Process Costing Overview

Overview

This lecture covers process costing, its similarities and differences with job order costing, the calculation of equivalent units of production (EUP), and the preparation of cost of production reports using weighted average and FIFO methods.

Comparing Job Order and Process Costing

• Both assign labor, material, and overhead costs to products and compute unit product cost.
• Both use manufacturing accounts: raw materials, work in process (WIP), finished goods, and manufacturing overhead.
• Cost flow: accumulate costs in WIP, transfer to finished goods when complete, then to cost of goods sold (COGS) when sold.
• Job order costing: used for heterogeneous, custom products; costs accumulated by job/job cost sheets.
• Process costing: used for homogeneous products produced continuously; costs accumulated by department/production reports.
• Process costing computes unit cost by department; job order by job.

Process Costing Concepts

• Processing department: area where materials, labor, or overhead is added; requires uniform activities/output.
• Sequential processing: units move in sequence through departments.
• Parallel processing: units may split into different processing paths after a certain point.

Journal Entries & Cost Flows

• Raw materials issued to WIP (by department), direct labor and overhead debited to respective WIP.
• Output transfer between departments: debit next dept's WIP, credit previous dept's WIP.
• Completed goods: transfer from last dept's WIP to finished goods, then to COGS when sold.

Equivalent Units of Production (EUP)

• EUP = total completed units + (ending WIP units × % completion).
• Needed because departments often have partially completed units at period-end.
• Methods for EUP: weighted average and FIFO.

Weighted Average Method

• Combines costs from prior and current periods.
• Cost per EUP = (beginning WIP cost + current period cost) ÷ total EUP.
• Use completed and transferred units + equivalent units in ending WIP.

FIFO Method

• Separates work done in previous periods and current.
• EUP = units completed/transferred - % completion in beginning WIP + equivalent units in ending WIP.
• Cost per EUP = current period costs ÷ EUP (exclude beginning WIP cost).

Cost of Production Report Sections

• 1: Quantity schedule and EUP computation.
• 2: Determine cost to be accounted for and cost per EUP.
• 3: Reconcile costs (cost as accounted for).

Operation (Hybrid) Costing

• Combines job order and process costing for products with batch customization then standard processing.

Key Terms & Definitions

• Process Costing — Costing method for homogeneous, mass-produced goods, accumulating costs by departments.
• Job Order Costing — Costing for heterogeneous, custom goods, accumulating costs by job.
• Equivalent Units of Production (EUP) — Measure combining partially completed units into full unit equivalents.
• Weighted Average Method — EUP method blending costs from prior and current periods.
• FIFO Method — EUP method calculating costs based strictly on current period work.
• Cost of Production Report — Summary showing flow of units, cost assignment, and reconciliation for a department.

Action Items / Next Steps

• Practice computing EUP and cost per EUP using both weighted average and FIFO methods.
• Prepare a cost of production report from given data.
• Review lost unit handling (normal vs. abnormal loss) for upcoming assignment.