1. Chapter 20 Process Costing and Activity-Based Costing © 2009 The McGraw-Hill Companies, Inc.

2. McGraw-Hill/Irwin Slide 2 Job Order versus Process Costing

3. McGraw-Hill/Irwin Slide 3 Production Report The Process Costing Production Report Step 4: Reconcile the total cost of work in process. Step 2: Translate the physical units into equivalent units. Step 1: Reconcile the number of physical units worked on during the period. Step 3: Calculate the cost per equivalent unit.

4. McGraw-Hill/Irwin Slide 4 Step 1: Reconcile the Physical Units Barrels Completed = 2,000 ‒ 400 = 1,600

5. McGraw-Hill/Irwin Slide 5 Barrels Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400 OR Barrels Started and Completed = Barrels Completed Beginning Barrels ‒ = 1,600 – 200 = 1,400 OR Barrels Started and Completed = Barrels Started Ending Barrels ‒ = 1,800 – 400 = 1,400 Step 1: Reconcile the Physical Units

6. McGraw-Hill/Irwin Slide 6 Equivalent units are the product of the number of partially completed units times the percentage of completion for those units. We need to calculate equivalent units because a process usually has some partially completed units in its beginning and ending inventory. Step 2: Translate Physical Units into Equivalent Units += 1 Two half completed units are equivalent to one completed unit, so 10,000 units 70% complete are equivalent to 7,000 complete units.

7. McGraw-Hill/Irwin Slide 7 Exh. 20-21 Step 2: Translate Physical Units into Equivalent Units Direct materials are added at the beginning of the process, so, once a unit is started, it will have 100% of the required direct materials. Conversion costs are incurred uniformly in the process. The 200 units in beginning inventory were 70% of the way through the process, and the 400 units in ending inventory were 60% of the way through the process. The 1,400 units that were started and completed during the period are 100% complete for material and conversion.

8. McGraw-Hill/Irwin Slide 8 Exh. 20-22 Step 2: Translate Physical Units into Equivalent Units 1,400 units × 100% = 1,400 200 units × (100% ‒ 70%) = 60 400 units × 60% = 240

9. McGraw-Hill/Irwin Slide 9 Step 3: Calculate Cost per Equivalent Unit Cost per Equivalent Unit Current Period Costs Equivalent Units =

10. McGraw-Hill/Irwin Slide 10 Step 4: Reconcile the Total Cost of Work in Process

11. McGraw-Hill/Irwin Slide 11 Step 4: Reconcile the Total Cost of Work in Process

12. McGraw-Hill/Irwin Slide 12 Activity Based Costing Four Basic Steps in ABC Step 4: Assign costs to products or services based on their activity demands. Step 2: Form activity pools and assign indirect costs to each pool. Step 1: Identify and classify activities Step 3: Select a cost driver for each pool and calculate the activity rate.

13. McGraw-Hill/Irwin Slide 13 Step 1. Identify and Classify Activities

14. McGraw-Hill/Irwin Slide 14 Step 2: Form Activity Pools and Assign Indirect Costs to Each Pool $90,000 Purchasing/ Receiving/Crushing $300,000 Setting up and Maintaining Equipment $216,000 Fermenting/ Aging in Barrels $99,000 Bottling/ Labeling $175,000 Quality Control $880,000 of Manufacturing Overhead Costs Mondavi has a total of $880,000 in manufacturing overhead cost that can be divided among five activity cost pools.

15. McGraw-Hill/Irwin Slide 15 Step 3: Select an Activity Cost Driver for Each Pool and Calculate an Activity Rate

16. McGraw-Hill/Irwin Slide 16 Step 4: Assign costs to Products or Services Based on Activity Demands Mondavi produces two types of wine, Standard Chardonnay and Vintage Cabernet with the following Activity requirements.

17. McGraw-Hill/Irwin Slide 17 Step 4: Assign costs to Products or Services Based on Activity Demands Chardonnay Cabernet

18. End of Chapter 20 © 2009 The McGraw-Hill Companies, Inc.