1. Prepared by Debby Bloom-Hill CMA, CFM

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 for which cost information is needed
Necessary to trace manufacturing costs to specific jobs
When completed, cost of job is removed from Work in Process and included in Finished Goods
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

4. Difference Between Job-Order and Process Costing Systems
Large quantities produced of homogeneous products
Average cost = total costs divided by total number of items produced
When completed, number of units completed times average cost determines cost to be moved from WIP to Finished Goods
Slide 3-4
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

5. Test Your Knowledge 1
Which of the following characteristics are associated with a process costing system?
Heterogeneous products
Homogeneous products
Answer: b
Heterogeneous products are unique
Homogeneous products are identical
Process costing is associated with identical products
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

6. Test Your Knowledge 2
Which of the following characteristics are associated with a process costing system?
Continuous production
Discontinuous production
Answer: a
Job order costing is associated with discontinuous production
Process costing is associated with continuous production
Slide 3-6
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

7. Test Your Knowledge 3
Which of the following characteristics are associated with a process costing system?
Costs are traced to jobs
Costs are traced to processing departments
Answer: b
Job order costing requires tracing costs to jobs
Process costing is associated with tracing costs to departments
Slide 3-7
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

8. Test Your Knowledge 4
An 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
A soap manufacturer produces many identical units
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

9. Job-Order Costing System
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

10. Process Costing System
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

11. Cost Flows through Departments
Manufacturing operations typically pass through two or more departments
Costs are accumulated in each department
Easy to identify when materials are added
Harder to identify when labor and overhead are added
Often grouped together as conversion costs
Assumed to be added evenly throughout the process
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

12. Test Your Knowledge 5
The costs in a process costing system are traced to:
Specific jobs
Specific customers
Specific company administrators
Specific production departments
Answer: d
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

13. Cost Flows through Accounts
The product costs accumulated in process are the same as in job-order costing
Direct materials
Direct labor
Manufacturing overhead
A processing department might have transferred in costs from another department
Each processing department accumulates product cost in a separate Work in Process account
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

14. Cost Flows through Accounts
Direct Material
Suppose that $142,000 of direct materials are used
Journal entry:
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

15. Cost Flows through Accounts
Direct Labor
Suppose that $62,200 of direct labor costs are incurred
Journal entry:
Slide 3-15
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

16. Cost Flows through Accounts
Manufacturing Overhead
A company may use either actual overhead costs or a predetermined overhead rate to assign overhead to products
Unless production and overhead costs are constant from month to month, use of actual overhead may result in substantial fluctuations in the unit cost
For that reason most companies use a predetermined overhead rate
Slide 3-16
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

17. Cost Flows through Accounts
Manufacturing Overhead
Suppose manufacturing overhead is applied at a rate of $3 per direct labor dollar
Journal entry:
Slide 3-17
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

18. Cost Flows through Accounts
Transferred-in Cost
When a department completes its work, the items are transferred to the next department
Related costs are transferred as well
Suppose the Mixing Department completed units with a cost of $360,000
Slide 3-18
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

19. Flow of Costs Between Processing Departments
Learning objective 1: Describe how products flow through departments and how costs flow through accounts

20. Calculating Unit Cost Equivalent Units
Partially completed units are converted to a comparable number of completed units, called equivalent units
Multiply the number of units by the percent complete to calculate the equivalent units
100 units that are 50% complete are equivalent to 50 complete units (100 x 50%)
Equivalent units may be different for material and conversion costs if materials and conversion costs enter production at different times.
Learning objective 2: Discuss the concept of an equivalent unit

21. Equivalent Units – Material and Conversion Costs
Learning objective 2: Discuss the concept of an equivalent unit

22. Calculating Equivalent Units
Equivalent units are normally calculated for materials and conversion costs
The equivalent units produced is the sum of the units finished and the units in ending work in process
Units finished are always 100% complete in terms of materials and conversion costs
Multiply the number of units in ending work in process by the corresponding percent complete to calculate the equivalent units
Learning objective 3: Calculate the cost per equivalent unit

23. Test Your Knowledge 6
At Rainier Chemical, conversion costs (labor and overhead) enter evenly throughout the production process. At the end of the year, 200 units in work in process are 80 percent complete. With respect to conversion costs, how many equivalent units are in work in process?
200
160
360
280
Answer: b
200 units * 80% complete = 160 equivalent units
Learning objective 3: Calculate the cost per equivalent unit

24. Test Your Knowledge 7 Beginning Work in Process 500 units
% complete = 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete = 85% materials, 50% conversion
Calculate equivalent units for materials
Learning objective 2: Discuss the concept of an equivalent unit

25. Test Your Knowledge 8 Beginning Work in Process 500 units
% complete: 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete: 85% materials, 50% conversion
Calculate equivalent units conversion
Slide 3-25
Learning objective 2: Discuss the concept of an equivalent unit

26. Calculating Unit Cost Cost Per Equivalent Unit
The average unit cost in a process costing system is referred to as cost per equivalent unit
The numerator represents the total cost for which a processing department must account in each period
Divide by the units completed plus the equivalent units in ending Work in Process
Learning objective 3: Calculate the cost per equivalent unit

27. Calculating Cost per Equivalent Unit
Consider cost per equivalent unit calculations for the mixing department
Beginning Work in Process inventory: 10,000 gallons that are 80% complete
Direct material costs = $18,000
Direct labor =$7,80
Overhead = $23,400
70,000 gallons started, 60,000 gallons completed
Direct material costs = $142,000
Direct labor cost = $62,200
Overhead cost = $186,600
Slide 3-27
Learning objective 3: Calculate the cost per equivalent unit

