part four product cost calculation

Part Four

Product Cost Calculation

Types of Costing Systems

There are three major types of product costing systems：

Category Costing System Job-Order Costing Systems Process Costing systems

Category Costing System according to variety cost calculation sheet, calculate the cost of each production

job order costing system estimates the costs of manufacturing products for different jobs required for specific customer orders

Applicable in organizations that treat each individual job as a single unit of output

A process costing system is applicable when all units produced during a specified time frame are treated as one unit of output

Every unit made during the time period is essentially identical

Distinction Between Job-Order Costing and Process Costing

Job-order costing allocates costsJob-order costing allocates coststo products that are identified byto products that are identified by

individual units or batches. individual units or batches.

Job-order costing allocates costsJob-order costing allocates coststo products that are identified byto products that are identified by

individual units or batches. individual units or batches.

Process costing averages costsProcess costing averages costsover large numbers of nearlyover large numbers of nearly

identical products.identical products.

Process costing averages costsProcess costing averages costsover large numbers of nearlyover large numbers of nearly

identical products.identical products.

Job-Order Costing Basic Records

Job-cost recordJob-cost recordJob-cost recordJob-cost record

Materials requisitionsMaterials requisitionsMaterials requisitionsMaterials requisitions

Labor time cardsLabor time cardsLabor time cardsLabor time cards

Date Started: Date Started: 1/7/031/7/03 Job Number: Job Number: 963 963Date Completed: Date Completed: 1/14/031/14/03 Units completed: Units completed: 12 12CostCost DateDate Ref.Ref. QuantityQuantity AmountAmount SummarySummary

Direct Materials:Direct Materials:6” Bars6” Bars 1/71/7 N41N41 2424 120.00120.00CasingsCasings 1/91/9 K56K56 1212 340.00340.00 460.00460.00Direct Labor:Direct Labor:DrillDrill 1/81/8 7Z47Z4 7.07.0 105.00105.00

1/91/9 7Z57Z5 5.55.5 82.50 82.50GrindGrind 1/131/13 9Z29Z2 4.04.0 80.00 80.00 267.50267.50Overhead:Overhead:AppliedApplied 1/141/14 9.0 mach. hrs.9.0 mach. hrs. 180.00180.00 180.00180.00Total costTotal cost 907.50907.50Unit costUnit cost 75.625 75.625

Date Started: Date Started: 1/7/031/7/03 Job Number: Job Number: 963 963Date Completed: Date Completed: 1/14/031/14/03 Units completed: Units completed: 12 12CostCost DateDate Ref.Ref. QuantityQuantity AmountAmount SummarySummary

Direct Materials:Direct Materials:6” Bars6” Bars 1/71/7 N41N41 2424 120.00120.00CasingsCasings 1/91/9 K56K56 1212 340.00340.00 460.00460.00Direct Labor:Direct Labor:DrillDrill 1/81/8 7Z47Z4 7.07.0 105.00105.00

1/91/9 7Z57Z5 5.55.5 82.50 82.50GrindGrind 1/131/13 9Z29Z2 4.04.0 80.00 80.00 267.50267.50Overhead:Overhead:AppliedApplied 1/141/14 9.0 mach. hrs.9.0 mach. hrs. 180.00180.00 180.00180.00Total costTotal cost 907.50907.50Unit costUnit cost 75.625 75.625

