Cornerstones of Cost Management, 3E: Process Costing

CORNERSTONES OF COST
MANAGEMENT, 3E
HANSEN/MOWEN
PROCESS COSTING
CHAPTER 6
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CHAPTER 6 OBJECTIVES
1. Describe the basic characteristics of
process costing, including cost flows,
journal entries, and the cost of production
report
2. Describe process costing for settings
without work-in-process inventories
3. Describe process costing for settings with
ending work-in-process inventories
4. Prepare a departmental production report
using the FIFO method
CHAPTER 6 OBJECTIVES
using the weighted average method
with transferred-in goods and changes in
output measures
7. Describe the basic features of operation
costing
8. Explain how spoilage is treated in a
process-costing system
BASIC OPERATIONAL AND COST CONCEPTS

A process system is characterized by a
large number of homogeneous products
passing through a series of processes
Each process is responsible for one or more
operations that bring a product one step closer
to completion
A process is a series of activities that are linked to
perform a specific objective
LO-1

Each process may require materials, labor
and overhead inputs
Upon completion of a particular process,
the partially completed goods are
transferred to another process
LO-1
EXHIBIT 6.1AN OPERATIONAL PROCESS

SYSTEM: ANTIHISTAMINE MANUFACTURING
LO-1

Cost Flows
Cost flows for a process-costing system are basically
similar to those of a job-order costing system
There are two key differences
First, a job-order costing system accumulates
production costs by job, and a process-costing system
accumulates production costs by process
Second, for manufacturing firms, the job-order costing
system uses a single work-in-process (WIP) account,
while the process-costing system has a WIP account
for every process
LO-1
EXHIBIT 6.2COMPARISON OF COST

ACCUMULATION METHODS
LO-1
EXHIBIT 6.2COMPARISON OF COST

ACCUMULATION METHODS (CONTINUED)
LO-1
EXHIBIT 6.3PROCESS COST FLOWS ILLUSTRATED

USING T-ACCOUNTS: NO ENDING WIP
LO-1

The Production Report
A document that summarizes the manufacturing
activity that takes place in a process department
for a given period of time
Divided into a unit information section and a cost
information section
Unit Information section
Cost Information section
1. Units to account for
1. Costs to account for
2. Units accounted for
2. Costs accounted for

LO-1
EXHIBIT 6.4BASIC FEATURES OF A

PROCESS-COSTING SYSTEM
LO-1

Unit Costs
First, measure the manufacturing costs for a
process department for a given period of time
Second, measure the output of the process
department for the same period of time
Finally, the unit cost for a process is computed by
dividing the costs of the period by the output of the
period
LO-1
PROCESS COSTING WITH NO WORK-INPROCESS INVENTORIES

Services that are homogeneous and
repetitively produced can use the processcosting approach
Examples: check processing in a bank,
changing oil, checking baggage, pressing
shirts, etc.
LO-2
PROCESS COSTING WITH NO WORK-INPROCESS INVENTORIES

JIT Manufacturing Firms
Emphasizes continuous improvement and the
elimination of waste
Strive to minimize inventories and reduce work-inprocess inventories to insignificant levels
LO-2
PROCESS COSTING WITH ENDING WORK-INPROCESS INVENTORIES

Physical Flow and Equivalent Units
Equivalent units of output are the complete units
that could have been produced given the total
amount of productive effort expended for the
period under consideration
Every transferred-out unit is an equivalent unit
LO-3

Physical Flow and Equivalent Units
First two steps in building a production report for
process costing
1. Preparation of a physical flow schedule, which
provides an analysis of the physical flow units
2. Calculation of the periods equivalent units
LO-3

Calculating Unit Costs, Assigning Costs
to Inventories, and Reconciliation
The final three steps needed for a production
report
3. Unit cost calculation
4. Valuation of inventories
5. Cost reconciliation
LO-3
FIFO COSTING METHOD

Equivalent units and manufacturing costs
in beginning work in process are excluded
from the current period unit cost
calculation
Recognizes that the work and costs
carried over from the prior period
legitimately belong to that period
LO-4
EXHIBIT 6.5PRODUCTION REPORT:

BLENDING DEPARTMENT
LO-4

BLENDING DEPARTMENT (CONTINUED)
LO-4

LO-4
WEIGHTED AVERAGE COSTING METHOD

The weighted average costing method
picks up beginning inventory costs and the
accompanying equivalent output and
treats them as if they belong to the
current period
Prior period output and manufacturing
costs found in beginning work in process
are merged with the current period output
and manufacturing costs
LO-5

