Professor Debbie Garvin, JD; CPA – ACG2071 PROCESS COSTING CHAPTER 5

 Job – Order Costing  Each unique product or batch is considered a job  Manufacturing costs are traced and allocated to specific jobs  Process Costing  Used when homogenous items are produced  Total costs are divided by total units produced Difference Between Job-Order & Process Costing Systems

Job and Process Costing Differences? Job Order Cost Systems:  Individual job cost records  DM & DL traced, and MOH allocated to individual jobs  Cost of finished jobs flow into FG Inventory  Cost of sold jobs flow out of FG Inventory into COGS

Process Cost Systems: Series of manufacturing processes Cost/process is accumulated & moved from one process to next process Costs transferred to FG Inventory only from the WIP Inventory of the LAST manufacturing process When units are sold, cost is transferred out of FG Inventory into COGS Job Order Cost Flow DM, DL & MOH WIP Inv. Finished Goods Inv. COGS Job Process Cost Flow DM,DL,MOH DM,DL,MOH DM,DL,MOH FG Inv COGS Dept 1Dept 2Dept 3 Job and Process Costing Differences

Mixing Dept Same cost accumulation in next processing department, in Packaging Dept, before all product costs transferred from WIP inv. to Finished Goods inventory Process Costing System

 In Process Costing, product passes through multiple depts Product and Cost Flows

 Benefits:  Cost trends  Budget to actual  Pricing  Financial Statements Process Costing Benefit

Cost of Goods Sold Manufacturing Wages Finished Goods Work in Process, Centers Dept Work in Process, Centers Dept Work in Process, Shells Dept Work in Process, Shells Dept Work in Process, Packaging Dept Work in Process, Packaging Dept Manufacturing Overhead Costs Direct Materials Costs Process Costing Benefit

Flow of Cost Between Processing Depts

1.$142,000 of DM costs incurred in January in the Mixing Dept. WIP, Mixing Dept$142,000 Raw Materials Inv. $142,000 2.$ 62,200 of DL costs used in January in the Mixing Dept. WIP, Mixing Dept$62,200 Wages Payable$62,200 3.Must assign MO. Mgt. estimates $2,160,000 MO & $720,000 DL cost for year. Predetermined o/h rate: $2.16m ÷ $.720 = $3 MOH for each $1 of DL cost. In Jan. ($62,200 DL costs x $3) = $186,600 of MO assigned to Mix. Dept. WIP for Jan. WIP, Mixing Dept$186,600 Manufacturing O/H$186,600 Flow of Cost Between Processing Depts

As process completed in one dept., units are transferred to the next dept. When Mixing dept completes its work, items, along w/their related costs, transferred to the Packaging dept. (transferred in cost). Assume during January, Mixing Dept. completes units w/a cost of $360,000. Completed units & costs transferred to Packaging Dept. WIP, Packaging Dept$360,000 WIP, Mixing Dept$360,000 Flow of Cost Between Processing Depts

 Conversion costs  DL + MOH  Equivalent units  Inventory flow assumptions  Weighted average  FIFO The Building Blocks of Process Costing

 Equivalent units  Amount of work done during a period in terms of fully complete units of output  When work in process inventories consist of partially completed goods, use equivalent units to express amount of work done during a period in terms of fully completed units of output The Building Blocks of Process Costing

 Inventory flow assumptions  Weighted average  FIFO  Cost-benefit standpoint  Weighted-average method costs less  Extra cost of calculating FIFO usually does not justify additional benefits gained from using FIFO The Building Blocks of Process Costing

In Jan. $390,800 costs incurred in Mixing Dept & 78,160 units completed  $390,800÷ 78,160 = $5 Cost/unit  Equivalent Units: Partially completed units are converted to a comparable number of completed units In our Mixing Dept. Ex. there were another 8,000 units that were 50% completed at end of month. Cost to get those 8,000 units 50% finished included in $390,800 cost. So cost per unit s/b $390,800 ÷ [78,160 + (8,000 x 50%)] = 82,160 units so $390,800 ÷ 82,160 equiv completed units = $4.76/unit Calculating Unit Cost

End of Jan. 800 units Transferred to Pkg. Dept. Mixing DepartmentMaterialsConversion Units transferred to next department800 units800 units WIP, Jan 31: (in mixing dept) 100 units x 100% complete-Materials100 units 100 units x 50% complete-Conversion50 equivalent units Equivalent units of production900 units 850 units completed-CC Equivalent units – Material & Conversion costs

McMillian Tire Company produces tires used on small trailers. The month of June ended with 300 tires in process, 85% complete as to direct materials and 50% complete as to conversion costs; 2,500 tires were transferred to finished goods during the month and 2,300 were started during the month. The beginning WIP inventory was 65% complete as to direct materials and 45% complete as to conversion costs. 1. Determine the denominators (how many equiv. completed units) to be used in the calculations of cost per equivalent unit for materials and conversion costs. Example Exercise #1