Job-Cost Record

General Flow of Costs: Enriquez Machine Parts

Company

BeginningBeginningdirect materialsdirect materials

inventory $110,000inventory $110,000

BeginningBeginningdirect materialsdirect materials


PurchasesPurchases$1,900,000$1,900,000PurchasesPurchases$1,900,000$1,900,000

+

=Ending Ending

InventoryInventory$120,000$120,000

Ending Ending InventoryInventory$120,000$120,000

Direct materialsDirect materialsusedused

$1,890,000$1,890,000


$1,890,000$1,890,000–


Company

BeginningBeginningWIPWIP

inventory $0inventory $0

BeginningBeginningWIPWIP

inventory $0inventory $0


$1,890,000$1,890,000


$1,890,000$1,890,000+

Direct laborDirect laborand overheadand overhead

$765,000$765,000

Direct laborDirect laborand overheadand overhead

$765,000$765,000

+

=EndingEnding

inventoryinventory$155,000$155,000

EndingEndinginventoryinventory$155,000$155,000

Cost of goodsCost of goodsmanufacturedmanufactured

$2,500,000$2,500,000


$2,500,000$2,500,000–


Company

BeginningBeginningfinished goodsfinished goods


BeginningBeginningfinished goodsfinished goods


Cost of goodsCost of goodsavailable foravailable for

sale $2,512,000sale $2,512,000

Cost of goodsCost of goodsavailable foravailable for

sale $2,512,000sale $2,512,000


$2,500,000$2,500,000


$2,500,000$2,500,000+ =

=Ending Ending

inventoryinventory$32,000$32,000

Ending Ending inventoryinventory$32,000$32,000

Cost ofCost ofgoods soldgoods sold$2,480,000$2,480,000

Cost ofCost ofgoods soldgoods sold$2,480,000$2,480,000

–

110,000110,0001,900,0001,900,0002,010,0002,010,000

Materials InventoryMaterials Inventory

Materials Cost

Materials InventoryMaterials Inventory 1,900,0001,900,000Accounts PayableAccounts Payable 1,900,0001,900,000

To record purchase of direct materialsTo record purchase of direct materials

Materials InventoryMaterials Inventory 1,900,0001,900,000Accounts PayableAccounts Payable 1,900,0001,900,000

To record purchase of direct materialsTo record purchase of direct materials

Materials Cost

1,890,0001,890,000

WIP InventoryWIP Inventory

110,000110,0001,900,0001,900,0002,010,0002,010,000

Materials InventoryMaterials Inventory

1,890,0001,890,000

Work-in-Process InventoryWork-in-Process Inventory 1,890,0001,890,000Materials InventoryMaterials Inventory 1,890,0001,890,000

To record usage of direct materialsTo record usage of direct materials

Work-in-Process InventoryWork-in-Process Inventory 1,890,0001,890,000Materials InventoryMaterials Inventory 1,890,0001,890,000

To record usage of direct materialsTo record usage of direct materials

Actual Overhead Costs

Factory Department OverheadFactory Department OverheadControlControl 392,000392,000

Various AccountsVarious Accounts 392,000392,000To record actual factory overhead incurredTo record actual factory overhead incurred

Factory Department OverheadFactory Department OverheadControlControl 392,000392,000

Various AccountsVarious Accounts 392,000392,000To record actual factory overhead incurredTo record actual factory overhead incurred

Labor and Overhead Costs

Work-in-Process InventoryWork-in-Process Inventory 390,000390,000Accrued PayrollAccrued Payroll 390,000390,000

To record actual labor costs incurredTo record actual labor costs incurred

Work-in-Process InventoryWork-in-Process Inventory 390,000390,000Accrued PayrollAccrued Payroll 390,000390,000

To record actual labor costs incurredTo record actual labor costs incurred

Work-in-Process InventoryWork-in-Process Inventory 375,000375,000Factory DepartmentFactory DepartmentOverhead ControlOverhead Control 375,000375,000

To record overhead appliedTo record overhead applied

Work-in-Process InventoryWork-in-Process Inventory 375,000375,000Factory DepartmentFactory DepartmentOverhead ControlOverhead Control 375,000375,000

To record overhead appliedTo record overhead applied

Actual and Applied Overhead

Actual overhead = $392,000Actual overhead = $392,000Actual overhead = $392,000Actual overhead = $392,000

Applied overhead = $375,000Applied overhead = $375,000Applied overhead = $375,000Applied overhead = $375,000

