1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 20 P ROCESS C OST A CCOUNTING

2. 20 - 2  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product.  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product. P ROCESS O PERATIONS C 1

3. 20 - 3 C OMPARING J OB O RDER AND P ROCESS O PERATIONS Job Order Systems  Custom orders  Heterogeneous products  Low production volume  High product flexibility  Low to medium standardization Process Systems  Repetitive operations  Homogeneous products  High production volume  Low product flexibility  High standardization A 1

4. 20 - 4 Direct Materials Finished Goods Cost for each job Direct Labor Factory Overhead Jobs The goods in process account consists of individual jobs in a job order system. C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

5. 20 - 5 Direct Materials Finished Goods Direct Labor Factory Overhead Processes The goods in process account consists of specific processes in a process cost system. Cost per unit processed C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

6. 20 - 6 Same objective: to determine the cost of products Same inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method: predetermined rate times actual activity C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

7. 20 - 7 E QUIVALENT U NITS OF P RODUCTION Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of equivalent units produced in the period. C 2

8. 20 - 8 E QUIVALENT U NITS OF P RODUCTION Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Two one-half full pitchers are equivalent to one full pitcher. + = So, 4,000 units that are 60 percent complete would total 2,400 equivalent units. C 2

9. 20 - 9 For the current period, PencilCo 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 PencilCo have for the period? 10,000 units + (5,000 units ×.30) = 11,500 equivalent units C 2 E QUIVALENT U NITS OF P RODUCTION

10. 20 - 10 Cost per equivalent unit = Product costs for the period Equivalent units for the period C OST P ER E QUIVALENT U NIT C 2 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit If PencilCo incurred $27,600 in production costs during the period, what is the cost per equivalent unit for the period?

11. 20 - 11 Equivalent units may be different for material, labor, and overhead, given that costs may be added at different stages of a process. At completion of Stage 1 of the process, material is 40% complete, but labor and overhead are only 25% complete. Stage 1 40% of Material 25% of Labor and Overhead E QUIVALENT U NITS C 2

12. 20 - 12 Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead + + = = 100% 50% E QUIVALENT U NITS C 2

13. 20 - 13 Stage 3 50% of Labor and Overhead The process is now complete. Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead E QUIVALENT U NITS C 2

14. 20 - 14 Process Cost Summary P ROCESS C OST S UMMARY Helps managers control their departments. Provides cost information for financial statements. Shows the flow of units and costs through work in process. Helps factory managers evaluate department manager performance. C 3

15. 20 - 15 T RENDS IN P ROCESS O PERATIONS Process design Just-in-time production AutomationServices Customer orientation C 3

16. 20 - 16 Hybrid costing systems contain features of both job order and process operations. Job Order Costing Process Costing Hybrid Costing Material costs are accounted for using a job order system. Conversion costs are accounted for using a process system. H YBRID C OSTING S YSTEMS A 2

17. 20 - 17 E ND OF C HAPTER 20