1. McGraw-Hill/Irwin 4-1 Process Costing and Hybrid Product- Costing Systems 4 Chapter Four

2. McGraw-Hill/Irwin 4-2 Comparison of Job-Order Costing and Process Costing Process Costing Job-order Costing F Used for production of small, identical, low cost items. F Mass produced in automated continuous production process. F Costs cannot be directly traced to each unit of product.

3. McGraw-Hill/Irwin 4-3 Process Costing Job-order Costing Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill Comparison of Job-Order Costing and Process Costing

4. McGraw-Hill/Irwin 4-4 Job-order costing l Costs accumulated by the job. l Work in process has a job-cost sheet for each job. l Many unique, high cost jobs. l Jobs built to customer order. Process costing l Costs accumulated by department or process. l Work in process has a production report for each batch of products. l A few identical, low cost products. l Units continuously produced for inventory in automated process. Comparison of Job-Order Costing and Process Costing

5. McGraw-Hill/Irwin 4-5 Process Cost Flows Let’s examine the cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials.

6. McGraw-Hill/Irwin 4-6 Raw Materials Purchases Direct Material Other Overhead Factory Overhead Process Cost Flows Work in Process Department A Indirect Material

7. McGraw-Hill/Irwin 4-7 Process Cost Flows Next let’s add labor and manufacturing overhead to the process cost flows. Are you with me?

8. McGraw-Hill/Irwin 4-8 Direct Labor Other Overhead Factory Overhead Process Cost Flows Work in Process Department A Direct Material Salaries and Wages Payable Indirect Labor Direct Labor Overhead Applied to Work in Process Overhead Indirect Material Indirect Labor

9. McGraw-Hill/Irwin 4-9 Process Cost Flows Next let’s transfer work from Department A to Department B. Are you ready?

10. McGraw-Hill/Irwin 4-10 Process Cost Flows Work in Process Department B Work in Process Department A Direct Material Direct Labor Overhead Transferred to Dept. B Transferred from Dept. A

11. McGraw-Hill/Irwin 4-11 Process Cost Flows Next let’s add material, labor, and manufacturing overhead to Department B. Are you with me?

12. McGraw-Hill/Irwin 4-12 Process Cost Flows Work in Process Department B Work in Process Department A Direct Material Direct Labor Overhead Transferred from Dept. A Direct Material Direct Labor Raw Materials Purchases Direct Material Direct Labor Salaries and Wages Payable Transferred to Dept. B

13. McGraw-Hill/Irwin 4-13 Process Cost Flows Work in Process Department B Work in Process Department A Direct Material Direct Labor Overhead Transferred from Dept. A Direct Material Direct Labor Other Overhead Factory Overhead Overhead Applied to Work in Process Indirect Material Indirect Labor Overhead Transferred to Dept. B

14. McGraw-Hill/Irwin 4-14 Process Cost Flows Now let’s complete the goods in Department B and sell them. Still with me?

15. McGraw-Hill/Irwin 4-15 Finished Goods Cost of Goods Sold Cost of Goods Mfd. Cost of Goods Sold Process Cost Flows Cost of Goods Mfd. Work in Process Department B Direct Material Direct Labor Overhead Transferred from Dept. A

16. McGraw-Hill/Irwin 4-16 Process Costing Direct Material Direct-labor costs are usually small in comparison to other product costs in process cost systems. (high level of automation) Type of Product Cost Dollar Amount Direct Labor Manufacturing Overhead

17. McGraw-Hill/Irwin 4-17 Process Costing Conversion Direct-labor costs are usually small in comparison to other product costs in process cost systems. (high level of automation) So, direct labor and manufacturing overhead are often combined into one product cost called conversion. Direct Material Type of Product Cost Dollar Amount

18. McGraw-Hill/Irwin 4-18 Direct Material Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Jobs The work-in-process account consists of individual jobs in a job-order cost system. Differences Between Job-Order and Process Costing

19. McGraw-Hill/Irwin 4-19 Direct Material Finished Goods Cost of Goods Sold Products The work-in-process account consists of individual products in a process cost system. Differences Between Job-Order and Process Costing Direct Labor & Overhead ( Conversion) When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.