$392,000 – $375,000 = $17,000 underapplied$392,000 – $375,000 = $17,000 underapplied$392,000 – $375,000 = $17,000 underapplied$392,000 – $375,000 = $17,000 underapplied

Cost of Goods SoldCost of Goods Sold 17,00017,000Factory DepartmentFactory DepartmentOverhead ControlOverhead Control 17,00017,000

To dispose of underapplied overheadTo dispose of underapplied overhead

Cost of Goods SoldCost of Goods Sold 17,00017,000Factory DepartmentFactory DepartmentOverhead ControlOverhead Control 17,00017,000

To dispose of underapplied overheadTo dispose of underapplied overhead

How to Apply Factory Overheadto Products

Enriquez Machine Parts Company’sEnriquez Machine Parts Company’sbudgeted manufacturing overhead forbudgeted manufacturing overhead forthe assembly department is $103,200.the assembly department is $103,200.

Enriquez Machine Parts Company’sEnriquez Machine Parts Company’sbudgeted manufacturing overhead forbudgeted manufacturing overhead forthe assembly department is $103,200.the assembly department is $103,200.

Budgeted direct labor cost is $206,400.Budgeted direct labor cost is $206,400.Budgeted direct labor cost is $206,400.Budgeted direct labor cost is $206,400.

$103,200 ÷ $206,400 = 50%$103,200 ÷ $206,400 = 50%$103,200 ÷ $206,400 = 50%$103,200 ÷ $206,400 = 50%

How to Apply Factory Overheadto Products

Suppose that at the end of the yearSuppose that at the end of the yearEnriquez has incurred $190,000Enriquez has incurred $190,000of direct-labor cost in assembly.of direct-labor cost in assembly.

Suppose that at the end of the yearSuppose that at the end of the yearEnriquez has incurred $190,000Enriquez has incurred $190,000of direct-labor cost in assembly.of direct-labor cost in assembly.

How much overhead wasHow much overhead wasapplied to assembly?applied to assembly?

How much overhead wasHow much overhead wasapplied to assembly?applied to assembly?

Activity-Based Costing in aJob-Order Environment

Costs in an activity centerCosts in an activity centerCosts in an activity centerCosts in an activity center

NonvalueNonvalueaddedadded

NonvalueNonvalueaddedadded

Key activities must be identified.Key activities must be identified.Key activities must be identified.Key activities must be identified.

ValueValueaddedaddedValueValueaddedadded

Product Costing in Service and Nonprofit Organizations

Service and nonprofit organizationsService and nonprofit organizationscall their “product” a programcall their “product” a program

or a class of service.or a class of service.

Service and nonprofit organizationsService and nonprofit organizationscall their “product” a programcall their “product” a program

or a class of service.or a class of service.

In service industries, eachIn service industries, eachcustomer order is a different job.customer order is a different job.

In service industries, eachIn service industries, eachcustomer order is a different job.customer order is a different job.

Budgets and Control of Engagements

$6,500,000 ÷ $2,500,000 = 260%$6,500,000 ÷ $2,500,000 = 260%$6,500,000 ÷ $2,500,000 = 260%$6,500,000 ÷ $2,500,000 = 260%

RevenueRevenue $10,000,000$10,000,000Direct laborDirect labor 2,500,000 2,500,000Contribution to overheadContribution to overhead and operating incomeand operating income 7,500,000 7,500,000Overhead (all other costs)Overhead (all other costs) 6,500,000 6,500,000Operating incomeOperating income $ 1,000,000$ 1,000,000

RevenueRevenue $10,000,000$10,000,000Direct laborDirect labor 2,500,000 2,500,000Contribution to overheadContribution to overhead and operating incomeand operating income 7,500,000 7,500,000Overhead (all other costs)Overhead (all other costs) 6,500,000 6,500,000Operating incomeOperating income $ 1,000,000$ 1,000,000

