1 Brenda Mallouk Process Cost System Management Accounting One

2 Brenda Mallouk Product Costing Type of System Job Cost Process Cost Actual M. L. & O/H Actual M & L Predetermined Overhead Standard M. L. & O/H Collecting the Cost

3 Brenda Mallouk Process Cost System What Is It?  Method of accumulating costs by process or operation  Products flow sequentially from one department to the next  A work in process account is maintained for each department

4 Brenda Mallouk Work-in-Process, Layout Finished Goods Inventory Flow of Costs For Multiprocessing Direct Material Direct Labour Applied Mfg. Overhead Mfg. Overhead Cost of goods completed and moved out for sale Cost of Completed Goods ready for sale Work-in-Process, Press Direct Labour Transferred-in Cost of Goods Sold Cost of Goods removed when sold Cost of Goods which have been sold Step One Step Two Step Five Step Four Transferred to Press Dept. Direct Material Mfg. Overhead Direct Labour Transferred-in Work-in-Process, Welding Transferred to Welding Dept. Step Three

5 Brenda Mallouk Process Cost Valuation End of period requirements -- - Value of ending work-in-process inventory - Value goods transferred to next department ? Average Cost ? FIFO How

6 Brenda Mallouk Where are the Units? B Started,Completed C D Next Month Last Month TO This month June 1June 30 May July A B DE

7 Brenda Mallouk Average Cost Equivalent Production A + B + C + D OR TO + D

8 Brenda Mallouk FIFO Cost Equivalent Production Transferred Out (TO - A) + D B + C + D OR From Opening Inventory From Current Production +

9 Brenda Mallouk Unit Costs Average Cost FIFO Cost (Inventory Value + Cost Added) / EP (Cost Added) / EP How To Calculate

10 Brenda Mallouk Shrinkage, Evaporation, Spoilage and Waste Loss from Normal spoilage. (amount expected) Loss from Abnormal spoilage (unexpected amount) Considered a product cost and and is absorbed (added) to the cost of the good units produced. Treated as a period cost and is expensed in the period in which it occurred. Item Accounting Treatment

11 Brenda Mallouk The following activity took place in the final department during January: Work-in-Process, January 1 1,400 Units transferred in from Prior Department14,000 Units spoiled700 Units transferred out to Finished Goods11,200 Additional material is added at the beginning of the process in the final department. The work-in-process inventory was 70% complete as to conversion on January 1 and 40% complete as to conversion on January 31. All spoilage was discovered at final inspection before the units were transferred to finished goods. 560 of the units spoiled were considered normal.

12 Brenda Mallouk The company uses the average cost method. The equivalent units and the current costs per equivalent unit of production for each cost factor are as follows: Equivalent Units Current Costs/ Equivalent Unit Cost of prior departments15,400 $ 5.00 Raw materials15, Conversion cost13, $ 9.00 Calculate a.The cost of production transferred to finished goods inventory. b.The cost assigned to work-in-process inventory on on January 31. c.The cost associated with the abnormal spoilage.

13 Brenda Mallouk Job-order costing Costs accumulated by the job. Work in process has a job-cost sheet for each job. Heterogeneous products Jobs built to customer order. Process costing Costs accumulated by department or process. Work in process has a production report for each batch of products. Homogeneous products. Units continuously produced for inventory. Comparison of Job-Order Costing and Process Costing