17-1 Similarities and Differences Between Job Order Cost and Process Cost Systems Job Order Cost  Costs assigned to each job.  Products have unique characteristics. Process Cost  Costs tracked through a series of connected mfg processes or departments … (mixing, baking, packaging etc).  Products are uniform or identical (homogenous) and produced in a large volume. Nature of Process Cost Systems

17-2 Illustration 17-2 Process and Job Cost Comparison Nature of Process Cost Systems

17-3 Nature of Process Cost Systems

17-4 Nature of Process Cost Systems Every production dept has it’s own Work-In-Process account. If you have 5 departments you have 5 “Work-In-Process” accounts One Work In Process Account

17-5 Process Cost Flow Illustration 17-5 TCorp makes skateboard wheels. Manufacturing consists of two processes: machining and assembly. Machining Dept shapes & drills materials. Assembly Dept assembles & packages the parts. Nature of Process Cost Systems

17-6  A process cost system requires fewer material requisition slips than a job order cost system. ► Materials are used for processes and not specific jobs. ► Requisitions are for larger quantities of materials. ► Journal entry to record materials used: Material Costs Nature of Process Cost Systems

17-7  Time tickets may be used in both systems.  All labor costs incurred within a production department are a cost of processing.  The journal entry to record factory labor costs: Nature of Process Cost Systems Factory Labor Costs

17-8  Objective to allocate overhead to production depts on objective and equitable basis.  Use the activity that “drives” or causes the costs.  Machine time used - primary driver.  Journal entry to allocate overhead: Manufacturing Overhead Costs Nature of Process Cost Systems

17-9 Illustration: Suppose a professor is asked to compute the cost of instruction per full-time equivalent student at your college. The finance dept. provides the following information. Costs: Total cost of instruction $ 9,000,000 Student population: Full-time students 900 Part-time students 1,000 Equivalent Units FYI: Part-time students take 60% of the classes of a full- time student during the year.

17-10 Total cost of instruction $9,000,000 Number of full-time equivalent students / 1,500 $ 6,000 Illustration: To compute the number of FTE students per year: To compute the Cost of Instruction per “FTE” student: Equivalent Units

17-11 Equivalent Units of Production (EUP) A term used to arrive at the cost per unit. * associated with the units that are not completed at the end of an accounting period (work-in-process). * indicates how much work was done on the units that are still in-process at the end of a designated period. * all of the work-in-process inventory at the end of a period are expressed as fully-completed units which gives us the equivalent units of production.

17-12 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. 2 half full pitchers = 1 full pitcher. + = Equivalent Units of Production (EUP)

17-13  Most widely used method.  Units “completed & transferred out” = 100% complete.  Considers the *degree of completion of units in mfg dept’s ending work in process. (* given to accounting by the mfg dept.)  Beginning work in process not part of computation. Equivalent Units Weighted Average Method

17-14 Illustration: Output of the Packaging Dept consists of: 10,000 units completed and transferred out, 5,000 units in ending W-I-P 70% completed. Calculate the equivalent units of production. Completed units: (10,000 units 100% complete) … 10,000 EU W-I-P Equiv Units: (5,000 units 70% complete) …... 3,500 EU 13,500 Equiv Units of Prod. Equivalent Units Weighted Average Method

17-15 W-I-P Mixing 80% of Material 35% of Labor and Overhead EUP while still “work-in-process” The product (bread) is still a work “In Process”. The Manufacturing Process is NOT complete. Calculate EU assuming 1,000 units “in process”: 1,000 x 80% complete (materials) = 800 EU as to Materials 1,000 x 35% complete (labor) = 350 EU as to “conversion”

17-16 W-I-P Baking 35% of Labor and Overhead 80% of Material EUP while still “work-in-process” + 20% added Direct Materials + 25% added Direct Labor & Mfg Overhead The product (bread) is still a work “In Process”. The Manufacturing Process is NOT complete. Calculate EU assuming 1,000 units “in process”: 1,000 x 100% complete (materials) = 1,000 EU as to Materials 1,000 x 60% complete (labor) = 600 EU as to “conversion”

17-17 Conversion Costs Conversion costs are costs required to convert raw materials into finished goods that are ready for sale. Conversion = Direct + Manufacturing Costs Labor Overhead Ex: of costs that may be considered conversion costs are: Direct labor & benefits Equipment depreciation Equipment maintenance Factory rent Factory supplies Factory insurance Factory utilities Factory supervisors Most conversion costs are likely to be “manufacturing overhead”.

