Chapter 16 - Process Costing and Analysis
Process Costing and Analysis
Yes, services can be delivered by processes. For example, Federal Express
delivers parcels by
picking them up from the sender,
transporting them to
sorting them for rerouting,
transporting them to their destination
delivering them to the recipient.
The main deciding factor in choosing between a job order costing system or a
process costing system is the type of product or service.
Examples where a
process costing system is likely appropriate include chemicals, cleaning fluids,
mail processing, and oil refinement.
Examples where a job order costing system is
likely appropriate include home building, tax return preparation, financial planning,
legal services, and consulting.
(Hybrid systems are also common.)
A materials consumption report is an alternative control document.
The main focus in process costing is the production department (process).
The journal entries to match cost flows with product flows are primarily the same
for both process costing and job order costing. In process costing, the materials
flow into production and direct labor is applied to the product.
overhead is measured and applied to each production department.
compares to each job in job order costing.
The computation of equivalent units of production focuses on converting partially
completed units to a measure in terms of completed units.
We need to use EUP
because some units of the production process are partially completed at the end of
the accounting period (for example, mail that must still be processed into
additional categories) and we desire some measure of the stage of completion.
The stage of completed units is typically different for direct materials, direct labor,
and factory overhead.
For example, toys must still be assembled once all the parts
The two main methods of process costing are the weighted-average and the first-in,
first-out (FIFO) methods.
The weighted-average method considers “average flow”
of the beginning inventory costs along with the current activity for a period,
whereas the FIFO method considers the explicit flow of costs and activity for a