Accuracy of Costs of Engagements

ProjectedProjectedcostcost PricePrice

Direct laborDirect labor $ 50,000$ 50,000 $ 75,000$ 75,000Applied overhead @ 260%Applied overhead @ 260% 130,000 130,000 195,000 195,000Total costs excluding travelTotal costs excluding travel $180,000$180,000 $270,000$270,000Travel costsTravel costs 14,000 14,000 14,000 14,000Total projected costsTotal projected costs $194,000$194,000 $284,000$284,000

Direct laborDirect labor $ 50,000$ 50,000 $ 75,000$ 75,000Applied overhead @ 260%Applied overhead @ 260% 130,000 130,000 195,000 195,000Total costs excluding travelTotal costs excluding travel $180,000$180,000 $270,000$270,000Travel costsTravel costs 14,000 14,000 14,000 14,000Total projected costsTotal projected costs $194,000$194,000 $284,000$284,000

Suppose that this accounting firm’s policy for pricing Suppose that this accounting firm’s policy for pricing is 150% of total professional costs plus travel costs.is 150% of total professional costs plus travel costs.Suppose that this accounting firm’s policy for pricing Suppose that this accounting firm’s policy for pricing is 150% of total professional costs plus travel costs.is 150% of total professional costs plus travel costs.

Process Costing Basics

Process costing is more efficientProcess costing is more efficientfor companies that produce, in afor companies that produce, in a

continuous process, large quantitiescontinuous process, large quantitiesof homogenous product.of homogenous product.

Process costing is more efficientProcess costing is more efficientfor companies that produce, in afor companies that produce, in a

continuous process, large quantitiescontinuous process, large quantitiesof homogenous product.of homogenous product.

Process Costing Compared With Job Costing

Direct materialsDirect materialsDirect laborDirect labor

Indirect resource costIndirect resource cost



Job 101Job 101Job 101Job 101Job 100Job 100Job 100Job 100

FinishedFinishedgoodsgoods


Cost ofCost ofgoods soldgoods sold











AssemblyAssemblyAssemblyAssemblyProcess AProcess AProcess AProcess A Process BProcess BProcess BProcess B


The journal entries for process-costingThe journal entries for process-costingsystems are similar to thosesystems are similar to those

for the job-order system.for the job-order system.

The journal entries for process-costingThe journal entries for process-costingsystems are similar to thosesystems are similar to those

for the job-order system.for the job-order system.

there is more than one singlethere is more than one singlework-in-process account.work-in-process account.

there is more than one singlethere is more than one singlework-in-process account.work-in-process account.

Five Key Steps

Step 1: Summarize the flow of physical units.Step 1: Summarize the flow of physical units.Step 1: Summarize the flow of physical units.Step 1: Summarize the flow of physical units.

Step 2: Calculate output in terms of equivalent units.Step 2: Calculate output in terms of equivalent units.Step 2: Calculate output in terms of equivalent units.Step 2: Calculate output in terms of equivalent units.

Step 3: Summarize the total costs to account for.Step 3: Summarize the total costs to account for.Step 3: Summarize the total costs to account for.Step 3: Summarize the total costs to account for.

Step 4: Calculate unit costs.Step 4: Calculate unit costs.Step 4: Calculate unit costs.Step 4: Calculate unit costs.

Step 5: Apply costs to units completed andStep 5: Apply costs to units completed and to units in ending work in process.to units in ending work in process.Step 5: Apply costs to units completed andStep 5: Apply costs to units completed and to units in ending work in process.to units in ending work in process.

Physical Units andEquivalent Units

Started and completedStarted and completed 20,00020,000 20,00020,000 20,00020,000Ending WIPEnding WIP 5,000 5,000 5,000 5,000 1,250 1,250Units accounted forUnits accounted for 25,000 25,000 Work done to dateWork done to date 25,00025,000 21,25021,250

Started and completedStarted and completed 20,00020,000 20,00020,000 20,00020,000Ending WIPEnding WIP 5,000 5,000 5,000 5,000 1,250 1,250Units accounted forUnits accounted for 25,000 25,000 Work done to dateWork done to date 25,00025,000 21,25021,250

(Step 1)(Step 1)PhysicalPhysical

unitsunits

(Step 2)(Step 2)Equivalent unitsEquivalent units

DirectDirectmaterialsmaterials ConversionConversion

100%100% 25%25%

Calculation of Product Costs

What is the cost of a completed unit?What is the cost of a completed unit?What is the cost of a completed unit?What is the cost of a completed unit?

