contrôle interne avancé-hec lausanne-2007/2008 chapter 17 process costing

Contrôle Interne Avancé-HEC Lausanne-2007/2008

CHAPTER 17

Process Costing


Job-Costing and Process Costing: Opposite Ends of a Continuum

Job-Costing Systems

Distinct, identifiableunits of a product

or service

Examples:Custom-made

machines,Houses

Process-CostingSystems

Masses of identicalor similar units of aproduct or service

Examples:Food,

Chemical processing


ProcessCosting

Job OrderCosting

Used for production of large, unique, high-cost items.

Built to order rather than mass produced.

Many costs can be directly traced to each job.

Basic Cost Accounting Procedures


ProcessCosting

Job OrderCosting

Typical job order cost applications: Special-order printing Building construction

Also used in service industry Hospitals Law firms



ProcessCosting

Job OrderCosting

Used for production of small, identical, low-cost items.

Mass produced in automated continuous production process.

Costs cannot be directly traced to each unit of product.



Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

ProcessCosting

Job OrderCosting



DirectMaterials

FinishedGoods

Cost per unit for

each job

DirectLabor

FactoryOverhead

Jobs

The Work in Process account consists of

individual jobs in job costing.

Job and Process Costing


DirectMaterials

FinishedGoods

DirectLabor

FactoryOverhead

Processes

Job and Process Costing

The Work in Process account consists of specific processes in

process costing.

Cost per unit

processed


Job and Process Costing Similarities

Same objective: to determine the cost of products

Same inventory accounts: raw materials, work in process, and finished goods

Same overhead assignment method:predetermined rate times actual activity


Work in Process Accounts — The Key to Process Costing

Work in Process

Assembly

Labor

Materials

Ind

irec

tIn

dir

ect

FinishedGoods

FactoryOverhead

Direct

Direct

Deliveredto

Customers

AppliedOverhead

Work in Process

Packaging


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.


Process-Costing Assumptions

Direct Materials are added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line,

Conversion Costs are added equally along the production process.


Costs are accumulated for a period of time by process or department.


Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.



Understanding Cost Flows






If partially complete units remain in process, we must use equivalent units

as the divisor to obtain unit costs.

If partially complete units remain in process, we must use equivalent units

as the divisor to obtain unit costs.

Understanding Cost Flows




Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Two one-half full pitchers are equivalent to one full pitcher.

+ = 1

Process Costing and Equivalent Units


For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period?

a. 10,000

b. 11,500

c. 1,500

d. 15,000


a. 10,000

b. 11,500

c. 1,500

d. 15,000




a. 10,000

b. 11,500

c. 1,500

d. 15,000


a. 10,000

b. 11,500

c. 1,500

d. 15,000

10,000 units + (5,000 units × .30) = 11,500 equivalent units



Cost perequivalent

unit

= Product costs for the periodEquivalent units for the period

Cost per Equivalent Unit


Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90




a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit



Weighted-Average Process-Costing Method

Calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done),

Assigns this cost to equivalent units completed and transferred out of the process, and to incomplete units still in process.


Weighted-Average Process-Costing Method

Weighted-average cost is the total of all costs in the Work-in-Process account divided by the total equivalent units of work done to date,

The beginning balance of the Work-in-Process account (work done in a prior period) is blended in with current period costs.


Five-Step Process-Costing Allocation

1. Summarize the flow of physical units of output,

2. Compute output in terms of equivalent units,

3. Compute cost per equivalent unit,4. Summarize total costs to account for,5. Assign total costs to units completed

and to units in ending Work in Process.


Steps 1 - 5

Weighted-Average Method


Step 1: Summarize OutputStep 2: Compute Equivalent Units

Flow of Production

Beginning Work in ProcessUnits Started during the current periodTotal Units to Account ForUnits Completed and Transferred Out During the Current Period: 100%Ending Work in Process Ending WIP is: 100% complete as to materials 10% complete as to conversion costsUnits Accounted ForWork Done in Current Period Only

STEP 1

PhysicalUnits

2575

1009010

100

Direct ConversionMaterials Costs

90 90

101

100 91

Equivalent UnitsSTEP 2


Step 3: Compute Cost per UnitStep 4: Summarize Total Costs

Beginning Work in ProcessCurrent Period Costs AddedTotal Costs to Account ForDivide by Equivalent Units from Step 2Cost per Equivalent Unit

STEP 4Total

ProductCosts

4,000$ 14,000 18,000$

Direct ConversionMaterials Costs

1,000$ 3,000$ 4,000 10,000 5,000 13,000

100 91 50.00$ 142.86$

STEP 3


Step 5: Assign Costs to Units Completed and Ending Work in Process

Cost Assignment:Multiply Equivalent Units from Step 2 Direct Conversion Total by Cost per Unit from Step 3 Materials Costs Costs

Units Completed and Transferred Out Direct Materials: 90 X $50.00 4,500$ Conversion Costs: 90 X $142.86 12,857$ 17,357$

Ending Work in Process Direct Materials: 10 X $50.00 500 Conversion Costs: 1 X $142.86 143 643

Total Cost Accounted For 18,000$ (Ties to Step 4, rounded to nearest $)


Result of the Process (as before)

Two critical figures arise out of Step Five of the cost allocation process:

1. The amount of the Journal Entry transferring the allocated cost of units completed and sent from Work-in-Process Inventory to Finished Goods Inventory,

2. The ending balance of the Work-in-Process Inventory account that will appear on the Balance Sheet.

contrôle interne avancé-hec lausanne-2007/2008 chapter 17 process costing

Documents

process costing work

process account

process costingprocess

job costing

unit costs

accumulated costs

total costs

conversion costs