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Learning Objectives (1 of 2)
Contrast process costing and job order costing Explain why equivalent units of production are used in process costing Calculate equivalent units of production, unit costs, and inventory values using weighted average method of process costing
Learning Objectives (2 of 2)
Compute equivalent units of production, unit costs, and inventory values using FIFO method of process costing Explain how standard costs are used in a process costing system Explain why a company would use a hybrid costing system
Process Costing
Averaging technique to assign costs to units produced
Unit Cost =
Process Costing
The Numerator - Production Costs
Accumulate costs by department Accumulate costs by product Direct material from material requisitions Direct labor from time sheets and wage rates Overhead Actual Predetermined application rates
Unit Cost = Production Costs Production Quantity
Process Costing
Production Costs
Direct material from material requisitions Direct labor from time sheets and wage rates Overhead Actual Predetermined application rates
Process Costing
The Denominator - Units Produced Complicated by work in process
Units started last period and completed this period Units started this period and not completed
FIFO Method
separates beginning work in process current period production
Process Costing
Direct material
added at the beginning, during, and/or at the end of process
Direct labor
added throughout the process
Overhead
added throughout the process based on direct labor based on other, multiple cost drivers
Costs
DM Conversion Total $ 5,943 $ 16,758 $ 22,701 321,120 660,270 981,390 $327,063 $677,028 $1,004,091
$1.59 +
$3.30 = $4.89
DM Conversion Beginning WIP/completed 0 3,000* Started and completed 198,000 198,000 Ending WIP Inventory 2,700 2,160 Equivalent units 200,700 203,160
Transferred Beginning WIP Inventory $22,701 Cost to complete Conversion (3,000 * $3.25) 9,750 Started and completed (198,000 * $4.85) Total cost transferred Transferred Ending inventory Out Direct Materials (2,700 * $1.60) $4,320 Conversion Costs (2,7000 * 80% * $3.25) 7,020 Cost accounted for *must agree with costs to account for
Ending WIP
11,340 $1,004,091*
Process Costing
The purpose of the six steps
Assign a value to ending work in process Assign a value to items transferred out Prepare this journal entry Finished Goods Work in Process or Transferred In Cost (successor department) Work in Process (current department)
Inventories are stated at standard cost Variances are calculated for material, labor, and overhead
Questions
What is an equivalent unit of production? What is the difference between the weighted average and FIFO methods of calculating equivalent units? Why would a company use a hybrid costing system?