4-1 Chapter Four Systems Design: Process Costing

4-2 Similarities Between Job-Order and Process Costing Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost. Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods. The flow of costs through the manufacturing accounts is basically the same in both systems.

4-3 Differences Between Job-Order and Process Costing Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each period. Process costing systems accumulate costs by department. Job-order costing systems accumulate costs by individual jobs. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.

4-4 Process costing is used for products that are: a.Different and produced continuously. b.Similar and produced continuously. c.Individual units produced to customer specifications. d.Purchased from vendors. Quick Check

4-5 Process costing is used for products that are: a.Different and produced continuously. b.Similar and produced continuously. c.Individual units produced to customer specifications. d.Purchased from vendors. Quick Check

4-6 Processing Departments Any unit in an organization where materials, labor or overhead are added to the product. The activities performed in a processing department are on all units of production. Furthermore, the output of a processing department must be The activities performed in a processing department are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogeneous.

4-7 Learning Objective 1 Record the flow of materials, labor, and overhead through a process cost system.

4-8 Comparing Job-Order and Process Costing Finished Goods Cost of Goods Sold Work in Process Direct Materials Direct Labor Manufacturing Overhead

4-9 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

4-10 Comparing Job-Order and Process Costing Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Processing Department Costs are traced and applied to departments in a process cost system. Direct Materials

4-11 T-Account and Journal Entry Views of Cost Flows For purposes of this example, assume there are two processing departments – Departments A and B. We will use T-accounts and journal entries.

4-12 Raw Materials Process Cost Flows (in T-account form) Work in Process Department B Work in Process Department A Direct Materials

4-13 Process Cost Flows (in journal entry form)

4-14 Process Cost Flows (in T-account form) Work in Process Department B Work in Process Department A Wages Payable Direct Materials Direct Labor

4-15 Process Costing (in journal entry form)

4-16 Process Cost Flows (in T-account form) Work in Process Department B Work in Process Department A Manufacturing Overhead Overhead Applied to Work in Process Applied Overhead Direct Labor Direct Materials Direct Labor Direct Materials Actual Overhead

4-17 Process Costing (In journal entry form)

4-18 Process Cost Flows (in T-account form) 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

4-19 Process Costing (in journal entry form)

4-20 Finished Goods Process Cost Flows (in T-account form) Work in Process Department B Cost of Goods Manufactured Direct Materials Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Manufactured

4-21 Process Costing (in journal entry form)

4-22 Finished Goods Cost of Goods Sold Process Cost Flows (in journal entry form) Work in Process Department B Cost of Goods Manufactured Direct Materials Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold Cost of Goods Manufactured

4-23 Process Costing (in journal entry form)

4-24 Equivalent Units of Production Equivalent units are the product of the number of partially completed units and the percentage completion of those units. We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory.

4-25 Equivalent Units – The Basic Idea Two half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 complete units. + = 1

4-26 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 Quick Check

4-27 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 10,000 units + (5,000 units × 0.30) = 11,500 equivalent units Quick Check

4-28 Calculating Equivalent Units Equivalent units can be calculated two ways:  The First-In, First-Out Method – FIFO is covered in the appendix to this chapter.  The Weighted-Average Method – This method will be covered in the main portion of the chapter.

4-29 Learning Objective 2 Compute the equivalent units of production using the weighted-average method.

4-30 Equivalent Units of Production Weighted-Average Method The weighted-average method... Makes no distinction between work done in prior or current periods. Blends together units and costs from prior and current periods. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending work in process inventory.

4-31 Treatment of Direct Labor Direct labor costs may be small in comparison to other product costs in process cost systems. Direct Materials Type of Product Cost Dollar Amount Direct Labor Conversion

4-32 Treatment of Direct Labor Type of Product Cost Dollar Amount Conversion Direct labor and manufacturing overhead may be combined into one product cost called conversion. Direct Materials Direct labor costs may be small in comparison to other product costs in process cost systems.

4-33 Weighted-Average Example Double Diamond Skis reported the following activity in Shaping and Milling Department for the month of May:

4-34 The first step in calculating the equivalent units is to identify the units completed and transferred out of the Department in May (4,800 units) Weighted-Average Example

4-35 The second step is to identify the equivalent units of production in ending work in process with respect to materials for the month (160 units) and add this to the 4,800 units from step one. Weighted-Average Example

4-36 Weighted-Average Example The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month (100 units) and add this to the 4,800 units from step one.

4-37 Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Weighted-Average Example

4-38 Learning Objective 3 Compute the cost per equivalent unit using the weighted-average method.

4-39 Beginning work in process: 200 units Materials: 55% complete $ 9,600 Conversion: 30% complete 5,575 Production started during May5,000 units Production completed during May4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Ending work in process 400 units Materials: 40% complete Conversion: 25% complete Compute and Apply Costs

4-40 Compute and Apply Costs The formula for computing the cost per equivalent unit is : Cost per equivalent unit = Cost of beginning work in process inventory Cost added during the period /Equivalent units of production +

4-41 Here is a schedule with the cost and equivalent unit information. Compute and Apply Costs

4-42 Compute and Apply Costs $356,475 ÷ 4,900 units = $72.75 $378,200 ÷ 4,960 units = $76.25 Here is a schedule with the cost and equivalent unit information.

4-43 Learning Objective 4 Assign costs to units using the weighted- average method.

4-44 Applying Costs

4-45 Applying Costs

4-46 Applying Costs

4-47 Computing the Cost of Units Transferred Out

4-48 Computing the Cost of Units Transferred Out

4-49 Computing the Cost of Units Transferred Out

4-50 Reconciling Costs

4-51 Reconciling Costs

4-52 Operation Costing Operation cost is a hybrid of job-order and process costing because it possesses attributes of both approaches Operation costing is commonly used when batches of many different products pass through the same processing department.

4-53 End of Chapter 4