Chapter 7 Process Costing

7-2 Learning Objectives 1. Explain the concept and purpose of equivalent units. 2. Assign costs to products using a five-step process. 3.Assign costs to products using weighted-average costing. 4. Prepare and analyze a production cost report. 5.Assign costs to products using first-in, first-out (FIFO) costing. 6.Analyze the accounting choice between FIFO and weighted-average costing. 7. Know when to use process or job costing. 8.Compare and contrast operation costing with job costing and process costing.

7-3 Job versus Process Costing Direct Materials, Direct Labor, and Factory Overhead Job 121 Job 122 Job 123 Finished Goods Cost of Goods Sold Direct Materials, Direct Labor, and Factory Overhead Process A Process B Process C Finished Goods Cost of Goods Sold Job Costing Process Costing

7-4 Equivalent Units 1. Explain the concept and purpose of equivalent units. When manufacturing a product using a continuous process we assume all units have the same costs. Some units are not completed Equivalent units Problem: Answer:

7-5 Equivalent Units Continued Number of units that could have been completed with the given costs. Equivalent Units (EqU) Number of units in process EqU=x Percentage of completion = x 1=

7-6 Equivalent Units Continued Jerilee has a big weekend planned. She works Friday night, plans to go to the football game Saturday, and wants to go to the fair on Sunday. She determines she will have ten hours to study. She can do all of her Accounting, all of her Spanish, or some Accounting and some Spanish. Jerilee has 10 hours of Accounting and 10 hours of Spanish. Problem: Answer:

7-7 Equivalent Units Continued She can do her Accounting Accounting10x100%=10 Spanish0x0=0 10 One class finished She can do her Spanish Accounting0x0=0 Spanish10x100%=10 One class finished

7-8 Equivalent Units Continued She can do half of each Accounting10x50%=5 Spanish10x50%=5 10 Equivalent to one class finished Or a combination Accounting10x60%=6 Spanish10x40%=4 10 Equivalent to one class finished

7-9 Product Costing in a Process Industry 2. Assign costs to products using a five-step process. Five steps to Costing a Product 1. Measure the physical flow of resources. 2. Compute the equivalent units of production. 3. Identify the product costs for which to account. 4. Compute the costs per equivalent unit. 5. Assign product cost to batches of work.

7-10 Assumptions about Costs in WIP Current PeriodBeginning Balance Current PeriodPrior Period How do we account for beginning balance and current period activities and costs? We combine beginning balance and current period activities and costs. Unit costs are aweighted average One possibility:weighted average

7-11 We separate prior period and current period activities and trace the beginning balance and current period costs to the respective units. Assumptions about Costs in WIP Continued Prior PeriodCurrent Period Another possibility: We assume units from last period are completed and transferred out first. First-in, First-out (FIFO) Prior PeriodCurrent Periodthen FIFO

7-12 Process Costing: an Example Bart’s Beverages Blending Department Units Materials Costs Conversion Costs WIP October 11,000 a $1,113$194 October activity5,00022,48714,056 Total6,000$23,600$14,250 5,500Transferred out WIP October b Total6,000 a 25% complete with respect to materials and 10% with respect to conversion costs. b 80% complete with respect to materials and 40% with respect to conversion costs.

7-13 Process Costing: Weighted Average 1. Measure the physical flow of resources. 2. Compute the equivalent units of production. 3. Identify the product costs for which to account. 4. Compute the costs per equivalent unit. 5. Assign product cost to batches of work. Use the five step process. Weighted Average L.O. 3 Assign costs to products using weighted-average costing.

7-14 Step 1: Measure the physical flow of resources. BB + Units Started = Units Transferred Out EB + 1,000 a +5,000 6,000 Total gallons to account for =5, b 6,000 Total gallons accounted for a 25% complete with respect to materials and 10% with respect to conversion costs. b 80% complete with respect to materials and 40% with respect to conversion costs.

7-15 Step 2: Compute the equivalent units of production. 5,500Transferred out5,500 Work in process, October a 200 b Equivalent units5,9005,700 Physical Units MaterialsConversion Equivalent Units a 500 units x 80% b 500 units x 40%

7-16 Step 3: Identify costs for which to account. Total Costs Materials Costs Conversion Costs WIP October 1 $1,307 $1,113 $194 October costs 36,543 22,487 14,056 Total $37,850 $23,600 $14,250

7-17 Step 4: Compute the costs per equivalent unit. TotalMaterialsConversion $1,307$1,113$194WIP, October 1 22,48714,05636,543October costs $4.00$2.50Cost per EqU $37,850$23,600$14,250Total costs (Step 3) 5,9005,700Total EqU (Step 2)

7-18 Step 5: Assign product cost to batches of work. TotalMaterialsConversion Transferred out WIP, October 31 $4.00$2.50Cost per EqU (Step 4) 5,500 EqU (Step 2) $4.00$2.50Cost per EqU (Step 4) EqU (Step 2) $35,750$22,000$13,750Costs transferred out 2,100Costs WIP, October 31$1,600$500 $37,850Total cost assigned$23,600$14,250

7-19 The Production Cost Report L.O. 4 Prepare and analyze a production cost report. A report that summarizes production and costs for a period Used by managers to monitor production and cost flows Production cost report Why?