(Step 3)(Step 3) Costs to account forCosts to account for $112,500$112,500 $70,000$70,000 $42,500$42,500(Step 4)(Step 4) ÷ Equivalent units÷ Equivalent units 25,000 25,000 21,250 21,250

= Unit costs= Unit costs $ 2.80$ 2.80 $ 2.00$ 2.00

(Step 3)(Step 3) Costs to account forCosts to account for $112,500$112,500 $70,000$70,000 $42,500$42,500(Step 4)(Step 4) ÷ Equivalent units÷ Equivalent units 25,000 25,000 21,250 21,250

= Unit costs= Unit costs $ 2.80$ 2.80 $ 2.00$ 2.00

DirectDirectmaterialsmaterials

ConversionConversioncostscostsTotalsTotals

Production Cost Report

Units completed and transferred out:Units completed and transferred out:20,000 units @ 44.8020,000 units @ 44.80 $ 96,000$ 96,000Units in ending inventory:Units in ending inventory:Materials:Materials: 5,000 × 2.805,000 × 2.80 14,000 14,000Conversion:Conversion: 1,250 × 2.001,250 × 2.00 2,500 2,500Total costsTotal costs $112,500$112,500

Units completed and transferred out:Units completed and transferred out:20,000 units @ 44.8020,000 units @ 44.80 $ 96,000$ 96,000Units in ending inventory:Units in ending inventory:Materials:Materials: 5,000 × 2.805,000 × 2.80 14,000 14,000Conversion:Conversion: 1,250 × 2.001,250 × 2.00 2,500 2,500Total costsTotal costs $112,500$112,500

(Step 5) Application of costs(Step 5) Application of costs

Journal Entries

Work-in-Process – FormingWork-in-Process – Forming 70,00070,000Direct-materials InventoryDirect-materials Inventory 70,00070,000

Materials added to production during the monthMaterials added to production during the month

Work-in-Process – FormingWork-in-Process – Forming 70,00070,000Direct-materials InventoryDirect-materials Inventory 70,00070,000

Materials added to production during the monthMaterials added to production during the month

Work-in-Process – FormingWork-in-Process – Forming 10,62510,625Accrued PayrollAccrued Payroll 10,62510,625

Direct labor during the monthDirect labor during the month

Work-in-Process – FormingWork-in-Process – Forming 10,62510,625Accrued PayrollAccrued Payroll 10,62510,625

Direct labor during the monthDirect labor during the month

Journal Entries

Work-in-Process – FormingWork-in-Process – Forming 31,87531,875Factory OverheadFactory Overhead 31,87531,875

Factory overhead applied during the monthFactory overhead applied during the month

Work-in-Process – FormingWork-in-Process – Forming 31,87531,875Factory OverheadFactory Overhead 31,87531,875

Factory overhead applied during the monthFactory overhead applied during the month

Work-in-Process – FinishingWork-in-Process – Finishing 96,00096,000Work-in-Process – FormingWork-in-Process – Forming 96,00096,000

Costs of goods completed and transferredCosts of goods completed and transferredduring the month from forming to assemblyduring the month from forming to assembly

Work-in-Process – FinishingWork-in-Process – Finishing 96,00096,000Work-in-Process – FormingWork-in-Process – Forming 96,00096,000

Costs of goods completed and transferredCosts of goods completed and transferredduring the month from forming to assemblyduring the month from forming to assembly

