Chapter 4: Process Costing

Conversion cost

Direct labor cost plus manufacturing overhead cost.

Industries that use job-order costing

Furniture Manufacturing Special-order printing Shipbuilding Many types of service organizations

Units in beginning work in process inventory + Units started into production or transferred in =

Units in ending work in process inventory + Units completed and transferred out

Job-order costing

Used when many different jobs or products are worked on each period

Cost per equivalent unit - Weighted-Average Method

Cost per equivalent unit = (Cost of beginning work in process inventory + cost added during the period) / equivalent units of production

Industries that use process costing

1. Bricks 2. Soda 3. Paper 4. Used by industries that convert raw materials into homogeneous products 5. Assembly operations 6. Utilities that produce gas, water, and electricity

Processing Department

An organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product.

Differences between Job-Order and Process Costing

Job-Order Costing: 1. Many different jobs are worked on during each period, with each job having different production requirements. 2. Costs are accumulated by individual job. 3. Unit costs are computed by job on the job cost sheet. Process Costing: 1. A single product is produced either on a continuous basis or for long periods of time. All units of product are identical. 2. Costs are accumulated by department. 3. Unit costs are computed by department.

Process costing

A costing method used when essentially homogeneous products are produced on a continuous basis.

Operation costing

A hybrid costing system used when products have some common characteristics and some individual characteristics.

Weighted-average method

A process costing method that blends together units and costs from both the current and prior periods.

Equivalent units of production

Department's output for the period composed of partially completed units and any units completed during the period.

Equivalent Units calculation under Weighted-Average method

Equivalent units of production = Units transferred to the next department or to finished goods + Equivalent units in ending work in process inventory

Equivalent units =

Number of partially completed units X Percentage completion

Equivalent units

The product of the number of partially completed units and their percentage of completion with respect to a particular cost. Equivalent units are the number of complete whole units that could be obtained from the materials and effort contained in partially completed units.

Similarities between Job-Order and Process Costing

1. Both systems have the same basic purposes: to assign material, labor, and manufacturing overhead costs to products and to provide a mechanism for computing unit product costs. 2. Both systems use the same basic manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods. 3. The flow of costs through the manufacturing accounts is basically the same in both systems.

2 common methods for determining unit product costs

1. Job order costing 2. Process costing

2 essential features of processing departments

1. The activity in the processing department is performed uniformly on all of the units passing through it. 2. The output of the processing department is homogeneous (all of the units produced are identical).

Equivalent units of productions (weighted-average method)

The units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department's ending work in process inventory.