1. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-1 13 Process Costing

2. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-2 13  Chemicals  Oil refining  Textiles  Paints  Flour  Canneries  Rubber  Steel  Food processing  Chemicals  Oil refining  Textiles  Paints  Flour  Canneries  Rubber  Steel  Food processing Types of Businesses Using Process Costing

3. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-3 13 Direct labor costs are usually small in comparison to other product costs in process cost systems. Direct Materials Type of Product Cost Dollar Amount Direct Labor Factory Overhead Characteristics of Process Costing

4. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-4 13 So, direct labor and factory overhead are often combined into one product cost called conversion. Direct Materials Type of Product Cost Dollar Amount Direct labor costs are usually small in comparison to other product costs in process cost systems. Conversion Characteristics of Process Costing

5. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-5 13 Job costing  Costs accumulated by the job.  Work in process has a job cost record for each job.  Many unique, high cost jobs.  Jobs built to customer order. Job costing  Costs accumulated by the job.  Work in process has a job cost record for each job.  Many unique, high cost jobs.  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.  A few identical, low cost products.  Units continuously produced for inventory in automated process. Process costing  Costs accumulated by department or process.  Work in process has a production report for each batch of products.  A few identical, low cost products.  Units continuously produced for inventory in automated process. Comparing Job Costing and Process Costing

6. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-6 13 Work in process contains individual jobs in a job cost system. Direct Materials Finished Goods Cost of Goods Sold Direct Labor Factory Overhead Work in Proces s Comparing Job Costing and Process Costing

7. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-7 13 Finished Goods Cost of Goods Sold Products Work in process contains homogenous products in a process cost system. Direct Labor & Overhead ( Conversion) Direct Materials Comparing Job Costing and Process Costing

8. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-8 13 Same objective: 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 Same objective: 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 Comparing Job Costing and Process Costing

9. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-9 13 Process costing accumulates costs by process or department and then assigns them to a large number of nearly identical products. Characteristics of Process Costing Continuous mass production Similar processes Homogeneous products Unit cost = Process costs Equivalent units produced

10. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-10 13 Same objective: 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 Equivalent units is a concept expressing partially complete units as a smaller number of fully complete units. Cost per equivalent unit = Manufacturing costs for a period Equivalent units for the period We must now deal with the concept of equivalent units. Equivalent Units

11. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-11 13 + = So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. Two one-half filled cups are equivalent to one full cup. Equivalent Units 1

12. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-12 13 During its first month of business, Jones 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 Jones have for the month? a. 10,000 b. 11,500 c. 13,500 d. 15,000 During its first month of business, Jones 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 Jones have for the month? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Equivalent Units

13. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-13 13 During its first month of business, Jones 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 Jones have for the month? a. 10,000 b. 11,500 c. 13,500 d. 15,000 During its first month of business, Jones 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 Jones have for the month? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Equivalent Units

14. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-14 13 Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units

15. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-15 13 Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’ cost per equivalent 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 Equivalent Units

16. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-16 13  Analysis of physical units  Calculation of equivalent units  Determination of total costs to account for  Computation of unit costs  Assignment of total costs  Analysis of physical units  Calculation of equivalent units  Determination of total costs to account for  Computation of unit costs  Assignment of total costs Steps in Determining Process Costs These five steps are the basis for the production cost report as we will see in the following examples.

17. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-17 13 The weighted average method...  Makes no distinction between work done in the prior period and work done in the current period.  Blends together units and costs in beginning inventory with units and costs in the current period. Assigning Costs Using Weighted-Average Costing Let’s look at an example using data from the Molding Department of Hsu Toy Company for the month of June.

18. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-18 13 Assigning Costs Using Weighted-Average Costing

19. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-19 13 First let’s look at a flow chart showing the blending of units in beginning work in process inventory with units started during the month. Assigning Costs Using Weighted-Average Costing

20. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-20 13 Assigning Costs Using Weighted-Average Costing Now let’s examine the five-step process. Beginning Inventory 10,000 units 40,000 units started 50,000 units in process Ending Inventory 6,000 units 44,000 units completed

21. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-21 13 Assigning Costs Using Weighted-Average Costing

22. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-22 13 Assigning Costs Using Weighted-Average Costing Units completed and transferred are 100% complete for material, labor, and overhead.

23. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-23 13 Assigning Costs Using Weighted-Average Costing 60% of 6,000 units 50% of 6,000 units100% of 6,000 units

24. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-24 13 Assigning Costs Using Weighted-Average Costing

25. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-25 13 Assigning Costs Using Weighted-Average Costing

26. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-26 13 $23,500 ÷ 47,000 equivalent units Assigning Costs Using Weighted-Average Costing $45,220 ÷ 47,600 equivalent units $54,000 ÷ 50,000 equivalent units

27. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-27 13 44,000 equivalent units @ $0.50 44,000 equivalent units @ $0.95 Assigning Costs Using Weighted-Average Costing 44,000 equivalent units @ $1.08

28. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-28 13 3,000 equivalent units @ $0.50 Assigning Costs Using Weighted-Average Costing 3,600 equivalent units @ $0.95 6,000 equivalent units @ $1.08

29. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-29 13 Assigning Costs Using Weighted-Average Costing

30. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-30 13 Assigning Costs Using First-In, First-Out (FIFO) Costing Distinguishes between work done in the prior period and work done in the current period. FIFO costing Assumes units in beginning work in process inventory are completed and transferred first.

31. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-31 13 Assigning Costs Using First-In, First-Out (FIFO) Costing Managers can better identify and manage current period costs. Advantages of FIFO costing Inventory costs are more current as current period costs are assigned to units in process and units completed.

32. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-32 13 Let’s revisit the Molding Department of Hsu Toy company for the month of June. We will use the same data as before, but now we will use FIFO costing. Assigning Costs Using FIFO Costing

33. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-33 13 Assigning Costs Using FIFO Costing

34. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-34 13 First let’s look at a flow chart showing the flow of units in beginning work in process inventory and the flow of units started during the month. Assigning Costs Using FIFO Costing

35. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-35 13 Now let’s examine the five-step process. Beginning Inventory 10,000 units 40,000 units started Ending Inventory 6,000 units 44,000 units completed 10,000 units completed 34,000 units completed Assigning Costs Using FIFO Costing

36. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-36 13 Assigning Costs Using FIFO Costing

37. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-37 13 Assigning Costs Using FIFO Costing All material added in prior period for units in beginning WIP 70% of 10,000 units 60% of 10,000 units

38. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-38 13 Assigning Costs Using FIFO Costing 100% of material, labor, and overhead is incurred in June for units started and completed in June.

39. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-39 13 Assigning Costs Using FIFO Costing 60% of 6,000 units 50% of 6,000 units 100% of 6,000 units

40. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-40 13 Assigning Costs Using FIFO Costing

41. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-41 13 Assigning Costs Using FIFO Costing

42. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-42 13 Assigning Costs Using FIFO Costing $44,000 ÷ 40,000 equivalent units $22,440 ÷ 44,000 equivalent units $43,600 ÷ 43,600 equivalent units

43. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-43 13 Assigning Costs Using FIFO Costing

44. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-44 13 Assigning Costs Using FIFO Costing All material added in prior period for beginning WIP 7,000 equivalent units @ $0.51 6,000 equivalent units @ $1.00

45. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-45 13 34,000 equivalent units @ $1.10 34,000 equivalent units @ $0.51 Assigning Costs Using FIFO Costing 34,000 equivalent units @ $1.00

46. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-46 13 Assigning Costs Using FIFO Costing 6,000 equivalent units @ $1.10 3,000 equivalent units @ $0.51 3,600 equivalent units @ $1.00

47. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-47 13 Assigning Costs Using FIFO Costing

48. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-48 13 Which is Better: FIFO or Weighted-Average FIFO costing results in a current period cost that can be used for performance evaluation. If there is no beginning inventory (JIT) or if beginning inventory is small, FIFO and weighted- average produce the same results.

49. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-49 13 Costs Transferred in from Prior Departments Multiple departments in a process result in units and costs that are transferred from a prior department to the current department. These transferred-in costs are treated exactly like a direct material that is added at the beginning of a production process. Multiple departments in a process result in units and costs that are transferred from a prior department to the current department. These transferred-in costs are treated exactly like a direct material that is added at the beginning of a production process.

50. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-50 13 Costs Transferred in from Prior Departments Let’s revisit Tsu Toy Company with the addition of transferred-in units and costs. We will transfer units from the Molding Department to the Finishing Department. The Finishing Department uses:  Conversion cost (a combination of labor and overhead).  The weighted-average method. Let’s revisit Tsu Toy Company with the addition of transferred-in units and costs. We will transfer units from the Molding Department to the Finishing Department. The Finishing Department uses:  Conversion cost (a combination of labor and overhead).  The weighted-average method.

51. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-51 13 Costs Transferred in from Prior Departments

52. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-52 13 Costs Transferred in from Prior Departments

53. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-53 13 Costs Transferred in from Prior Departments 100% complete for material, conversion, and transferred-in units.

54. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-54 13 Costs Transferred in from Prior Departments 50% of 8,000 units Transferred-in units are 100% complete

55. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-55 13 Costs Transferred in from Prior Departments

56. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-56 13 Costs Transferred in from Prior Departments

57. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-57 13 $25,000 ÷ 50,000 equivalent units Costs Transferred in from Prior Departments $54,000 ÷ 54,000 equivalent units $145,570 ÷ 58,000 equivalent units

58. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-58 13 50,000 equivalent units @ $0.50 50,000 equivalent units @ $1.00 Costs Transferred in from Prior Departments 50,000 equivalent units @ $2.5099

59. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-59 13 0 equivalent units @ $0.50 Costs Transferred in from Prior Departments 4,000 equivalent units @ $1.00 8,000 equivalent units @ $2.5099 Rounding Error

60. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-60 13 Costs Transferred in from Prior Departments

61. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-61 13 I’m ready to process some leisure time. End of Chapter 13