1Process CostingChapter 17(omit section on standard costs pp. 609-612Costing system used by companies that mass produce a homogeneous product What type of companies use Process Costing?• Repetitive production process• Large numbers of identical (homogeneous) products• Continuous productionIndustry examples• Paper• Chemical• Food processing• Lumber• Textiles• ElectronicsObjective of Process Costing• Track product costs• Determine unit cost–Pricing– Control– Decision makingProcess Costing System• WIP Inventory account for each process– Not a subsidiary account (like in Job Costing)• Requisition Material by Process• Charge time by process• Overhead is either traced directly to process or appliedRM InventoryWIP InventoryWIP InventoryWIP InventoryFG InventoryCGS2Beginning balance+Transferred In Costs+Materials+Labor+Overhead- Transferred out to next process or to Finished Goods InventoryWork In Process InventoryAccountsRaw Materials InventoryWork in Process inventory for each processnot a subsidiaryFinished Goods InventoryCost of Goods SoldTracking transferred out costs• Problem: no stopping point– Continuous production• Difficult to determine total units produced– Continuous productionExample 1• Started 100 units in production• End of period: 20 units that are 80% complete• Transferred out 80 units• Total costs (DM +DL + OH) = $9,600• Unit cost = Total cost / total units• Total units = ????Example 1 PossibilitiesUnit Costs9600/100 96.00$ Cost T/O96 x 80 = 7680 Cost of EI9600-7680= 1920 Unit cost of EI1920/20 96.00$ Unit Costs9600/80 120.00$ Cost T/O120 x 80 9600 Cost of EI9600 - 9600 0 Unit cost of EI0/20 -$ Equivalent Units• The number of whole units that could have been produced during a time period if all effort had been expended to complete each unit started• EX. 100 unit that are 70% complete= 70 eu3Example 1 Unit Cost• Determine equivalent units of production• Unit cost = total cost / equivalent units• Equivalent units = 80 + 20 x 80%• 80 + 16 = 96• Unit cost = 9600 / 96 =100• Transferred out 80 units x $100 = $8,000• What is the unit cost of goods transferred out?• What is the unit cost of goods still in inventory?9600 80001600Work In Process InventoryExample #2Beg - DM 1,800 DL 3,280 OH 5,000 10,080 Work In Process InventoryUnits ScheduleBeginning 0 unitsStarted 600 unitsEnd Inv 200 units 40% Complete• How many units were started and completed?600-200=400• How many units are in ending inventory?200• Calculate equivalent units.400 + 200x.4=400+80=480Units ScheduleBeginning 0 unitsStarted 600 unitsEnd Inv 200 units 40% CompleteExample #2• Calculate unit cost• Calculate cost of goods transferred out.• Calculate the cost of the ending inventory.Beg - DM 1,800 DL 3,280 OH 5,000 10,080 Work In Process InventoryActual Unit s x %complete EUStarted and completed 400 100% 400Ending Inventory 200 40% 80480Beg - DM 1,800 DL 3,280 OH 5,000 84001,680 Work In Process Inventory4Example #3Beg - DM 1,800 DL 3,280 OH 5,000 10,080 Work In Process InventoryUnits ScheduleBeginning 0 unitsStarted 600 unitsEnd Inv 200 units100% complete as to materials and 40% complete as to conversionExample #4Beg DM 40 Beg Conv 60 DM 200 Conversion900 1,200 Work In Process InventoryUnits ScheduleBeginning 20 unitsStarted 100 unitsEnd Inv 40 unitsBeg: 100% c as to materials, 60% c conversionEnd: 100% c as to materials, 40% c conversionWeighted Average vs. FIFO• Weighted Avg– Treat beg. Inv as if work was ALL done this period– Add in Beg Inv Costs with Current Costs when computing unit cost•FIFO– Cost out beg. Inv separate from work done this periodWeighted Average• Equivalent units– Units transferred out (all beginning units even though partially complete at the beg. of the period + units started and completed this period– Units in Ending Inventory multiplied by percent completeWeighted AverageUnit cost:Beg Inv Costs + Current Costsequivalent unitsCost Transferred out:unit cost x units transferred outCost of Ending Inventory:unit cost x units in end. Inven x %completeFIFO• Equivalent unitsUnits in Beg Inven x percent complete this periodUnits started and completed this periodUnits in Ending Inventory multiplied by percent completeFIFOUnit cost:Current Costsequivalent unitsCost Transferred out:Beg. Inventory costs Plus cost to complete Beg Inv unitsPlus unit cost x units started and completed this periodCost of Ending Inventory:unit cost x units in end. Inven x %completeCost of Prod. Report WgtAvg SawyerCompany Name CLASS EXAMPLEPeriod 31-DecUnits % Materials % ConversionBeg. Inv. Units 20 100% 60%End Inv Units 40 100% 40%Transferred to Finished Goods 80 Raw Materials ConversionBeginning Inventory Costs: 40.00$ 60.00$ Raw Materials ConversionCosts Added: 200.00$ 900.00$ CLASS EXAMPLEProduction Report31-DecPhysical UnitsPercent Complete as to MaterialsPercent Complete as to ConversionWork in Process, Beginning 20 100% 60%Units started 100 Total units to account for 120 Equivalent UnitsDirect Material ConversionUnits completed and transferred80 100% 100% 80 80 Work in Process, Ending 40 100% 40% 40 16 Total units accounted for 120 120 96 Direct Material Cost Conversion Cost Total CostWork in process, beginning 40$ 60$ 100$ Costs added 200$ 900$ 1,100$ Total costs to account for 240$ 960$ 1,200$ Equivalent Units 120 96 Cost per equivalent unit 2.00$ 10.00$ 12.00$ Cost of goods completed and transferred outunits unit cost Total CostNumber of Units transferred out x Total cost per equivalent Unit80 12.00$ 960.00$ Costs remaining in ending WIP inventory40 2.00$ 80.00$ 16 10.00$ 160.00$ Total cost of ending WIP Inventory 240.00$ Check:Cost of goods completed and transferred out960.00$ Cot of Ending WIP Inventory 240.00$ Total costs accounted for 1,200.00$ Direct Material:Number of equivalent units of material x cost per equivalent unit of materialConversion:Number of equivalent units of conversion x cost per equivalent unit of conversionFIFO SawyerCompany Name Class ExamplePeriod 31-DecUnits % Materials % ConversionBeg. Inv.