CHAPTER 3 Process Costing

Difference Between Job-Order and Process Costing Systems Job-Order Costing  Each unique product or batch is considered a job  Manufacturing costs are traced to specific jobs Process Costing  Used when homogenous items are produced  Total costs are divided by total units produced

Process Costing Example

Job-Order Costing System

Process Costing System

Product and Cost Flows Product Flows Through Departments  A product typically passes through multiple departments  Conversion Costs (Labor and Overhead)

Product and Cost Flows Cost Flows Through Accounts  Direct Material  Direct Labor  Manufacturing Overhead  Transferred-in Cost

Flow of Cost Between Processing Departments

Study Break #1 Which one(s) of the following characteristics are associated with a process costing system? a.Heterogeneous products b.Homogeneous products c.Continuous production d.Discontinuous production e.Costs are traced to jobs f.Costs are traced to processing departments Answer: b, c, and f

Study Break #2 The best example of a business requiring a process costing system would be a(n): a.Custom cabinet shop b.Antique furniture restorer c.Soap manufacturer d.Automobile repair shop Answer: c. Soap manufacturer

Study Break #3 The costs in a process cost system are traced to: a.Specific jobs b.Specific customers c.Specific company administrators d.Specific production departments Answer: d. Specific production departments

Calculating Unit Cost Equivalent Units  Partially completed units are converted to a comparable number of completed units

Equivalent units – Material and Converision costs

Example Exercise #1 McMillian Tire Company produces tires used on small trailers. The month of June ended with 300 tires in process, 85% complete as to direct materials and 50% complete as to conversion costs; 2,500 tires were transferred to finished goods during the month and 2,300 were started during the month. The beginning WIP inventory was 65% complete as the direct materials and 45% complete as to conversion costs. 1.Determine the denominators to be used in the calculations of cost per equivalent unit for materials and conversion costs.

Example Exercise #1 Solution Materials  Units completed2,500  Equivalent units (300*85%) 255 2,755 units Labor  Units completed2,500  Equivalent units (300*50%) 150 2,650 units

Calculating Unit Cost Cost Per Equivalent Unit  Average unit cost  Formula Cost in Beginning WIP + Cost incurred in current period Units completed + Equivalent units in Ending WIP

Example Exercise #2 The balance in beginning WIP at Bing Rubber Company for direct labor was $135,000. During the month of March, an additional $650,000 of direct labor was incurred, and 25,000 pounds of rubber were produced. At the end of March, 8,000 pounds of rubber were in process and the units were 50% complete. At the start of March, the company had 5,000 pounds of rubber that were 30% complete. 1.Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process.

Example Exercise #2 Solution Direct Labor  Beginning WIP$135,000  March labor$650,000  Total Labor Cost$785,000 Units  Units completed 25,000  Equivalent units (8,000*50%) 4,000  Total Units 29,000 Cost per Equivalent Unit  $785,000 / 29,000 pounds = $27.07 per pound

Production Cost Report  Reconciliation of Units  Reconciliation of Costs  Details of Cost per Equivalent Unit Calculations

Reconciliation of Units

Reconciliation of Costs

Basic Steps in Process Costing  Account for the number of physical units  Calculate the cost per equivalent unit for materials, labor, and overhead  Assign cost to items completed and items in ending Work in Process  Account for the amount of product cost

Dealing with Transferred-In Cost  Process Costing Systems generally use multiple processes  Items completed in one processing department, costs are transferred to the next department  When units are completed in the final process, the costs are transferred to finished goods

Process Costing and Incremental Analysis Incremental Analysis  Compare change in revenue with change in cost Process Costing  Utilizes an average of fixed and variable costs  Could impact decision making when considering additional production

Full and Incremental Cost