Systems Design:Process Costing

Chapter

4

4-2

Process Costing

How are unitcosts used?

To helpset prices

To evaluateproducts

To evaluateproductionefficiency

To determinebalance sheet

inventory

4-3

Job costingCosts accumulated by

the job.

Work in process has a job cost record for each job.

Many unique, high cost jobs.

Jobs built to customer order.

Process costing Costs accumulated by

department or process.

Work in process has a production report for each batch of products.

A few identical, low cost products.

Units continuously produced for inventory in automated process.

Comparing Job Costingand Process Costing

4-4

Work in process contains individual

jobs in a job cost system.

Direct Materials

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

Work inProcess

Comparing Job Costingand Process Costing

4-5

FinishedGoods

Cost of GoodsSold

Products

Work in process contains homogenous products in a process

cost system.

Direct Labor& Overhead

(Conversion)

Direct Materials

Comparing Job Costingand Process Costing

4-6

Same overhead assignment method:predetermined rate times actual activity

Comparing Job Costingand Process Costing

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

Same objective: determine

the cost of products

4-7

No beginning or endingWork in Process Inventory

Common when a company issuccessful at just-in-time production

Assigning Costs to Products – All Units Fully Completed

Cost perunit

=Manufacturing costs for a period

Units produced for the period

4-8

Assigning Costs to Products – Some Units Not Fully Completed

Same objective: 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

No beginning Work in Process Inventory

Ending Work in Process Inventory consistsof units started during the period, butincomplete at the end of the period.

We must now deal with the conceptof equivalent units.

4-9

Assigning Costs to Products – Some Units Not Fully Completed

Same objective: 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

Equivalent units is a concept expressing partially complete units as a smaller number

of fully complete units.

Cost perequivalent

unit

=Manufacturing costs for a period

Equivalent units for the period

We must now deal with the conceptof equivalent units.

4-10

Raw Materials•Purchases •Direct

Materials

•OtherOverhead

Manufacturing Overhead

•Direct Materials

Process Cost Flows

Work in Process Department B

Work in Process Department A

•Indirect Materials

•Indirect Materials

Actual Applied

•DirectMaterials

4-11

Wages Payable•Direct

Materials

•Direct Materials

Process Cost Flows

Work in Process Department B

Work in Process Department A

•Direct Labor •Direct

Labor

•Direct Labor

•IndirectLabor

•OtherOverhead

Manufacturing Overhead

•IndirectMaterials

Actual Applied

•IndirectLabor

4-12

Wages Payable•Direct

Materials

•Direct Materials

Process Cost Flows

Work in Process Department B

Work in Process Department A

•Direct Labor •Direct

Labor

•Direct Labor

•IndirectLabor

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•OtherOverhead

Manufacturing Overhead

Actual Applied

•IndirectMaterials•Indirect

Labor

4-13

Process Cost Flows

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

4-14

Finished Goods

Cost of Goods Sold

Process Cost Flows

Work in Process Department B

•Cost of Goods

Manufactured

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of GoodsSold

•Cost of GoodsSold

4-15

Production Report

ProductionReport

Shows the flowof units and coststhrough work inprocess

Becomes thejob cost sheetin processcosting

Helps managerscontrol theirdepartments

Provides costinformation for

financial statements

4-16

Production Report

A computation ofcost per equivalent unit.

A computation ofcost per equivalent unit.

Section 1

Section 2

Section 3

Production Report A quantity schedule showing the flow of units and the computation of

equivalent units.

A quantity schedule showing the flow of units and the computation of

equivalent units.

4-17

Production Report

Section 1

Section 2

Section 3

Production Report A reconciliation of cost flows for the period, including:

Total cost for units completed and transferred from the processing department.

Total cost for partially completed units remaining in work in process.

A reconciliation of cost flows for the period, including:

Total cost for units completed and transferred from the processing department.

Total cost for partially completed units remaining in work in process.

4-18

Equivalent Units of Production

Equivalent units are partially completepartially complete and are part of work in process inventory. Partially completed

products are expressed in terms of a smaller number of fully completed

units.

4-19

Equivalent Units of Production

+ =

Two half completed products are equivalent to one completed product.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

4-20

The weighted average method . . .Makes no distinction between work done in the prior

period and work done in the current period.Blends together units and costs in beginning

inventory with units and costs in the current period.

