to smooth costs over time.
Weighted-average method.
If the number of EUP in BWIP is zero in the period computed, the two methods produce the same result.
FIFO and weighted-average methods.
Because the weighted-average method includes the cost incurred in the prior period for units in BWIP, EUP is equal to units completed and transferred out plus the EUP completed in EWIP.