Process Costing

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EM 501 Financial and Management Accounting Process Costing
˙smail Serdar Bakal I
Middle East Technical University

Fall 2012 (METU)

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Process Costing
Process Costing is a system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead Unit costs are computed by dividing total costs incurred by the number of units of output from the production process Key question in process costing How to determine ‘number of units produced’ including the units in work-in-process?

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Concept of Equivalent Units
A derived amount of output units that
takes the quantity of each input in units completed and in unfinished units of work in process and converts the quantity of input into the amount of completed output units that could be produced with that quantity of input

Calculated separately for each input (direct materials and conversion cost)

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Steps of Process Costing
Summarize the flow of physical units of output Compute output in terms of equivalent units Compute cost per equivalent unit Summarize total costs to account for Assign total costs to units completed and to units in ending Work in Process

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Process: Illustration
Global Defense, Inc., manufactures components for missiles and military equipment. These components are assembled in the Assembly Department. We focus on the assembly process for one component DG-19. The process costing system has a single direct-cost category (direct materials) and a single indirect-cost category (conversion costs). Direct materials are added at the beginning of the process whereas conversion costs are added evenly during assembly. We will consider three cases: Case 1: Zero beginning and ending work-in-process inventory Case 2: Zero beginning work-in-process inventory but some ending work-in-process inventory Case 3: Both some beginning and some ending work-in-process inventory

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Case 1
On January 1, there was no beginning inventory of DG-19. During January, 400 units were started, completely assembled and transferred out to the Testing Department Physical Units for January Work in process, beginning inventory (January 1) Started during January Completed and transferred out during January Work in process, ending inventory, (January 31) Total Costs for January Direct material costs added during January Conversion costs added during January Total Assembly Department costs added during January $32,000 24,000 $56,000 0 units 400 units 400 units 0 units

Direct material cost per unit ($32,000 / 400) Conversion cost per unit ($24,000 / 400) Assembly Department cost per unit Fall 2012 (METU) EM 501

$80 60 $140
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Case 2
In February, another 400 units are placed into production. Only 175 units are completed and transferred to the Testing Department. The partially assembled units are 60% complete from the perspective of conversion costs. Physical Units for February Work in process, beginning inventory (February 1) Started during February Completed and transferred out during February Work in process, ending inventory, (February 28) Total Costs for February Direct material costs added during February Conversion costs added during February Total Assembly Department costs added during February $32,000 18,600 $50,600 0 units 400 units 175 units 225 units

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Case 2: Steps 1 and 2
Step 1 Physical Units 0 400 400 175 225 400 400 310 175 225 175 135 Step 2 Equivalent Units Direct Conversion Materials Costs

Flow of Production Work in process, beginning Started...
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