17-18 Illustration: Kellogg produces Eggo® Waffles using three departments: Mixing, Baking, and Packaging. The Mixing Department combines dry ingredients, including flour, salt, and baking powder, with liquid ingredients, including eggs and vegetable oil, to make waffle batter. Illustration 17-9 provides information related to the Mixing Department at the end of June. Refinements on the Weighted-Average Method Equivalent Units

17-19 Ex: Kellogg makes Eggo’s® using three depts: Mixing, Baking, and Packaging. Info for Mixing Dept at the end of June. “Refinements” to Wtd Avg Calculation * Conversion costs = labor costs + overhead costs.

17-20 Ex: Kellogg makes Eggo’s® using three depts: Mixing, Baking, and Packaging. Info for Mixing Dept at the end of June. “Refinements” to Wtd Avg Calculation * Conversion costs = labor costs + overhead costs.

17-21  Beginning work in process is not part of the equivalent-units-of-production formula … WHY NOT ? Equivalent Units

17-22 The fabricating department has the following production and cost data for the current month. Beginning Units Ending Work in Process Transferred Out Work in Process –0– 15,000 10,000 Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.

17-23 Compute EU for (a) materials and (b) conversion costs. Units transferred out …………. 15,000 Ending work in process units.. 10,000 25,000 Beginning Units Ending Work in Process Transferred Out Work in Process –0– 15,000 10,000 Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs.

17-24 Compute EU for (a) materials and (b) conversion costs. Beginning Units Ending Work in Process Transferred Out Work in Process –0– 15,000 10,000 Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Units transferred out …… 15,000 Equiv Units-ending WIP.. 3,000 (10,000 x 30%) 18,000

17-25 Production Cost Report

17-26 A production cost report is the  Key document used to understand activities.  Prepared for each department and shows Production Quantity and Cost data.  Four steps in preparation: Step 1: Compute physical unit flow Step 2: Compute equivalent units of production Step 3: Compute unit production costs Step 4: Prepare a cost reconciliation schedule Production Cost Report

17-27 Illustration Flow of costs in making Eggo® Waffles Production Cost Report

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17-29

17-30 Illustration Unit and cost data—Mixing Department Production Cost Report

17-31  Physical units - actual units to be accounted for during a period, regardless of work performed.  Total units to be accounted for - units started (or transferred) into production during the period + units in production at beginning of period.  Total units accounted for - units transferred out during period + units in process at end of period. Compute the Physical Unit Flow (Step 1) Production Cost Report

17-32 Illustration Production Cost Report Compute the Physical Unit Flow (Step 1)

17-33 Mixing Department  Department adds materials at beginning of process and  Incurs conversion costs uniformly during the process. Illustration Production Cost Report Compute Equivalent Units of Production (Step 2)

17-34  Costs expressed in terms of equivalent units of production.  When equivalent units of production are different for materials and for conversion costs, three unit costs are computed: 1.Materials 2.Conversion 3.Total Manufacturing Compute Unit Production Costs (Step 3) Production Cost Report

17-35 LO 6 Compute total materials cost related to Eggo® Waffles: Work in process, June 1 Direct materials costs $ 50,000 Cost added to production during June Direct material cost 400,000 Total material costs$450,000 Illustration Illustration Production Cost Report Compute Unit Production Costs (Step 3)

17-36 Compute total conversion costs related to Eggo® Waffles: Work in process, June 1 Conversion costs $ 35,000 Costs added to production during June Conversion costs 170,000 Total conversion costs$205,000 Illustration Production Cost Report Compute Unit Production Costs (Step 3) Illustration 17-18

17-37 Compute total manufacturing costs per unit: Illustration Production Cost Report Compute Unit Production Costs (Step 3) Illustration 17-19

17-38 Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows. Costs to be accounted for Work in process, June 1 $ 85,000 Started into production570,000 Total costs$655,000 Illustration Production Cost Report Prepare a Cost Reconciliation Schedule (Step 4)

17-39 Illustration Production Cost Report

17-40 Prepare the Production Cost Report LO 7 Production Cost Report Illustration 17-23

17-41  Companies often use a combination of a process cost and a job order cost system.  Called operations costing, this hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product.  At the same time, the product may have some customized, individual features that require the use of a job order cost system. Costing Systems – Final Comments Production Cost Report