1. Job Order Cost Process Cost
Nature of Process Cost Systems
Similarities and Differences Between Job Order Cost and Process Cost Systems
Job Order Cost
Costs assigned to each job.
Products have unique characteristics. (You can tell one unit from another).
Process Cost
Costs tracked through a series of connected mfg processes or departments … (mixing, baking, packaging etc).
Products are uniform or identical (homogenous) and produced in a large volume.

2. Nature of Process Cost Systems
Process and Job Cost Comparison
Illustration 17-2

3. Nature of Process Cost Systems

4. Nature of Process Cost Systems

5. Nature of Process Cost Systems

6. Nature of Process Cost Systems

7. Nature of Process Cost Systems

8. Nature of Process Cost Systems
One Work In Process Account
Every production dept has it’s own Work-In-Process account.
If you have 5 departments you have 5 “Work-In-Process” accounts

9. Nature of Process Cost Systems
Process Cost Flow
TCorp makes skateboard wheels. Manufacturing consists of two processes: machining and assembly. Machining Dept shapes & drills materials. Assembly Dept assembles & packages the parts.
Illustration 17-5

10. Nature of Process Cost Systems
Material Costs
Fewer materials requisitions.
Materials are used for processes and not specific jobs.
Requisitions are for larger quantities of materials.
Journal entry to record materials used:
Work In Process – Dept 1
12,000
Work In Process – Dept 2
6,000
Raw Materials Inventory
18,000

11. Nature of Process Cost Systems
Factory Labor Costs
Time tickets may be used in both systems.
All labor costs incurred within a production department are a cost of processing.
The journal entry to record factory labor costs:
Work In Process – Dept 1
15,000
Work In Process – Dept 2
19,000
Factory Labor
34,000

12. Nature of Process Cost Systems
Manufacturing Overhead Costs
Objective to allocate overhead to production depts on objective and equitable basis.
Use the activity that “drives” or causes the costs.
Machine time used - primary driver.
W-I-P … Dept 1
40,000
W-I-P … Dept 2
15,000
Factory Overhead
55,000

14. Equivalent Units Costs: Total cost of instruction $ 9,000,000
Illustration: Suppose a professor is asked to compute the cost of instruction per student at your college. The finance dept. provides the following information.
Costs:
Total cost of instruction $ 9,000,000
Student population:
Full-time students
Part-time students ,000
FYI: Part-time students take 60% of the classes of a full-time student during the year.

15. Equivalent Units Costs: Total cost of instruction $ 9,000,000
Illustration: Suppose a professor is asked to compute the cost of instruction per full-time equivalent student at your college. The finance dept. provides the following information.
Costs:
Total cost of instruction $ 9,000,000
Student population:
Full-time students students
Part-time students ,000 students
FYI: Part-time students take 60% of the classes of a full-time student during the year.

16. Equivalent Units Illustration:
To compute the number of FTE students per year:
To compute the Cost of Instruction per “FTE” student:
Total cost of instruction $9,000,000
Number of full-time equivalent students / ,500
$ ,000

17. Equivalent Units of Production (EUP)
A term used to arrive at the cost per unit.
* associated with the units that are not completed at the end of an accounting period (work-in-process).
* indicates how much work was done on the units that are still in-process at the end of a designated period.
* work-in-process inventory at the end of a period are expressed as fully-completed units which gives us the equivalent units of production.
Direct material, direct labor, and factory overhead costs are accumulated for a process for a production period. Once the costs are properly accumulated in the process, we will divide these costs by the equivalent units processed to get the cost per unit for the period.
Equivalent units is a term that refers to the number of units that would have been completed if all of the effort during a period had been applied only to the units started in that period. For example, four thousand units that are sixty percent complete would total two thousand four hundred equivalent units (sixty percent of four thousand is two thousand four hundred).

19. Equivalent Units of Production (EUP)
Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.
2 half full pitchers = 1 full pitcher.
Direct material, direct labor, and factory overhead costs are accumulated for a process for a production period. Once the costs are properly accumulated in the process, we will divide these costs by the equivalent units processed to get the cost per unit for the period.
Equivalent units is a term that refers to the number of units that would have been completed if all of the effort during a period had been applied only to the units started in that period. For example, four thousand units that are sixty percent complete would total two thousand four hundred equivalent units (sixty percent of four thousand is two thousand four hundred). + =

20. Equivalent Units Weighted Average Method
Most widely used method.
Beginning work in process not part of computation.
Units “completed & transferred out” = 100% complete.
Considers the *degree of completion of units in mfg dept’s ending work in process.
(*given to accounting by the mfg dept.)