Assigning Costs UsingWeighted-Average Costing

4-21

Assigning Costs UsingWeighted-Average Costing

Now let’s examine the five-step process.

Beginning Inventory250 units

1,000 unitsstarted

EndingInventory150 units

1,250 units1,100 unitscompleted

4-22

BeginningWork in Process

250 Units100% Complete

EndingWork in Process

150 Units100% Complete

1,000 Units Started

850 Units Startedand Completed

Weighted Average Example

MaterialsMaterials

1,100 Units Completed

150 Equivalent Units 150 × 100%

1,250 Equivalent units of production

4-23

BeginningWork in Process250 Units

80% Complete

EndingWork in Process

150 Units33 1/3% Complete

1,000 Units Started

850 Units Startedand Completed

Weighted Average Example

ConversionConversion

1,100 Units Completed

50 Equivalent Units150 × .333%

1,150 Equivalent units of production

Work to Complete Process

20%

250 Units

4-24

Costs Transferred infrom Prior DepartmentsMultiple departments in a process result

in units and costs that are transferred from a prior department to the current department.

These transferred-in costs are treated exactly like a direct material that is added at the beginning of a production process.

Let’s see an example.

4-25

Complete the five-step process for Ace CD Inc. to assign costs to units completed and to units left in process for

June.

Costs Transferred infrom Prior Departments

Percentage CompleteFlow of units in June Units Materials Conversion Trans-inBeginning WIP inventory 20,000 100% 25% 100%Transferred-in during June 60,000Units completed 65,000 100% 100% 100%Ending WIP inventory 15,000 40% 60% 100%

Percentage CompleteFlow of units in June Units Materials Conversion Trans-inBeginning WIP inventory 20,000 100% 25% 100%Transferred-in during June 60,000 Units completed 65,000 100% 100% 100%Ending WIP inventory 15,000 40% 60% 100%

Total CostsFlow of costs in June Units Materials Conversion Trans-inCosts incurred in June 25,500$ 31,300$ 45,000$ Beginning WIP inventory 20,000 10,000 2,000 15,000 Transferred-in during June 60,000 Units completed 65,000 Ending WIP inventory 15,000

4-26

Costs Transferred infrom Prior Departments

Step 1 Step 2Physical Equivalent Units

Flow of Units in June Units Material Conversion Trans-inUnits to account for Beginning WIP inventory 20,000 Units transferred in during June 60,000 Total units to account for 80,000

Units accounted for Completed and transferred out 65,000 ? ? ? Ending WIP inventory 15,000 ? ? ? Total units accounted for 80,000 ? ? ?

4-27

Step 1 Step 2Physical Equivalent Units

Flow of Units in June Units Material Conversion Trans-inUnits to account for Beginning WIP inventory 20,000 Units transferred in during June 60,000 Total units to account for 80,000

Units accounted for Completed and transferred out 65,000 65,000 65,000 65,000 Ending WIP inventory 15,000 ? ? ? Total units accounted for 80,000 ? ? ?

Costs Transferred infrom Prior Departments

100% complete for material,conversion, and transferred-in units.

4-28

Step 1 Step 2Physical Equivalent Units

Flow of Units in June Units Material Conversion Trans-inUnits to account for Beginning WIP inventory 20,000 Units transferred in during June 60,000 Total units to account for 80,000

Units accounted for Completed and transferred out 65,000 65,000 65,000 65,000 Ending WIP inventory 15,000 6,000 9,000 15,000 Total units accounted for 80,000 71,000 74,000 80,000

Costs Transferred infrom Prior Departments

40% of 15,000 units60% of 15,000 units

Transferred-in units are 100% complete

4-29

Costs Transferred infrom Prior Departments

Flow of Costs in June Material Conversion Trans-in TotalCosts to account for (Step 3) Costs in beginning WIP inventory 10,000$ 2,000$ 15,000$ 27,000$ Current period costs 25,500 31,300 45,000 101,800 Total costs to account for 35,500$ 33,300$ 60,000$ 128,800$

Costs per equivalent unit (Step 4) ? ? ? ?

Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? ? Cost of ending WIP inventory ? ? ? ? Total costs accounted for ? ? ? ?