2009 Foster School of Business Cost Accounting L.DuCharme 1 Process Costing Chapter 17

2009 Foster School of Business Cost Accounting L.DuCharme 2 Quote for today When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one I was astonished at how much the old man had learned in seven years. -- Mark Twain

2009 Foster School of Business Cost Accounting L.DuCharme 3 Overview—Process Costing When to use Accounting issue Equivalent Units (EUs) Mechanics of process costing –w/o TI costs –with TI costs Accounting for Spoilage (chapter 18)

2009 Foster School of Business Cost Accounting L.DuCharme 4 When is it appropriate to use process costing? Or what companies use process costing? Which companies would not use process costing?

2009 Foster School of Business Cost Accounting L.DuCharme 5 Illustrating Process Costing Direct Materials, Direct Labor Indirect Manufacturing Costs Department A Department B Finished GoodsCost of Goods Sold

2009 Foster School of Business Cost Accounting L.DuCharme 6 What is the BIG accounting issue? The task is to divide the total costs in WIP between ending WIP and inventory completed and transferred out (CTO). This is no big deal until you consider that E.WIP is partially completed and CTO by definition is 100% complete (for each step of production)! What do we do?

2009 Foster School of Business Cost Accounting L.DuCharme 7 Equivalent Units 15 half-time (50%) professors is equivalent to 7.5 full-time professors. Often for people we refer to FTEs. 100 teddy bears that are (on average) 45% complete are equivalent to 45 completed bears = 45 equivalent units.

2009 Foster School of Business Cost Accounting L.DuCharme 8 EU—when to use Not all organizations that use process costing have to calculate EUs! You only have to calculate/use EUs when ending WIP inventories are material. –No (or little) ending WIP—what companies? –Material ending WIP—what companies?

2009 Foster School of Business Cost Accounting L.DuCharme 9 Assumed flow of costs Process costing is combined with the assumed flow of costs: –Standard cost –Weighted average (we will focus on this) –FIFO (least used)

2009 Foster School of Business Cost Accounting L.DuCharme 10 Three Equations/steps At the core of calculations are 3 equations: –Physical unit calculations (in units)— B.WIP + units started this period = CTO + E.WIP –EU calculations (in EU)— B.WIP + work done this period = CTO + E.WIP –Costs (in $)— B.WIP + period’s costs = CTO + E.WIP

2009 Foster School of Business Cost Accounting L.DuCharme 11 Timing of added costs Whenever a factor of production is added at a different time (beginning, middle, end, etc.) in production, a separate EU computation is required (for that factor)! For example if DM is added at a different time than CC, each has to have a separate EU calculation (see example in class)

2009 Foster School of Business Cost Accounting L.DuCharme 12 Transferred –In Costs CTO from one department is TI to the next department. TI does not equal direct materials.

2009 Foster School of Business Cost Accounting L.DuCharme 13 The BIG Picture The goal is to assign costs to CTO units. In order to do this you need costs per unit. (1)When costs change from period to period, you have to make a cost-flow assumption. (2) When incomplete units are present in E.WIP, you have to adjust via EU calculations.

2009 Foster School of Business Cost Accounting L.DuCharme 14 Process Costing Examples (1) Without TI costs (2) With TI costs My format****

2009 Foster School of Business Cost Accounting L.DuCharme 15 Process Costing--WA method P.U.$DM$CC WIP, Apr.1 300$7,500$2,125 Started in Apr. (or work done) 2,200 CTO Apr. WIP, Apr Cost added in Apr. $70,000$42,500 Apr. 1, % complete100%40% Apr. 30, % complete100%25%

2009 Foster School of Business Cost Accounting L.DuCharme 16 WA-- solution P.U.$DM EU-DM $CC EU-cc WIP, Apr.1 300$7,500300$2, Started in Apr. (or work done) 2,200 CTO Apr. 2,000 WIP, Apr Cost added in Apr. $70,000$42,500 Total Cost$77,500$44,625 WA $/EU$31 / EU$21 /EU

2009 Foster School of Business Cost Accounting L.DuCharme 17 WA--solution DMCCTotal CTO (2,000 EU) 2,000 eu * $31/eu $62,000 2,000 eu * $21/eu $42,000 $104,000 E.WIP (500 : 125 EU) 500 eu * $31/eu $15, eu * $21/eu $2,625 $18,125 Total =$77,500$44,625$122,125

2009 Foster School of Business Cost Accounting L.DuCharme 18 Today’s Quote “I have no use for bodyguards, but I have very specific use for two highly trained certified public accountants.” -- Elvis Presley

2009 Foster School of Business Cost Accounting L.DuCharme 19 WA with TI costs--example Finishing department (assume that): –TI costs are added at the beginning –DM are added at the end –CC are added evenly throughout

2009 Foster School of Business Cost Accounting L.DuCharme 20 Data for problem P.U.TI $ TI-eu DM $ DM-eu CC $ CC-eu B.WIP500$17,750100%$00%$7,25060% Started (or work done) 2,000 CTO2,100 E.WIP400100%0%30% Costs Added $104,000$23,100$38,400 Total $$121,750$23,100$45,650

2009 Foster School of Business Cost Accounting L.DuCharme 21 WA with TI costs--solution P.U.TI $DM $CC $ B.WIP500$17,750$0$7,250 Started (or work done) 2,000 CTO2,100 E.WIP400 Total $$121,750$23,100$45,650 WA $/EU

2009 Foster School of Business Cost Accounting L.DuCharme 22 WA with TI costs--solution TIDMCCTotal WA: $/EU$48.700$11.000$ CTO 2,100 eu $102,270$23,100$43,182$168,552 E.WIP 400 : 0 : 120 $19,480$0$2,468$21,948 Total$190,500

2009 Foster School of Business Cost Accounting L.DuCharme 23 Chapter 18 This chapter focuses on accounting for Spoilage (flip side of product quality). You are responsible for the first 3 pages of the chapter and what is covered in class.

2009 Foster School of Business Cost Accounting L.DuCharme 24 Terminology Spoilage –Unacceptable product discarded or sold for disposal value (e.g., “Seconds”). Reworked units –Unacceptable product that is reworked and sold as good product. Scrap—material left over with min. or zero sales value. Waste—can be toxic and very costly to dispose of.

2009 Foster School of Business Cost Accounting L.DuCharme 25 Goal of most operations Reduction of S/R/S/W –Consistent with increased quality –R&D and design play key roles in reducing S/R/S/W.

2009 Foster School of Business Cost Accounting L.DuCharme 26 “Types” of spoilage Normal spoilage –Expected spoilage with efficient operations. (“normal spoilage rates” = units of normal spoilage / total good units) Abnormal spoilage –Unexpected (greater than expected) spoilage under efficient operations. Considered avoidable & controllable. Some companies treat all spoilage as abnormal!

2009 Foster School of Business Cost Accounting L.DuCharme 27 Why do we care? Because we account for the two types differently!! Abnormal spoilage is expensed in the period it is discovered. Normal spoilage is added to job cost, or under process costing added equally to all units passing the inspection point.

2009 Foster School of Business Cost Accounting L.DuCharme 28 Accounting for Spoilage Job CostingProcess Costing Abnormal Spoilage Expense Normal Spoil. : Due to this job Add to job costN/A Common to allAdd to cost of all via MOH Add equally to all units passing inspection point

2009 Foster School of Business Cost Accounting L.DuCharme 29 End of Chapter 17 & 18