28. Cost per EU – Mixing Department
Slide 3-28
Learning objective 3: Calculate the cost per equivalent unit

29. Test Your Knowledge 9
At Rainier Chemical, labor cost in Work in Process at the start of April was $50,000 and $450,000 of labor was incurred during the month units are in WIP at the end of April and they are 80% complete with respect to labor units were completed during the month. What is the cost per equivalent unit for labor?
$225
$481
$536
$500
Answer: d
Total labor cost = $50,000 + $450,000 = $500,000
Equivalent units = 840 units units * 80% = 1,000 units
Cost per equivalent unit = $500,000 / 1,000 = $500
Learning objective 3: Calculate the cost per equivalent unit

30. Costs Transferred Out
60,000 gallons completed by the Mixing Department
Unit cost is $6 per gallon
$360,000 (60,000 X $6) of cost transferred to the Packaging Department
Slide 3-30
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

31. Ending Work in Process Slide 3-31
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

32. Summary of Cost Activity – Mixing Department
Slide 3-32
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

33. Production Cost Report
An end of the month report for a process costing system
Provides a reconciliation of units
Provides a reconciliation of costs
Provides the details of the cost per equivalent unit calculations
The reconciliations help ensure that mistakes are not made in calculations
Learning objective 5: Describe a production cost report

34. Production Cost Report
Reconciliation of Units
Learning objective 5: Describe a production cost report

35. Production Cost Report
Reconciliation of Costs
Learning objective 5: Describe a production cost report

36. Basic Steps in Process Costing
Step 1: Reconcile the physical number of units. The number of units at the start of the period plus the number of units started during the period should equal the number of units completed plus the number of units in ending Work in Process
Learning objective 5: Describe a production cost report

37. Basic Steps in Process Costing
Step 2: Calculate the cost per equivalent unit for material, labor, and overhead. Remember that cost (numerator in the calculation) includes both beginning cost and cost incurred during the period. The number of equivalent units (denominator) includes the number of units completed and the number of equivalent units in ending Work in Process
Cost per equivalent unit =
(cost in beginning WIP + costs added)
(units completed + EU of ending WIP)
Learning objective 5: Describe a production cost report

38. Basic Steps in Process Costing
Step 3: Assign cost to items completed and items in ending Work in Process. The cost of items completed is simply the product of the total cost per equivalent unit and the number of units completed. The cost of items in Work in Process is the sum of the products of equivalent units in process and cost per equivalent unit for material, labor, and overhead
Learning objective 5: Describe a production cost report

39. Basic Steps in Process Costing
Step 4: Account for the amount of product cost. The cost of beginning inventory plus the cost incurred during the period should equal the amount of cost assigned to completed items plus the amount of cost assigned to items in ending Work in Process
Learning objective 5: Describe a production cost report

40. Dealing with Transferred-In Cost
Packaging Department summary
Beginning Work in Process 15,000 gallons 50% through packaging operation
Costs in WIP: materials $10,500, labor $4,500, $9,000 overhead, $92,250 transferred in
Units transferred in 60,000 gallons with $360,000 transferred in cost
Costs added: Materials $49,500, labor $27,900, $55,800 overhead
Ending Work in Process 5,000 gallons 40% through packaging operation
Learning objective 5: Describe a production cost report

41. Production Cost Report – Packaging Department
Slide 3-41
Learning objective 5: Describe a production cost report

42. Production Cost Report – Packaging Department
Slide 3-42
Learning objective 5: Describe a production cost report

43. Production Cost Report – Packaging Department
Slide 3-43
Learning objective 5: Describe a production cost report

44. Test Your Knowledge 10
The packaging department at Rainier Chemical had no beginning Work in Process at the start of April. During April, the department received $300,000 of transferred-in cost. During April, the department completed 600 units and 200 were in Work in Process.
With respect to transferred-in cost, the 200 units in Work in Process are:
Equivalent to 200 completed units
Equivalent to 0 completed units
Equivalent to 100 completed units
Identical to the equivalent units for conversion costs
Answer: a
Since processing was completed in another department, units transferred in are 100% complete for all categories
Learning objective 3: Calculate the cost per equivalent unit

45. Process Costing and Incremental Analysis
Whenever we make a decision, we need to perform incremental analysis
We need to determine the change in revenue and the change is cost, assuming a particular alternative is selected
If the net change is positive, the decision alternative is “good” since it will have a positive impact on firm profit
If the net change is negative, the decision alternative is “bad” in that it will have a negative impact on firm profit
Learning objective 5: Describe a production cost report

46. Process Costing and Incremental Analysis
When using process costing information to make a decision, we have to be careful to recognize that the cost per unit is the average of fixed and variable costs
It does not measure the change in cost associated from producing an additional unit
Generally, total fixed costs do not change when one additional unit is produced
Learning objective 5: Describe a production cost report

47. Process Costing and Incremental Analysis
A company has no beginning or ending Work in Process
Variable costs are materials and labor
Fixed cost is manufacturing overhead
Cost summary:
Learning objective 5: Describe a production cost report

48. Process Costing and Incremental Analysis
Decreasing price to $2.90 will increase demand to 275,000 units
$2.90 is less than equivalent cost per unit
Incremental analysis: profit will increase
Slide 3-48
Learning objective 5: Describe a production cost report

49. You Get What You Measure

50. Copyright
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