21. Equivalent Units Weighted Average Method
Illustration: Output of the Packaging Dept consists of:
10,000 units completed and transferred out,
5,000 units in ending W-I-P 70% completed.
Calculate the equivalent units of production.
Completed units: (10,000 units 100% complete) … 10,000 EU
W-I-P Equiv Units: (5,000 units 70% complete) …... 3,500 EU
13,500 Equiv Units of Prod.

23. EUP while still “work-in-process”
Calculate EU assuming 1,000 units “in process”:
W-I-P Mixing
80% of Material
1,000 x 80% complete (materials) = 800 EU as to Materials
35% of Labor and Overhead
1,000 x 35% complete (labor) = 350 EU as to “conversion”
If materials, labor and overhead are added at different rates in the process, the completion percentages will be different. Multiplying different percentages times the unfinished units will result in different equivalent units for materials, labor and overhead.
In this example, we see that material is added before labor and overhead, resulting in a higher completion percentage. This is not unusual as material must be present first before the work can begin. Think about baking cookies. All of the ingredients (materials) are present before the processing begins in the oven.
Once all of the labor and overhead are added to the materials in the process, the units are complete.
The product (bread) is still a work “In Process” The Manufacturing Process is NOT complete.

24. EUP while still “work-in-process”
Calculate EU assuming 1,000 units “in process”:
W-I-P Baking
80% of Material
+ 20% added Direct Materials
1,000 x 100% complete (materials) = 1,000 EU as to Materials
35% of Labor and Overhead
+ 25% added Direct Labor & Mfg Overhead
1,000 x 60% complete (labor) = 600 EU as to “conversion”
If materials, labor and overhead are added at different rates in the process, the completion percentages will be different. Multiplying different percentages times the unfinished units will result in different equivalent units for materials, labor and overhead.
In this example, we see that material is added before labor and overhead, resulting in a higher completion percentage. This is not unusual as material must be present first before the work can begin. Think about baking cookies. All of the ingredients (materials) are present before the processing begins in the oven.
Once all of the labor and overhead are added to the materials in the process, the units are complete.
The product (bread) is still a work “In Process” The Manufacturing Process is NOT complete.

26. Conversion Costs Conversion = Direct + Manufacturing
Conversion costs are costs required to convert raw materials into finished goods that are ready for sale.
Conversion = Direct Manufacturing
Costs Labor Overhead
Ex: of costs that may be considered conversion costs are:
Direct labor & benefits Equipment depreciation
Equipment maintenance Factory rent
Factory supplies Factory insurance
Factory utilities Factory supervisors
Most conversion costs are likely to be “manufacturing overhead”.

28. Equivalent Units
Ex: Eggo® are made using 3 depts: Mixing, Baking, & Packaging.
The Mixing dept combines flour, salt, and baking powder, with liquid ingredients, including eggs and vegetable oil, to make waffle batter.

29. Equivalent Units

30. Equivalent Units
* Conversion costs = labor + overhead.

31. “Refinements” to Wtd Avg Calculation
100 %
Conversion costs = labor + overhead.

32. “Refinements” to Wtd Avg Calculation
Conversion costs = labor + overhead.

33. Equivalent Units

34. Equivalent Units

36. The fabricating department has the following production and cost data for the current month.
Beginning Units Ending
Work in Process Transferred Out Work in Process
–0– 15, ,000
Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs.
Compute the equivalent units of production for (a) materials and (b) conversion costs.

37. Compute EU for (a) materials and (b) conversion costs.
Beginning Units Ending
Work in Process Transferred Out Work in Process
–0– 15, ,000
Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs.
Compute EU for (a) materials and (b) conversion costs.
Units transferred out …………. 15,000
Ending work in process units ,000
25,000

38. Units transferred out …… 15,000
Beginning Units Ending
Work in Process Transferred Out Work in Process
–0– 15, ,000
Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs.
Compute EU for (a) materials and (b) conversion costs.
Units transferred out …… 15,000
Equiv Units-ending WIP , (10,000 x 30%)
18,000