2. CHAPTER 3
Process Costing

3. 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

4. Process Costing Example

5. Job-Order Costing System

6. Process Costing System

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

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

9. Flow of Cost Between Processing Departments

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

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

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

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

14. Equivalent units – Material and Converision costs

15. 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.
Determine the denominators to be used in the calculations of cost per equivalent unit for materials and conversion costs.

16. Example Exercise #1 Solution
Materials
Units completed 2,500
Equivalent units (300*85%)
2,755 units
Labor
Equivalent units (300*50%)
2,650 units

17. 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

18. 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.
Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process.

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

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

21. Reconciliation of Units

22. Reconciliation of Costs

23. 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

24. 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

25. Process Costing and 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

26. Full and Incremental Cost

27. Copyright
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