Weighted-Average Method Example

Beginning WIP:Beginning WIP:5,000 units5,000 units

100% materials100% materials25% conversion costs25% conversion costs

Beginning WIP:Beginning WIP:5,000 units5,000 units


Ending WIP:Ending WIP:7,000 units7,000 units


Ending WIP:Ending WIP:7,000 units7,000 units


Month ended May 31:Month ended May 31:Forming DepartmentForming Department


Beginning WIPBeginning WIP 5,000 5,000Started in MayStarted in May 26,00026,000Units to accounted forUnits to accounted for 31,000 31,000 Completed andCompleted and transferred outtransferred out 24,00024,000 24,00024,000 34,00034,000Ending WIPEnding WIP 7,000 7,000 7,000 7,000 4,200 4,200Units accounted forUnits accounted for 31,00031,000 31,00031,000 28,20028,200

Beginning WIPBeginning WIP 5,000 5,000Started in MayStarted in May 26,00026,000Units to accounted forUnits to accounted for 31,000 31,000 Completed andCompleted and transferred outtransferred out 24,00024,000 24,00024,000 34,00034,000Ending WIPEnding WIP 7,000 7,000 7,000 7,000 4,200 4,200Units accounted forUnits accounted for 31,00031,000 31,00031,000 28,20028,200


unitsunits




(Step 3)(Step 3) Beginning WIPBeginning WIP $ 16,500$ 16,500 $14,000$14,000 $ 2,500$ 2,500Costs addedCosts added 138,820 138,820 82,100 82,100 56,720 56,720Costs to account forCosts to account for $155,320$155,320 $96,100$96,100 $59,220$59,220

(Step 4)(Step 4) ÷ Equivalent units÷ Equivalent units 31,000 31,000 28,200 28,200= Unit costs= Unit costs $ 3.10$ 3.10 $ 2.10$ 2.10

(Step 3)(Step 3) Beginning WIPBeginning WIP $ 16,500$ 16,500 $14,000$14,000 $ 2,500$ 2,500Costs addedCosts added 138,820 138,820 82,100 82,100 56,720 56,720Costs to account forCosts to account for $155,320$155,320 $96,100$96,100 $59,220$59,220

(Step 4)(Step 4) ÷ Equivalent units÷ Equivalent units 31,000 31,000 28,200 28,200= Unit costs= Unit costs $ 3.10$ 3.10 $ 2.10$ 2.10




Units completed and transferred out:Units completed and transferred out:24,000 units @ $5.2024,000 units @ $5.20 $124,800$124,800Units in ending inventory:Units in ending inventory:Materials:Materials: 7,000 × 3.107,000 × 3.10 21,700 21,700Conversion:Conversion: 4,200 × 2.104,200 × 2.10 8,820 8,820Total costsTotal costs $155,320$155,320

Units completed and transferred out:Units completed and transferred out:24,000 units @ $5.2024,000 units @ $5.20 $124,800$124,800Units in ending inventory:Units in ending inventory:Materials:Materials: 7,000 × 3.107,000 × 3.10 21,700 21,700Conversion:Conversion: 4,200 × 2.104,200 × 2.10 8,820 8,820Total costsTotal costs $155,320$155,320


FIFO Method Example

Beginning WIPBeginning WIP 5,000 5,000Started in MayStarted in May 26,00026,000Units to accounted forUnits to accounted for 31,000 31,000 Completed andCompleted and transferred outtransferred out 24,00024,000 24,00024,000 24,00024,000Ending WIPEnding WIP 7,000 7,000 7,000 7,000 4,200 4,200Units accounted forUnits accounted for 31,00031,000Work done to dateWork done to date 31,00031,000 28,20028,200Less: Beginning WIPLess: Beginning WIP 5,000 5,000 1,250 1,250Equivalent unitsEquivalent units 26,00026,000 26,95026,950

