Chapter 4 Systems Design: Process Costing

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin 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., 2005 McGraw-Hill /Irwin Types of Costing Systems Used to Determine Product Costs Job-order Costing Process Costing Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin 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 the 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 the key document. Unit costs are computed by department. Differences Between Job-Order and Process Costing

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Processing Department 1 Processing Department 2 Processing Department 3 Finished Goods Start Basic raw materials Processing costs Partially completed goods Processing costs Completed goods Processing costs Sequential Processing Departments

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Processing Department 1 Processing Department 2 Processing Department 3 Finished Goods Start Basic raw materials Processing costs Partially completed goods Processing costs Completed goods Processing costs Processing Department A Parallel Processing Departments

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs Finished Goods Cost of Goods Sold Direct Labor ProcessingDepartmentProcessingDepartment Direct Material Manufacturing Overhead

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Raw Materials Purchases Direct Material Flow of Materials, Labor and Overhead Costs Indirect Material Work in Process Finishing Department Work in Process Mixing Department Direct Material Other Overhead Manufacturing Overhead Indirect Material ActualApplied

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Wages Payable Direct Material Flow of Materials, Labor and Overhead Costs Direct Labor Indirect Labor Other Overhead Manufacturing Overhead Indirect Material ActualApplied Indirect Labor Work in Process Finishing Department Work in Process Mixing Department Direct Material Direct Labor

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Wages Payable Direct Material Flow of Materials, Labor and Overhead Costs Direct Labor Indirect Labor Overhead Applied to Work in Process Other Overhead Manufacturing Overhead Indirect Material ActualApplied Indirect Labor Work in Process Finishing Department Work in Process Mixing Department Direct Material Direct Labor Applied Overhead

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs Now, let’s transfer the partially completed goods from the Mixing Department to the Finishing Department.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs Direct Material Direct Labor Applied Overhead Direct Material Direct Labor Applied Overhead Transferred to Finishing Transferred from Mixing Work in Process Finishing Department Work in Process Mixing Department

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs The goods have been completed in the Finishing Department and will be transferred to Finished Goods Inventory when they are ready to be sold.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Finished Goods Cost of Goods Sold Flow of Materials, Labor and Overhead Costs Direct Material Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold Cost of Goods Manufactured Work in Process Finishing Department

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Materials, Labor, and Overhead Cost Entries

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Flow of Materials, Labor and Overhead Costs

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. It is the concept of expressing partially completed products as a smaller number of fully completed units. += Two one-half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 completed units.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Quick Check

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Quick Check

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin 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 Equivalent Units of Production

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Quick Check

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit Quick Check

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Weighted Average Method Using the weighted-average method, equivalent units will always be calculated as follows:

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Weighted Average Method Matrix, Inc. reported the following activity in Mixing Department for the month of June:

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Equivalent units are calculated as follows: Weighted Average Method

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Equivalent units are calculated as follows: Weighted Average Method

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Equivalent units are calculated as follows: Weighted Average Method

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Equivalent units are calculated as follows: Weighted Average Method Equivalent units of production always equals: Units completed and transferred Units completed and transferred + Equivalent units remaining in work in process + Equivalent units remaining in work in process Equivalent units of production always equals: Units completed and transferred Units completed and transferred + Equivalent units remaining in work in process + Equivalent units remaining in work in process

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin 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 Method MaterialsMaterials 5,400 Units Completed 540 Equivalent Units 900 × 60% 5,940 Equivalent units of production

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin 6,000 Units Started 5,400 Units Completed 270 Equivalent Units 900 × 30% 5,670 Equivalent units of production Weighted Average Method ConversionConversion Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 30% Complete 5,100 Units Started and Completed

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Production Report Section 1 Section 2 Section 3  A computation of cost per equivalent unit.  Quantity schedule with computation of equivalent units.  A reconciliation of cost flows for the period.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin  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.  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., 2005 McGraw-Hill /Irwin Work in process, May 1: 200 units Materials:55% complete. $ 9,600 Conversion:30% complete. 5,575 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$ 368,600 Conversion cost 350,900 Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete. Work in process, May 1: 200 units Materials:55% complete. $ 9,600 Conversion:30% complete. 5,575 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$ 368,600 Conversion cost 350,900 Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete. Cost Production Report Example

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Production Report Example Section  : Quantity Schedule with Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Section  : Quantity Schedule with Equivalent Units Production Report Example

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Production Report Example Section  : Compute cost per equivalent unit

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin $378,200 ÷ 4,960 units = $76.25 Production Report Example Section  : Compute cost per equivalent unit

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin $356,475 ÷ 4,900 units = $72.75 Section  : Compute cost per equivalent unit Production Report Example

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin Production Report Example Section  : Cost Reconciliation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin 4,800 $ Production Report Example Section  : Cost Reconciliation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin 160 $ $72.75 All costs accounted for Section  : Cost Reconciliation Production Report Example

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill /Irwin End of Chapter 4