Systems Design: Process Costing Chapter4 Systems Design: Process Costing

Process Costing To help set prices To evaluate products How are unit costs used? To determine balance sheet inventory To evaluate production efficiency

Comparing Job Costing and Process Costing Costs 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 Costing and Process Costing Work in process contains individual jobs in a job cost system. Direct Materials Finished Goods Work in Process Direct Labor ManufacturingOverhead Cost of Goods Sold

Comparing Job Costing and Process Costing Work in process contains homogenous products in a process cost system. Direct Materials Direct Labor & Overhead (Conversion) Finished Goods Products Cost of Goods Sold

Comparing Job Costing and Process Costing 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

Assigning Costs to Products – All Units Fully Completed No beginning or ending Work in Process Inventory Common when a company is successful at just-in-time production Cost per unit = Manufacturing costs for a period Units produced for the period

Assigning Costs to Products – Some Units Not Fully Completed Same objective: determine the cost of products No beginning Work in Process Inventory Ending Work in Process Inventory consists of units started during the period, but incomplete at the end of the period. Same Inventory accounts: raw materials, work in process, and finished goods We must now deal with the concept of equivalent units. Same overhead assignment method: predetermined rate times actual activity

Assigning Costs to Products – Some Units Not Fully Completed We must now deal with the concept of equivalent units. Same objective: determine the cost of products Equivalent units is a concept expressing partially complete units as a smaller number of fully complete units. Same Inventory accounts: raw materials, work in process, and finished goods Transition to next slide: now let’s look at cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials. Cost per equivalent unit = Manufacturing costs for a period Equivalent units for the period Same overhead assignment method: predetermined rate times actual activity

Manufacturing Overhead Process Cost Flows Work in Process Department A Raw Materials Direct Materials Direct Materials Purchases Indirect Materials Manufacturing Overhead Work in Process Department B Actual Applied Direct Materials Then direct labor Other Overhead Indirect Materials

Manufacturing Overhead Process Cost Flows Work in Process Department A Wages Payable Direct Materials Direct Labor Direct Labor Indirect Labor Manufacturing Overhead Work in Process Department B Actual Applied Direct Materials Then indirect labor Other Overhead Direct Labor Indirect Materials Indirect Labor

Manufacturing Overhead Overhead Applied to Work in Process Process Cost Flows Work in Process Department A Wages Payable Direct Materials Direct Labor Direct Labor Indirect Labor Applied Overhead Manufacturing Overhead Work in Process Department B Actual Applied Direct Materials Next, transfer from department A to B Other Overhead Overhead Applied to Work in Process Direct Labor Indirect Materials Applied Overhead Indirect Labor

Process Cost Flows Work in Process Department A Work in Process Department B Direct Materials Transferred to Dept. B Direct Materials Direct Labor Direct Labor Applied Overhead Applied Overhead Transferred from Dept. A Now, let’s complete the goods in B and sell them

Process Cost Flows Work in Process Department B Finished Goods Direct Materials Cost of Goods Manufactured Cost of Goods Manufactured Cost of Goods Sold Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold Cost of Goods Sold

Production Report Production Report Shows the flow of units and costs through work in process Provides cost information for financial statements Production Report Becomes the job cost sheet in process costing Helps managers control their departments

A computation of cost per equivalent unit. Production Report Section 1 Section 2 Section 3 Production Report A quantity schedule showing the flow of units and the computation of equivalent units. A computation of cost per equivalent unit.

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.

Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units. Equivalent units = # of partially completed units * percentage completion <-> equivalent amount of material and labor

Equivalent Units of Production Two half completed products are equivalent to one completed product. + = So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.

Assigning Costs Using Weighted-Average Costing 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 Using Weighted-Average Costing Beginning Inventory 250 units 1,250 units 1,100 units completed 1,000 units started Ending Inventory 150 units Now let’s examine the five-step process.

Weighted Average Example Materials 1,000 Units Started Beginning Work in Process 250 Units 100% Complete Ending Work in Process 150 Units 100% Complete 850 Units Started and Completed 1,100 Units Completed 150 × 100% 150 Equivalent Units 1,250 Equivalent units of production

Weighted Average Example Conversion 1,000 Units Started Beginning Work in Process 250 Units 80% Complete Work to Complete Process 20% 250 Units Ending Work in Process 150 Units 33 1/3% Complete 850 Units Started and Completed 1,100 Units Completed 150 × .333% 50 Equivalent Units 1,150 Equivalent units of production

Costs Transferred in from Prior Departments Multiple 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.

Costs Transferred in from Prior Departments 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 in from Prior Departments

Costs Transferred in from Prior Departments 100% complete for material, conversion, and transferred-in units.

Costs Transferred in from Prior Departments 60% of 15,000 units 40% of 15,000 units Transferred-in units are 100% complete

Costs Transferred in from Prior Departments