Beginning WIPBeginning WIP 5,000 5,000Started in MayStarted in May 26,00026,000Units to accounted forUnits to accounted for 31,000 31,000 Completed andCompleted and transferred outtransferred out 24,00024,000 24,00024,000 24,00024,000Ending WIPEnding WIP 7,000 7,000 7,000 7,000 4,200 4,200Units accounted forUnits accounted for 31,00031,000Work done to dateWork done to date 31,00031,000 28,20028,200Less: Beginning WIPLess: Beginning WIP 5,000 5,000 1,250 1,250Equivalent unitsEquivalent units 26,00026,000 26,95026,950


unitsunits



FIFO Method Example

(Step 3)(Step 3) Beginning WIPBeginning WIP $ 16,500$ 16,500 ((work done before May)work done before May)

Costs addedCosts added 138,820 138,820 $82,100$82,100 $56,720$56,720Costs to account forCosts to account for $155,320$155,320

(Step 4)(Step 4) ÷ Equivalent units÷ Equivalent units 26,000 26,000 26,950 26,950= Unit costs= Unit costs $3.1577$3.1577 $2.1046$2.1046

(Step 3)(Step 3) Beginning WIPBeginning WIP $ 16,500$ 16,500 ((work done before May)work done before May)

Costs addedCosts added 138,820 138,820 $82,100$82,100 $56,720$56,720Costs to account forCosts to account for $155,320$155,320

(Step 4)(Step 4) ÷ Equivalent units÷ Equivalent units 26,000 26,000 26,950 26,950= Unit costs= Unit costs $3.1577$3.1577 $2.1046$2.1046



FIFO Method Example

Units in ending inventory:Units in ending inventory:Materials:Materials: 7,000 × 3.15777,000 × 3.1577 $ 22,104$ 22,104Conversion:Conversion: 4,200 × 2.10464,200 × 2.1046 8,839 8,839Total WIP (7,000 units)Total WIP (7,000 units) $ 30,943$ 30,943Completed and transferred outCompleted and transferred out (24,000 units), $155,320 – $30,943(24,000 units), $155,320 – $30,943 124,377 124,377Total costs accounted forTotal costs accounted for $155,320$155,320

Units in ending inventory:Units in ending inventory:Materials:Materials: 7,000 × 3.15777,000 × 3.1577 $ 22,104$ 22,104Conversion:Conversion: 4,200 × 2.10464,200 × 2.1046 8,839 8,839Total WIP (7,000 units)Total WIP (7,000 units) $ 30,943$ 30,943Completed and transferred outCompleted and transferred out (24,000 units), $155,320 – $30,943(24,000 units), $155,320 – $30,943 124,377 124,377Total costs accounted forTotal costs accounted for $155,320$155,320


Transferred-in Costs inProcess Costing

The costs transferred fromThe costs transferred fromanother department are similaranother department are similar

to direct material added atto direct material added atthe beginning of processing.the beginning of processing.

The costs transferred fromThe costs transferred fromanother department are similaranother department are similar

to direct material added atto direct material added atthe beginning of processing.the beginning of processing.

Process Costing in a JIT System

In just-in-time production systems, inventoryIn just-in-time production systems, inventoryof work in process is typically small comparedof work in process is typically small compared

to the costs of goods produced and sold.to the costs of goods produced and sold.

In just-in-time production systems, inventoryIn just-in-time production systems, inventoryof work in process is typically small comparedof work in process is typically small compared

to the costs of goods produced and sold.to the costs of goods produced and sold.

The cost of tracking work in processThe cost of tracking work in processexceeds the benefits for many companies.exceeds the benefits for many companies.

The cost of tracking work in processThe cost of tracking work in processexceeds the benefits for many companies.exceeds the benefits for many companies.

Backflush Costing

What is backflush costing?What is backflush costing?What is backflush costing?What is backflush costing?

It is an accounting system thatIt is an accounting system thatapplies costs to products onlyapplies costs to products only

when the production is complete.when the production is complete.

It is an accounting system thatIt is an accounting system thatapplies costs to products onlyapplies costs to products only

when the production is complete.when the production is complete.

