PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 04

Process Costing

4-2

Processing DepartmentsAny unit in an organization where materials, labor, or overhead are added to the product.

The activities performed in a processingThe activities performed in a processingdepartment are department are performed uniformlyperformed uniformly on all on all

units of production. Furthermore, the output ofunits of production. Furthermore, the output ofa processing department must be a processing department must be homogeneoushomogeneous. .

Products in a process costing environment Products in a process costing environment typically flow in a sequence from one departmenttypically flow in a sequence from one department

to another.to another.

4-3

Comparing Job-Order and Process Costing

FinishedFinishedGoodsGoods

FinishedFinishedGoodsGoods

Cost of Cost of GoodsGoodsSoldSold

Cost of Cost of GoodsGoodsSoldSold

Direct LaborDirect Labor

Manufacturing Overhead

Manufacturing Overhead

ProcessingProcessingDepartmentDepartmentProcessingProcessingDepartmentDepartment

Costs are traced and applied to departments

in a process cost system.

Costs are traced and applied to departments

in a process cost system.

Direct Materials

Direct Materials

4-4

Raw Materials

Process Cost Flows: The Flow of Raw Materials (in T-account form)

Work in Process Department B

Work in Process Department A

•DirectMaterials

•Direct Materials

•Direct Materials

4-5

Process Cost Flows: The Flow of Labor Costs (in T-account form)

Work in Process Department B

Work in Process Department A

Salaries and Wages Payable

•Direct Materials

•Direct Materials

•Direct Labor

•Direct Labor •Direct

Labor

4-6

Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)

Work in Process Department B

Work in Process Department A

Manufacturing Overhead

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•Direct Labor

•Direct Materials

•Direct Labor

•Direct Materials

•Actual Overhead

4-7

Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)

Work in Process Department B

Work in ProcessDepartment A

•Direct Materials

•Direct Labor

•AppliedOverhead

•Direct Materials

•Direct Labor

•AppliedOverhead

Transferred to Dept. B

•Transferred from Dept. A

DepartmentDepartmentAA

DepartmentDepartmentAA

DepartmentDepartmentBB

DepartmentDepartmentBB

4-8

Finished Goods

Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)

Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of Goods

Manufactured

4-9

Finished Goods

Cost of Goods Sold

Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form)

Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of GoodsSold

•Cost of GoodsSold

•Cost of Goods

Manufactured

4-10

Equivalent Units of Production

Equivalent units are the product of the number of partially completed

units and the percentage completion

of those units.

These partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to

that output.

4-11

Equivalent Units – The Basic IdeaTwo half-completed products are Two half-completed products are

equivalent toequivalent to one complete product. one complete product.Two half-completed products are Two half-completed products are

equivalent toequivalent to one complete product. one complete product.

So, 10,000 units 70% completeSo, 10,000 units 70% completeare are equivalent toequivalent to 7,000 complete units. 7,000 complete units.

So, 10,000 units 70% completeSo, 10,000 units 70% completeare are equivalent toequivalent to 7,000 complete units. 7,000 complete units.

+ = 1

4-12

Equivalent Units of ProductionWeighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in prior or current periods.

2. Blends together units and costs from prior and current periods.

3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.

The weighted-average method . . .

1. Makes no distinction between work done in prior or current periods.

2. Blends together units and costs from prior and current periods.

3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.

4-13

Treatment of Direct Labor

Type of Product Cost

Do

llar

Am

ou

nt Conversion

Direct labor and manufacturing

overhead may be combined into

one classification of product

cost called conversion costs.

Direct labor and manufacturing

overhead may be combined into

one classification of product

cost called conversion costs.

DirectMaterials

DirectLabor

DirectLabor

ManufacturingOverhead

4-14

Compute and Apply Costs

The formula for computing the cost per equivalent unit is:

Cost perequivalent

unit

=

Cost of beginningWork in Process

Inventory Cost added during

the period

Equivalent units of production

+

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Appendix 4A

Process Costing Using the FIFO Method

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FIFO vs. Weighted-Average Method

The FIFO method (generally considered more accurate than the weighted-average method) differs

from the weighted-average method in two ways:

1.1. The computation of equivalent units.The computation of equivalent units.

2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated.inventory are treated.

1.1. The computation of equivalent units.The computation of equivalent units.

2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated.inventory are treated.

4-17

Cost per Equivalent Unit - FIFO

The formula for computing the cost per equivalent unit under FIFO method is:

4-18

A Comparison of Costing MethodsIn a lean production environment, FIFO and

weighted-average methods yield similar unit costs.

In a lean production environment, FIFO and weighted-average methods yield similar

unit costs.

When considering cost control, FIFO is When considering cost control, FIFO is superior to weighted-average because it superior to weighted-average because it

does not mix costs of the current period with does not mix costs of the current period with costs of the prior period.costs of the prior period.

When considering cost control, FIFO is When considering cost control, FIFO is superior to weighted-average because it superior to weighted-average because it

does not mix costs of the current period with does not mix costs of the current period with costs of the prior period.costs of the prior period.

4-19

End of Chapter 04