 Materials  Units completed_____  Equivalent units _____  Labor & Overhead (Conversion costs)  Units completed_____  Equivalent units _____ Example Exercise #1 Solution

 Materials  Units completed2,500  Equivalent units  Labor & Overhead (Conversion costs)  Units completed2,500  Equivalent units (300 x 50%) 150 2,650 Example Exercise #1 Solution

 Average unit cost in process costing system called Cost Per Equivalent Unit  Formula for determining cost/equiv. unit is: Cost in Beg. WIP + Cost incurred in current period = Units completed + Equivalent units in Ending WIP = Average cost/unit Calculating Unit Cost

The balance in beginning WIP at Bing Rubber Company for direct labor was $135,000. During the month of March, an additional $650,000 of direct labor was incurred, and 25,000 pounds of rubber were produced. At the end of March, 8,000 pounds of rubber were in process and the units were 50% complete. At the start of March, the company had 5,000 pounds of rubber that were 30% complete.  Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process. Example Exercise #2

 Direct Labor  Beginning WIP$  March labor$  Total Labor Cost$  Units  Units completed_____lbs  Equivalent units (8,000 * 50%)_____lbs  Total Units_____lbs  Cost per Equivalent Unit  $785,000 / 29,000 pounds = $_____per pound Example Exercise #2 Solution

 Direct Labor  Beginning WIP$135,000  March labor +$650,000  Total Labor Cost$785,000  Units  Units completed25,000lbs  Equivalent units (8,000 * 50%)4,000lbs  Total Units29,000lbs  Cost per Equivalent Unit for Labor  $785,000 / 29,000 pounds = $27.07 per pound Example Exercise #2 Solution

Cost Flows for Job Costing & Process Costing M/OH Applied WIP Inv FG Inv COGS Direct Labor Direct Materials WIP Mixing Dept Direct Labor M/OH Applied Transferred In Costs Direct Materials WIP Pkgng Dept WIP Pkgng Dept FG Inv Direct Labor M/OH Applied Job Costing Cost Flows Process Costing Cost Flows (Job Cost Sheets accumulate cost by job.) When jobs are finished… Prepare Production Cost Report by process.

 Using weighted average assumption  5 steps to process costing:  Summarize the flow of physical units  Compute output in terms of equivalent units  Summarize total costs to account for  Compute the cost per equivalent unit  Assign total costs to units completed and to units in ending WIP inventory How Does Process Costing Work?

Seaview Co. manufactures swim masks in 2 Depts: Shaping & Insertion Depts. Shaping Dept had no masks in Beg WIP Inv. During month they began work on 50,000 masks. 1 st question: How many units were worked on (completed or not)? 2 nd question: What happened to those units ? (Finished or still in process) Shaping Dept Production Report for Month Step 1: Summarize the Flow of Physical Units

In this process, all direct materials added at beginning of department process. Conversion costs added evenly throughout shaping process, 25% completed as of end of Oct. 100% complete-DM; 25% complete-CC Step 2: Compute Output in Terms of Equivalent Units

In addition, 1.2m units had been completed & transferred out of Frying Dept to Pkg Dept during month. 1. How many equiv. units of DM & equivalent units of conversion costs are associated w/the 1.2m units completed & transferred out? 2. Compute equiv units of DM & equiv units of conv costs assoc. w/100,000 partially completed units still in ending WIP inventory. Frying Dept of Rummel’s P.C. had 100,000 partially completed units in WIP at end of August. All D.M. had been added to units, but units were only 60% through conversion process.

3. What are ttl equiv. units of DM & ttl equiv units for conv costs for month? Step 1 Flow of Units Step 2 Equivalent Units Flow of Production: Direct Materials Conversion Cost Units to account for: Beginning work in process, Started in production Total physical units to account for Units accounted for: Completed and transferred out 1,200,000 Ending work in process 100,000 Total physical units accounted for 1,300,000 Total equivalent units 1,200, ,000 60,000 1,300,000 1,260,000

During month, Shaping Dept. used $140,000 of DM and $68,000 of CC (*$21,250 of DL + $46,750 of MOH) Step 3: Summarize Total Costs to Account For

Step 4: Compute the Cost per Equivalent Unit

Step 5: Assign Total Costs to Units Completed and to Units in Ending WIP Inventory

Work in Process Inventory—Department 1 Balance – Oct 10 Direct Materials 140,000 Direct Labor.21,250 Manufacturing Overhead 32,000 $176,000 DebitCredit Oct. 31Work-in-process – Department 2176,000 Work-in-process – Department 1176,000 $46,750 T-Account after 5 steps completed

 Same 5-step process  Include cost of units transferred in when calculating equivalent units (EU) and cost per EU  Transferred-in costs $176,000 $32,000 Process Costing in a Second or Later Processing Department

Insertion Dept. (Dept. 2) Report for Month Step 1: Summarize the Flow of Physical Units

Step 1Step 2: Equivalent Units Flow of Physical Units Transferred InDirect Materials Conversion Cost ┼ 7000 units in Ending WIP inv are 30% complete for Conv costs & no DM added In Insertion Dept, Conv. Costs added evenly & DMs (faceplate) added at end of process. Step 2: Compute Output in Terms of Equivalent Units for Insertion Dept.

Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit Transferred In Direct Materials Conversion Costs Total Beginning work in process, October 1 $ 22,000$ 0.00$ 1,100$ 23,100 Costs added during October 176,00019,000*12,935*207,935 Total costs to account for $ 198,000$ 19,000$ 14,035$ 231,035 Divide by total equivalent units 45,00038,00040,100 Cost per equivalent unit * $ 4.40$ 0.50$ 0.35 Insertion Dept Production Cost Report * Info from Insertion Dept data for month of October

Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory Insertion Dept. Transferred In Direct Materials Conversion Cost Total Units completed and transferred out to Finished Goods Inventory (38,000) [ 38,000 x ( ) =$199,500 Ending work in process, October 31 (7,000) Transferred-in costs [ 7,000 x 4.40]30,800 Direct materials [ 0 x 0.50 ]0 Conversion costs [ 2,100 x 0.35] 735 Total ending work in process, October 31 $ 31,535 Total costs accounted for $ 231,035

Work in Process Inventory—Department 2 Balance – Oct 1$22,000 Transferred In costs176,000 Direct Materials. 19,000 Conversion Costs (DL + MOH) 14,035 Total$231,035 Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit

Work in Process Inventory—Department 2 Balance – Oct 1$22,000 Transferred In costs176,000 Direct Materials. 19,000 Conversion Costs (DL + MOH) 14,035 Total$31,535 After posting, the Key WIP Account Appears as Follows $199,500 Transfer to Finished Goods

Other process costing info follows: Units: Beginning WIP 6,000 units Transferred in from Molding Dept during period27,000 units Completed during period15,000 units Ending WIP (20% complete-conversion work)18,000 units Costs: Beginning WIP(Transferred-in cost-$100; CC $220)$320 Transferred in from Molding Dept during period4,850 Conversion costs added during period2,942 Gator Co. uses 4 depts to produce plastic gatorhats: Mixing, Molding, Drying & Assembly. Drying Dept requires no direct materials. Conversion costs are incurred evenly throughout drying process.

After drying process, the gatorhats are completed by assembling the gator to the headband and packaging them for shipment to retail outlets. Requirements: 1.Draw a time line of the Drying Dept.’s process. 2.Use time line to compute number of equiv. units of work performed by Drying Dept. during period, the cost/equivalent unit, & total costs to account for. 3.Assign total costs to: units completed & transferred to assembly operation; and units in Drying Dept.'s ending WIP inventory

Drying Dept. Start Trnsfrred in from 100% complete Molding Dept(27,000) Trnsfrd out to BB in Drying Dept Assem Dept (6,000) 15,000 units completed 15,000 18,000 units started but not completed (ending WIP inv.)

DRYING DEPARTMENT Step 1 Flow of Units Step 2 Equivalent Units Flow of Production: Transferred In CostsConversion Costs Units to account for: Beginning work in process, 6,000 Units transferred in 27,000 Total physical units to account for 33,000 Units accounted for: Completed and transferred out 15,000 Ending work in process 18,000 3,600 a Total physical units accounted for 33,000 Total equivalent units 33,00018, a 18,000 units each 20% completed = 3,600 Req #2: Step 1: Summarize flow of Physical Units & Step 2: Compute output in Equivalent Units

47 Req #2: Summarize total costs to account for & Compute cost per Equivalent Unit DRYING DEPARTMENT Steps 3 & 4 Summarize total costs to account for and compute cost per equivalent unit Transferred In Conversion Costs Total Beginning work in process $ 100$ 220$ 320 Costs added during period 4,8502,9427,792 Total costs to account for $ 4,950$ 3,162$8,112 Divide by total equivalent units 33,00018,600 Cost per equivalent unit $ 0.15$ 0.17

48 Requirement #3: Assign total costs to units transferred out and units in ending inventory DRYING DEPARTMENT Step 5 Assign total costs to units transferred out and ending inventory Transferred InConversion CostTotal Units completed and transferred out to Finished Goods Inventory (15,000 units) [ 15,000 x ( ) =$4,800 Ending work in process (18,000 units) Transferred-in costs [ 18,000 x 0.15]2,700 Conversion costs [ 3,600 x 0.17] 612 Total ending work in process $ 3,312 Total costs accounted for $8,112

END OF SEGMENT Professor Garvin, JD; CPA – ACG2071