Cost Management: Measuring, Monitoring, and Motivating Performance, 2nd Edition

CHAPTER 6

Process Costing

In Brief

When products are mass-produced, tracing manufacturing costs to individual units is impractical. Therefore, the process-costing method traces or allocates costs first to departments, and then allocates department costs to individual units. Physical units that are partially complete at the beginning and end of the accounting period are also assigned costs. Defective or spoiled units arise in all manufacturing settings, and process costing adds the costs of these units to the costs of good units produced or recognizes the cost as a loss, depending on the type of spoilage. To assign costs appropriately to all of the units processed (completed, partially complete, and spoiled), accountants must understand both the production process and the various methods for applying process costing.

This Chapter Addresses the Following Questions:

• Q1 How are costs assigned to mass-produced products?
• Q2 What are equivalent units, and how do they relate to the production process?
• Q3 How is the weighted average method used in process costing?
• Q4 How is the FIFO method used in process costing?
• Q5 What alternative methods are used for mass production?
• Q6 How is process costing performed for multiple production departments?
• Q7 How are spoilage costs handled in process costing?
• Q8 How does process costing information affect managers' incentives and decisions?

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