© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-1 PROCESS COSTING Chapter 18

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-2 Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product. Process Costing Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-3 Job Costing Custom orders Unique products Low production volume High product flexibility Low to medium standardization of labor and material Process Costing Repetitive operations Identical products High production volume Low product flexibility High standardization of labor and material Comparing Job and Process Costing

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-4 Direct Materials Finished Goods Cost per unit for each job Direct Labor Factory Overhead Jobs The Work in Process account consists of individual jobs in job costing. Job and Process Costing

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-5 Direct Materials Finished Goods Direct Labor Factory Overhead Processes The Work in Process account consists of specific processes in process costing. Cost per unit processed Job and Process Costing

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-6 Same objective: to 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 Job and Process Costing Similarities

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-7 Work in Process Assembly Labor Materials Indirect Finished Goods Factory Overhead Direct Delivered to Customers Applied Overhead Work in Process Packaging Work in Process Accounts — The Key to Process Costing

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-8 Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. Computing Unit Cost

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-9 Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. If partially complete units remain in process, we must use equivalent units as the divisor to obtain unit costs. Computing Unit Cost Costs are accumulated for a period of time by process or department.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Two one-half full pitchers are equivalent to one full pitcher. + = Process Costing and Equivalent Units 1

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Process Costing and Equivalent Units For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Cost per equivalent unit = Product costs for the period Equivalent units for the period Cost Per Equivalent Unit

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Cost Per Equivalent Unit

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per 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 Cost Per Equivalent Unit

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equivalent units may be different for material and labor and overhead at different stages of a process. At completion of Stage 1 of the process, material is 40% complete, but labor and overhead are only 25% complete. Stage 1 40% of Material 25% of Labor and Overhead Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead + + = = 100% 50% Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Stage 3 50% of Labor and Overhead The process is now complete. Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Owl Inc uses FIFO process costing in its Fabrication Department where a product called Strata is made. Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Material is added at the beginning of the process so it is always 100% complete. Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Overhead is applied on the basis of labor, so both are at the same percentage of completion. Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Physical Flow of Units

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

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Since materials are added at the beginning of the process, no additional materials are necessary to complete the beginning inventory. Computing Equivalent Units of Production

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin } 100, ,000 units completed and transferred. Computing Equivalent Units of Production

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

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Since labor and overhead were 40 percent complete in the beginning inventory, 60 percent of the work must be completed in April. Computing Equivalent Units of Production

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin } 100,000 Transferred Computing Equivalent Units of Production

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

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Process Costing and Equivalent Units

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Cost per Equivalent Unit

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. Cost Reconciliation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-34

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-35

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin $ $ $0.50 = $1.10

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 18-37

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin End of Chapter 18