Principles of Backflush Costing

Backflush costing has onlyBackflush costing has onlytwo categories of costs: two categories of costs:

Backflush costing has onlyBackflush costing has onlytwo categories of costs: two categories of costs:

MaterialsMaterialsMaterialsMaterials ConversionConversionConversionConversion

There is no work in process account.There is no work in process account.There is no work in process account.There is no work in process account.

Backflush Costing Example

Speaker Technology, Inc., recentlySpeaker Technology, Inc., recentlyintroduced backflush costing and JIT.introduced backflush costing and JIT.

Speaker Technology, Inc., recentlySpeaker Technology, Inc., recentlyintroduced backflush costing and JIT.introduced backflush costing and JIT.

Model AX27 Standard material cost:Model AX27 Standard material cost: $14$14Standard conversion cost:Standard conversion cost: $21$21Model AX27 Standard material cost:Model AX27 Standard material cost: $14$14Standard conversion cost:Standard conversion cost: $21$21

Actual production for the month:Actual production for the month: 400 units 400 unitsActual materials purchased:Actual materials purchased: $5,600$5,600Actual conversion costs:Actual conversion costs: $8,400 $8,400

Actual production for the month:Actual production for the month: 400 units 400 unitsActual materials purchased:Actual materials purchased: $5,600$5,600Actual conversion costs:Actual conversion costs: $8,400 $8,400


Materials InventoryMaterials Inventory 5,6005,600Accounts Payable or CashAccounts Payable or Cash 5,6005,600

To record material purchasesTo record material purchases

Materials InventoryMaterials Inventory 5,6005,600Accounts Payable or CashAccounts Payable or Cash 5,6005,600

To record material purchasesTo record material purchases

Conversion CostsConversion Costs 8,4008,400Accrued WagesAccrued Wages 8,4008,400

To record conversion costs incurredTo record conversion costs incurred

Conversion CostsConversion Costs 8,4008,400Accrued WagesAccrued Wages 8,4008,400

To record conversion costs incurredTo record conversion costs incurred


Finished Goods InventoryFinished Goods Inventory 14,00014,000Material InventoryMaterial Inventory 5,600 5,600Conversion CostsConversion Costs 8,400 8,400

To record costs of completed productionTo record costs of completed production

Finished Goods InventoryFinished Goods Inventory 14,00014,000Material InventoryMaterial Inventory 5,600 5,600Conversion CostsConversion Costs 8,400 8,400

To record costs of completed productionTo record costs of completed production

Cost of Goods SoldCost of Goods Sold 14,00014,000Finished Goods InventoryFinished Goods Inventory 14,000 14,000

To record costs of 400 units soldTo record costs of 400 units sold

Cost of Goods SoldCost of Goods Sold 14,00014,000Finished Goods InventoryFinished Goods Inventory 14,000 14,000

To record costs of 400 units soldTo record costs of 400 units sold


Cost of Goods SoldCost of Goods Sold 14,00014,000Material InventoryMaterial Inventory 5,6005,600Conversion CostsConversion Costs 8,4008,400

Cost of Goods SoldCost of Goods Sold 14,00014,000Material InventoryMaterial Inventory 5,6005,600Conversion CostsConversion Costs 8,4008,400

Cost of Goods SoldCost of Goods Sold 200 200Conversion CostsConversion Costs 200 200

To recognize underapplied conversion costsTo recognize underapplied conversion costs

Cost of Goods SoldCost of Goods Sold 200 200Conversion CostsConversion Costs 200 200

To recognize underapplied conversion costsTo recognize underapplied conversion costs

The Finished Goods Account can be eliminated.The Finished Goods Account can be eliminated.The Finished Goods Account can be eliminated.The Finished Goods Account can be eliminated.

Thanks for Your Attention

part four product cost calculation

Documents

unit cost

directlabor cost

activitybased costing

budgeted direct labor

overhead costswork

overhead appliedactual

process inventory1

cost of goodsavailable