20. McGraw-Hill/Irwin 4-20 Equivalent Units: A Key Concept [ [Costs are accumulated for a period of time for products in work-in-process inventory. [ [Products in work-in-process inventory at the beginning and end of the period are only partially complete. [ [Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. [ [Costs are accumulated for a period of time for products in work-in-process inventory. [ [Products in work-in-process inventory at the beginning and end of the period are only partially complete. [ [Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

21. McGraw-Hill/Irwin 4-21 Equivalent Units Example Two one-half completed products are equivalent to one completed product. So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. + = l

22. McGraw-Hill/Irwin 4-22 For the current period, 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 period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Equivalent Units Question 1

23. McGraw-Hill/Irwin 4-23 For the current period, 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 period? 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 Question 1

24. McGraw-Hill/Irwin 4-24 Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit = Costs for the period Equivalent units for the period

25. McGraw-Hill/Irwin 4-25 If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units Question 2

26. McGraw-Hill/Irwin 4-26 If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s 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 Question 2

27. McGraw-Hill/Irwin 4-27 Departmental Production Report Production Report Ê Analysis of physical flow of units. Ë Calculation of equivalent units. Ì Computation of unit costs. Í Analysis of total costs.

28. McGraw-Hill/Irwin 4-28 Equivalent Units of Production – Weighted-Average Method The weighted-average method... l Makes no distinction between work done in the prior period and work done in the current period. l Blends together units and costs from the prior period and the current period. The FIFO method is a more complex method and is rarely used in practice.

29. McGraw-Hill/Irwin 4-29 Production Report Example At this point, we need to look at an example to illustrate the departmental production report.

30. McGraw-Hill/Irwin 4-30 [MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. [MVP uses the weighted-average cost procedure. [Material is added at the beginning of the Cutting Department, and conversion is incurred uniformly throughout the process. [Using the following information for the month of March, let’s prepare a production report for the Cutting Department. Production Report Example

31. McGraw-Hill/Irwin 4-31 Work in process, March 1: 20,000 units Materials: 100% complete. $ 50,000 Conversion: 10% complete. 7,200 Units started into production in March:30,000 units Units completed and transferred out in March:40,000 units Work in process, March 31: 10,000 units Materials100% complete. Conversion 50% complete. Costs incurred during March Materials cost$ 90,000 Conversion cost 193,500 Cost Production Report Example

32. McGraw-Hill/Irwin 4-32 Ê Analysis of Physical Flow of Units Production Report Example

33. McGraw-Hill/Irwin 4-33 Production Report Example Ë Calculation of Equivalent Units 50% of 10,000 units Beginning inventory % is not used in weighted-average method.

34. McGraw-Hill/Irwin 4-34 Production Report Example Ë Calculation of Equivalent Units 100% of 10,000 units, all material added at beginning

35. McGraw-Hill/Irwin 4-35 Ì Computation of unit costs Production Report Example $140,000 ÷ 50,000 equivalent units $200,700 ÷ 45,000 equivalent units $2.80 + $4.46

36. McGraw-Hill/Irwin 4-36 All costs accounted for Production Report Example Í Analysis of total costs

37. McGraw-Hill/Irwin 4-37 Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Operation Costing Process Costing (Products produced in batches) Costing Conversion costs assigned to batches as in process costing. Material Costs Charged to batches as in job-order costing.

38. McGraw-Hill/Irwin 4-38 Process Costing Typical Accounting Entries Let’s look at the accounting journal entries for a process cost system. We’ll omit the numbers so that we can focus on accounts.

39. McGraw-Hill/Irwin 4-39 Process Costing Typical Accounting Entries

40. McGraw-Hill/Irwin 4-40 Process Costing Typical Accounting Entries

41. McGraw-Hill/Irwin 4-41 Process Costing Typical Accounting Entries

42. McGraw-Hill/Irwin 4-42 Process Costing Typical Accounting Entries

43. McGraw-Hill/Irwin 4-43 Process Costing Typical Accounting Entries

44. McGraw-Hill/Irwin 4-44 Process Costing Typical Accounting Entries

45. McGraw-Hill/Irwin 4-45 I’m ready to process some leisure time. End of Chapter 4