BLENDING DEPARTMENT
LO-5

LO-5
WEIGHTED AVERAGE COSTING METHOD

FIFO Compared with Weighted Average
Differ on two key dimensions
1. How output is computed
2. What costs are used for calculating the periods
unit cost
The two methods use different total costs and

different measures of output
LO-5
TREATMENT OF TRANSFERRED-IN GOODS

The cost of this material is the cost of the goods
transferred out computed in the prior department
The units started in the subsequent department
correspond to the units transferred out from the
prior department
The units of the transferring department may be
measured differently than the units of the
receiving department
LO-6
EXHIBIT 6.7PRODUCTION AND COST

DATA: ENCAPSULATING DEPARTMENT
LO-6

Step
Step 1:
1: Physical
Physical Flow
Flow Schedule
Schedule
LO6
EXHIBIT 6.8EQUIVALENT UNITS OF PRODUCTION:

WEIGHTED AVERAGE METHOD
Step
Step 2:
2: Calculation
Calculation of
of Equivalent
Equivalent Units
Units
LO-6

Step
Step 3:
3: Computation
Computation of
of Unit
Unit Costs
Costs
LO6

Step
Step 4:
4: Valuation
Valuation of
of Inventories
Inventories
LO6

ENCAPSULATING DEPARTMENT
LO-7

ENCAPSULATING DEPARTMENT
(CONTINUED)
LO-7
OPERATION COSTING
Basics of Operation Costing
A blend of job-order and process-costing
procedures applied to batches of homogeneous
products
Uses job-order procedures to assign direct materials
costs to batches
Uses process procedures to assign conversion costs
Work orders are used to collect production costs

for each batch
Work orders also are used to initiate production
LO-7
EXHIBIT 6.10BASIC FEATURES OF

OPERATION COSTING
LO-7
EXHIBIT 6.10BASIC FEATURES OF

OPERATION COSTING (CONTINUED)
END OF CHAPTER 6
LO-7

Cornerstones of Cost Management, 3E: Process Costing

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CORNERSTONES OF COST

BASIC OPERATIONAL AND COST CONCEPTS

BASIC OPERATIONAL AND COST CONCEPTS

EXHIBIT 6.1AN OPERATIONAL PROCESS

BASIC OPERATIONAL AND COST CONCEPTS

EXHIBIT 6.2COMPARISON OF COST

EXHIBIT 6.2COMPARISON OF COST

EXHIBIT 6.3PROCESS COST FLOWS ILLUSTRATED

BASIC OPERATIONAL AND COST CONCEPTS

Cost Information section

1. Units to account for

1. Costs to account for

2. Units accounted for

2. Costs accounted for

EXHIBIT 6.4BASIC FEATURES OF A

BASIC OPERATIONAL AND COST CONCEPTS

PROCESS COSTING WITH NO WORK-INPROCESS INVENTORIES

PROCESS COSTING WITH NO WORK-INPROCESS INVENTORIES

PROCESS COSTING WITH ENDING WORK-INPROCESS INVENTORIES

PROCESS COSTING WITH ENDING WORK-INPROCESS INVENTORIES

PROCESS COSTING WITH ENDING WORK-INPROCESS INVENTORIES

FIFO COSTING METHOD

EXHIBIT 6.5PRODUCTION REPORT:

EXHIBIT 6.5PRODUCTION REPORT:

EXHIBIT 6.5PRODUCTION REPORT:

WEIGHTED AVERAGE COSTING METHOD

EXHIBIT 6.6PRODUCTION REPORT:

EXHIBIT 6.6PRODUCTION REPORT:

WEIGHTED AVERAGE COSTING METHOD

The two methods use different total costs and

TREATMENT OF TRANSFERRED-IN GOODS

EXHIBIT 6.7PRODUCTION AND COST

TREATMENT OF TRANSFERRED-IN GOODS

EXHIBIT 6.8EQUIVALENT UNITS OF PRODUCTION:

TREATMENT OF TRANSFERRED-IN GOODS

TREATMENT OF TRANSFERRED-IN GOODS

EXHIBIT 6.9PRODUCTION REPORT:

EXHIBIT 6.9PRODUCTION REPORT:

Work orders are used to collect production costs

EXHIBIT 6.10BASIC FEATURES OF

EXHIBIT 6.10BASIC FEATURES OF

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