Systems Design: Process Costing Chapter 4

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Types of Costing Systems Used to Determine Product Costs Job-order Costing Process Costing F Many units of a single, homogeneous product flow evenly through a continuous production process. F One unit of product is indistinguishable from any other unit of product.. F Each unit of product is assigned the same average cost. F Many units of a single, homogeneous product flow evenly through a continuous production process. F One unit of product is indistinguishable from any other unit of product.. F Each unit of product is assigned the same average cost.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill Job-order Costing Process Costing

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Job order costing  Many jobs are worked during the period.  Costs are accumulated by individual jobs.  Job cost sheet is the key document.  Unit cost computed by job. Job order costing  Many jobs are worked during the period.  Costs are accumulated by individual jobs.  Job cost sheet is the key document.  Unit cost computed by job. Process costing  A single product is produced for a long period of time.  Costs are accumulated by departments.  Department production report is key document.  Unit costs are computed by department. Process costing  A single product is produced for a long period of time.  Costs are accumulated by departments.  Department production report is key document.  Unit costs are computed by department. Differences Between Job-Order and Process Costing

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Process Costing Direct Materials Direct labor costs may be small in comparison to other product costs in process cost systems. Direct labor costs may be small in comparison to other product costs in process cost systems. Type of Product Cost Dollar Amount Direct Labor Manufacturing Overhead

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Process Costing Direct Materials Type of Product Cost Dollar Amount Conversion So, direct labor and manufacturing overhead are often combined into one product cost called conversion. Direct labor costs may be small in comparison to other product costs in process cost systems. Direct labor costs may be small in comparison to other product costs in process cost systems.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Comparing Job-Order and Process Costing Direct Materials Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Work in Proces s

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Comparing Job-Order and Process Costing Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Jobs Costs are traced and applied to individual jobs in a job-order cost system. Direct Materials

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Comparing Job-Order and Process Costing Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Processing Department Processing Department Costs are traced and applied to departments in a process cost system. Direct Materials

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Process Cost Flows Work in Process Department B Work in Process Department A Direct Materials Direct Labor Applied Overhead Direct Materials Direct Labor Applied Overhead Transferred to Dept. B Transferred from Dept. A

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Finished Goods Cost of Goods Sold Process Cost Flows Work in Process Department B Cost of Goods Manufactured Direct Materials Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Equivalent Units of Production partially complete 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.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 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.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Equivalent Units

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit = Costs for the period Equivalent units of production for the period

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Equivalent Units of Production – Weighted Average Method The weighted average method...  Makes no distinction between work done in prior and current period.  Blends together units and costs from prior period and current period. Let’s see how this works!

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Weighted Average Example Smith Company reported the following activity in Department A for the month of June:

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Equivalent units are calculated as follows: Weighted Average Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Equivalent units are calculated as follows: Weighted Average Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Equivalent units are calculated as follows: Weighted Average Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 60% Complete 6,000 Units Started 5,400 Units Completed 5,100 Units Started and Completed Weighted Average Example Materials 5,400 Units Completed 540 Equivalent Units 900 × 60% 5,940 Equivalent units of production

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 6,000 Units Started 5,400 Units Completed 5,100 Units Started and Completed 270 Equivalent Units 900 × 30% 5,670 Equivalent units of production Beginning Work in Process 300 Units 20% Complete Ending Work in Process 900 Units 30% Complete Weighted Average Example Conversion

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Production Report Shows the flow of units and costs through work in process Becomes the job cost sheet in process costing Helps managers control their departments Provides cost information for financial statements

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Production Report  A computation of cost 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.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Production Report Section 1 Section 2 Section 3 Production Report  A reconciliation of cost flows for the period, including: v Total cost for units completed and transferred from the processing department. v Total cost for partially completed units remaining in work in process.  A reconciliation of cost flows for the period, including: v Total cost for units completed and transferred from the processing department. v Total cost for partially completed units remaining in work in process.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. Double Diamond uses the weighted average cost procedure. Using the following information for the month of May, let’s prepare a production report for Shaping and Milling. Production Report Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Work in process, May 1: 200 units Materials:50% complete. $ 3,000 Conversion:30% complete. 1,000 Units started into production in May:5,000 Units completed and transferred out in May:4,800 Costs added to production in May Materials cost$ 74,000 Conversion cost 70,000 Work in process, May 31: 400 units Materials40% complete. Conversion25% complete. Cost Production Report Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Section 1: Quantity Schedule with Equivalent Units Production Report Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Production Report Example Section 1: Quantity Schedule with Equivalent Units

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Production Report Example Section 1: Quantity Schedule with Equivalent Units

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Section 2: Compute cost per equivalent unit Production Report Example`

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Production Report Example Section 2: Compute cost per equivalent unit $77,000 ÷ 4,960 units = $ (rounded)

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Production Report Example $71,000 ÷ 4,900 units = $ (rounded) Section 2: Compute cost per equivalent unit

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Section 3: Cost Reconciliation Production Report Example

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 4,800 $ Production Report Example Section 3: Cost Reconciliation

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill 160 $ Production Report Example Section 3: Cost Reconciliation 100 $14.49 All costs accounted for

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Operation Costing Operation costing employs some aspects of both job-order and process costing. Conversion costs assigned to batches as in process costing. Material Costs Charged to batches as in job-order costing. Job-order Costing Process Costing Operation Costing (Products produced in batches)

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill I’m going to process some leisure time, unless you want to see some journal entries. End of Chapter 4