COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 1 Chapter 6 Product and Service Costing: A Process Systems Approach

2 Study Objectives 1.Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report. 2.Describe process costing for settings without beginning or ending work-in- process inventories. 3.Define equivalent units, and explain their role in process costing. 4.Prepare a departmental production report using the FIFO method. 5.Prepare a departmental production report using the weighted average method. 6.Prepare a departmental production report with transferred-in goods and changes in output measures. 7.Describe the basic features of operation costing. 8.Explain how spoilage is treated in a process-costing system.

3 Process-Costing Systems: Basic Operational and Cost Concepts

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7 1.Homogeneous units pass through a series of similar processes. 2.Each unit in each process receives a similar dose of manufacturing costs. 3.Manufacturing costs are accumulated by a process for a given period of time. 4.There is a work-in-process account for each process. Basic features of a process-costing system continued

8 Process-Costing Systems: Basic Operational and Cost Concepts 5.Manufacturing cost flows and the associated journal entries are generally similar to job- order costing. 6.The departmental production report is the key document for tracking manufacturing activity and costs. 7.Unit costs are computed by dividing the departmental costs of the period by the output of the period. Basic features of a process-costing system (con’t)

9 Process Costing With No Beginning or Ending Work-in-Process Inventories Services that are homogeneous and repetitively produced can use the process- costing approach. Examples: check processing in a bank, changing oil, dental cleaning, surgical procedures JIT manufacturing firms minimize inventories and strive to reduce work-in-process inventories to insignificant levels.

10 Process Costing With Ending Work-in-Process Inventories

11 Process Costing With Ending Work-in-Process Inventories

12 Process Costing With Ending Work-in-Process Inventories Analysis of the flow of physical units Calculation of equivalent units Computation of unit cost Valuation of inventories (goods transferred out and ending work in process) Cost reconciliation Cost of Production Report

13 Process Costing With Ending Work-in-Process Inventories Nonuniform application of productive inputs

14 FIFO Costing Method Under the FIFO costing method, the equivalent units and manufacturing costs in beginning work in process are excluded from the current-period unit cost calculation. Thus, FIFO recognizes that the work and costs carried over from the prior period legitimately belong to that period.

15 FIFO Costing Method

16 FIFO Costing Method Step 1: Physical Flow Analysis

17 FIFO Costing Method Step 2: Calculation of Equivalent Units

18 Step 3: Computation of Unit Cost FIFO Costing Method Unit direct materials cost= $12,600 ÷ 70,000 = $0.18 Unit conversion cost= $3,050 ÷ 61,000 = $0.05 Unit cost= Unit direct materials + Unit conversion cost = $ $0.05 = $0.23 per ounce

19 Step 4: Valuation of Inventories FIFO Costing Method

20 Step 5: Cost Reconciliation FIFO Costing Method

21 FIFO Costing Method

22 FIFO Costing Method

23 Weighted Average Costing Method Step 1: Physical Flow Analysis

24 Step 2: Calculation of Equivalent Units Weighted Average Costing Method

25 Step 3: Computation of Unit Cost Weighted Average Costing Method Unit direct materials cost= ($1,000 + $12,600) ÷ 80,000 = $0.17 Unit conversion cost= ($350 + $3,050) ÷ 68,000 = $0.05 Unit cost= Unit direct materials + Unit conversion cost = $ $0.05 = $0.22 per completed unit

26 Weighted Average Costing Method Step 4: Valuation of Inventories Cost of goods transferred out= $0.22 × 60,000 = $13,200 Direct materials: $0.17 × 20,000$3,400 Conversion costs: $0.05 × 8, Total cost$3,800

27 Weighted Average Costing Method Step 5: Cost Reconciliation

28 Weighted Average Costing Method

29 Weighted Average Costing Method

30 FIFO compared with Weighted Average Weighted Average Costing Method

31 Treatment of Transferred-in Goods

32 Step 1: Physical Flow Analysis Treatment of Transferred-in Goods

33 Treatment of Transferred-in Goods Step 2: Calculation of Equivalent Units

34 Treatment of Transferred-in Goods Unit transferred-in cost= ($800 + $13,200) ÷ 280,000 = $0.05 Unit direct material cost= ($300 + $2,500) ÷ 280,000 = $0.01 Unit conversion costs= ($180 + $5,000) ÷ 259,000 = $0.02 Unit cost= $ $ $0.02 = $0.08 Step 3: Computation of Unit Cost

35 Treatment of Transferred-in Goods Step 4: Valuation of Inventories Cost of goods transferred out= $0.08 × 250,000 = $20,000 Transferred-in materials: $5.05 × 30,000$1,500 Direct materials: $0.01 × 30, Conversion costs: $0.02 × 9, Total cost$1,980

36 Treatment of Transferred-in Goods

37 Treatment of Transferred-in Goods

38 Operation Costing Operation costing –A blend of job-order and process-costing procedures Job-order procedures to assign direct material costs to batches Process-costing procedures to assign conversion costs –Applied to homogeneous products

39 Operation Costing

40 Operation Costing

41 Operation costing example Operation Costing

42 The following costs are collected from work orders: Operation costing example Operation Costing

43 1.Work in Process—Picking4,000 Materials4,000 2.Work in Process—Picking1,000 Conversion Costs Applied1, Work in Process—Encapsulating5,000 Work in Process—Picking 5,000 4.Work in Process—Encapsulating3,000 Conversion Costs Applied3,000 Operation Costing Operation costing example continued

44 5.Work in Process—Bottling8,000 Work in Process—Encapsulating8,000 6.Work in Process—Bottling1,500 Conversion Costs Applied1,500 7.Finished Goods9,500 Work in Process—Bottling9,500 The journal entries for Work Order #101 are not shown but would follow a similar pattern. Operation Costing Operation costing example

45 Appendix: Spoiled Units BWIP – April 1 100,000 pounds, 40% complete (conversion) Direct materials$20,000 Direct labor10,000 Overhead30,000 EWIP – April 30 50,000 pounds, 60% complete (conversion)

46 Appendix: Spoiled Units Completed and transferred out: 360,000 pounds Direct materials$211,000 Direct labor100,000 Overhead270,000 April spoilage 10,000 pounds

47 Appendix: Spoiled Units

48 Appendix: Spoiled Units

49 Appendix: Spoiled Units DM unit cost ($20,000 + $211,000) ÷ 420,000$0.55 CC unit cost ($40,000 + $370,000) ÷ 398, Total cost per equivalent unit$1.58 Cost of goods transferred out: Good units $1.58 × 360,000$568,800 Spoiled units ($0.55 × 10,000) + ($1.03 × 8,000) 13,740 Total cost per equivalent unit$582,540 Cost of ending work in process: ($0.55 × 50,000) + ($1.03 × 30,000)$58,400

50 Appendix: Spoiled Units

51 Appendix: Spoiled Units Abnormal spoilage

52 Appendix: Spoiled Units Abnormal spoilage

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan 53 End Chapter 6