7-20 Month Ending October 31 The Production Cost Report Blending Department MaterialsConversionPhysicalUnits to be accounted for Units accounted for WIP beginning inventory1,000 Completed and transferred out 5,500 WIP ending inventory a 200 b Total units to account for6,0005,9005,700 Total units to account for6,000 Units Equivalent Units a 500 units x 80% b 500 units x 40% Units started in this period5,000 Weighted Average

7-21 The Production Cost Report Continued Costs to be accounted for Costs assigned to units transferred out35,75022,000 e 13,750 f Costs assigned to WIP ending inventory2,1001,600 g 500 h Total costs accounted for$37,850$23,600$14,250 WIP beginning inventory$1,3071, Total costs to be accounted for$37,850$23,600$14,250 Current period costs22,48714,05636,543 MaterialsConversionTotalCosts to be accounted for Costs per equivalent unit$4.00 c $2.50 d c $23,600/5,900 units d $14,250/5,700 units e $4.00 x 5,500 units f $2.50 x 5,500 units g $4.00 x 400 units h $2.50 x 200 units

7-22 Assigning Costs using FIFO L.O. 5 Assign costs to products using first-in, first-out (FIFO) costing. Use the same five step process. 1. Measure the physical flow of resources. 2. Compute the equivalent units of production. 3. Identify the product costs for which to account. 4. Compute the costs per equivalent unit. 5. Assign product cost to batches of work. FIFO

7-23 Step 1: Measure the physical flow of resources. BB + Units Started = Units Transferred Out EB + 1,000 a +5,000 6,000 Total gallons to account for =5, b 6,000 Total gallons accounted for a 25% complete with respect to materials and 10% with respect to conversion costs. b 80% complete with respect to materials and 40% with respect to conversion costs. Exactly the same as weighted average.

7-24 Step 2: Compute the equivalent units of production. 5,500Transferred out WIP October c 200 d Equivalent units5,6505,600 Physical Units MaterialsConversion Equivalent Units From WIP October 11, a 900 b Units started and completed in October 4,500 c 500 units x 80% d 500 units x 40% a 1,000 units x 75% b 1,000 units x 90%

7-25 Step 3: Identify costs for which to account. Total Costs Materials Costs Conversion Costs WIP October 1 $1,307 $1,113 $194 October costs 36,543 22,487 14,056 Total $37,850 $23,600 $14,250 Exactly the same as weighted average.

7-26 Step 4: Compute the costs per equivalent unit. TotalMaterialsConversion $22,487$14,056$36,543October costs $3.98$2.51 Cost per equivalent unit 5,6505,600 Equivalent units (Step 2) Note: Include only current period costs and activities.

7-27 Step 5: Assign product cost to batches of work. TotalMaterialsConversion Transferred out Units in WIP October 1 $1,307$1,113$194 Complete beginning WIP Prior period costs EU (Step 2) [A] $3.98$2.51Cost per EU (Step 4) [B] Cost to complete beginning WIP [A x B] 5,2442,9852,259 Units started and completed in October 4,500 $3.98$2.51Cost per EU [B] Cost of units started, completed and transferred out [B x C] 29,20517,91011,295 $22,008$13,748 Total cost of units transferred out $35,756 Number of units [C]

7-28 Step 5: Assign product cost to batches of work continued TotalMaterialsConversion Transferred out* WIP, October 31 $3.98$2.51Cost per EU (Step 4) EU (Step 2) 2,094Costs WIP, October 31$1,592$502 $37,850Total cost assigned$23,600$14,250 * From previous page $22,008* $13,748* $35,756*

7-29 Comparison of FIFO and Weighted Average L.O. 6 Analyze the accounting choice between FIFO and weighted-average costing. Separates prior period and current period activities and traces the prior period and current period costs to the respective units. FIFO Does not separate prior period and current period activities and costs. Weighted Average

7-30 Comparison of FIFO and Weighted Average Continued Bart’s Beverages Blending Department FIFO Weighted Average Costs to account for $37,850 Cost of goods transferred out$35,756 2,094Costs WIP, October 31 $37,850Costs accounted for $35,750 2,100 $37,850 Cost per EU Materials Conversion $3.98 $2.51 $4.00 $2.50

7-31 L.O. 7 Know when to use process or job costing. Choosing between Job and Process Costing Job CostingProcess Costing An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods. An accounting system used when identical units are produced through a series of uniform production steps. Custom Homes Movies Services Cornflakes Beverages Paint

7-32 Operation Costing Job CostingProcess Costing An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods. An accounting system used when identical units are produced through a series of uniform production steps. Operation Costing A hybrid costing system often used in manufacturing goods that have some common characteristics plus some individual characteristics. Automobiles Computers Clothing L.O. 8 Compare and contrast operation costing with job costing and process costing.

7-33 Chapter 7 Finalmente! Finally!