1. Process Costing Objectives — Compare job order and process costing — Talk about costs to account for — Understand the concept of equivalent units

2. Process Costing Job-Order Costing Used for production of small, identical, low cost items. Mass produced, automated continuous production process. Costs cannot be directly traced to each unit of product. Types of Product-Costing Systems Used for production of large, unique, high-cost items. Built to order rather than mass produced. Many costs can be directly traced to each job.

3. Direct Materials Direct Labor Manufacturing Overhead Job No. 1 Job No. 2 Job No. 3 Accumulating Costs - Job-Order Costing System Cost of Goods Sold Cost of Goods Sold Finished Goods Finished Goods

4. Direct Materials Direct Labor Manufacturing Overhead Direct Materials Direct Labor Manufacturing Overhead Process A Process B Assembly Accumulating Costs - Process Costing System Cost of Goods Sold Cost of Goods Sold Finished Goods Finished Goods

5. Similarities – Job Order and Process Costing The same purpose exists - assign manufacturing costs to products, provide a mechanism for computing unit costs Both systems use the same basic manufacturing accounts The flow of costs through each system is similar

6. Differences – Job Order and Process Costing The flow of units in a process costing system is more or less continuous - as a result, units are indistinguishable from one another Costs are accumulated by department, rather than by job – as a result, the firm can have more than one work- in-process inventory account

7. 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

8. Process Costing Direct Material 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. Type of Product Cost Dollar Amount

9. Peas! Peas! Example Frozen Vegetable Company quick-cooks peas before freezing them. The Company uses two departments -- cooking and freezing. Suppose the Company processed 10,000 pounds of peas in the month of January and incurred the following costs: DM$ 3,000 Conversion Costs: DL5,000 OH9,000 14,000 Total$ 17,000

10. Peas! Peas! Example (con’t) What would be the (per) unit cost of goods completed? DM$ 3,000 Conversion Costs: DL5,000 OH9,000 14,000 Total$ 17,000

11. Peas! Peas! Example (con’t) What if not all 10,000 pounds of peas were completed in the month of January? Assume that 2,000 were still in process at the end of the month -- only 8,000 were started and fully completed. How should the costs be accounted for?

12. MY NOTES The deal is that if we have no incomplete units at the end of the period, then we don’t have a problem. If we have incomplete units, then we need to think about how to allocate costs. Not like ending WIP in a job order costing system - WHY? There we have tracked costs to a job. Here we are worried about getting an average cost so we can track the cost of products produced/work done in the department

13. Process Costing - 5 Key Steps Step 1 -- Summarize the flow of physical units -- where are the costs? Step 2 -- Calculate output in terms of Equivalent Units Step 3 -- Summarize total costs to account for which are the costs charged (debited) to WIP Step 4 -- Calculate equivalent unit costs Step 5 -- Apply/assign costs to units completed and to units in the ending WIP

14. Step 1 and Step 2: In Pictures Two one-half completed products are equivalent to one completed product. + = So, 10,000 units 80 percent complete are equivalent to ? complete units.

15. Step 1 and Step 2 -- Equivalent Units 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.

16. During the current period, Regina 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 Regina have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Equivalent Units Question 1

17. 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

18. Regina incurred $27,600 in production costs for the 11,500 equivalent units. What was Regina’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units Question 2

19. Equivalent Units of Production – Weighted-Average Method Makes no distinction between work done in the prior period and work done in the current period. Blends together units and costs from the prior period and the current period. The weighted-average method..

20. MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. MVP uses the weighted-average process costing method. Material is added at the beginning of the Cutting Department, and conversion costs are incurred uniformly throughout the process. A Process Costing Example

21. 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

22. (1) Analysis of Physical Flow of Units

23. 100% of 10,000 units, all material added at beginning (2) Calculation of Equivalent Units

24. (2) Calculation of Equivalent Units (con’t) 50% of 10,000 units Beginning inventory % is not used in weighted-average method.

25. (3) Computation of total costs to account for

26. (4) Computation of unit costs $140,000 ÷ 50,000 equivalent units $200,700 ÷ 45,000 equivalent units $2.80 + $4.46

27. (5) Analysis of total costs

28. All costs accounted for (5) Analysis of total costs

29. Equivalent Units Practice The following data are from Energy Resource’s Amarillo Plant: WIP, November 1 2,000,000 gallons DM 100% complete CC 25% complete Units started during November 950,000 gallons WIP, November 30 240,000 gallons DM 100% complete CC 80% complete Calculate the equivalent unit amounts necessary to determine per unit costs.

30. Process Costing

32. Process Costing Practice Centura completed and transferred 900,000 units to finished goods during 1999. WIP as of December 31, 1999, had 300,000 units that were 50% complete w/r/t CC and 100% w/r/t DM. Finished goods inventory consisted of 200,000 units. Materials are added at the beginning of production and overhead is applied at a rate of 60% of direct labor costs. There was no finished goods inventory on January 1, 1999. Their inventory cost records provide the following information:

33. Process Costing

34. Process Costing in Subsequent Production Departments An added complication in process costing system is that production often takes place in more than one department. In the previous example, only costs and units in the MVP’s Cutting Department were taken into consideration. Now let’s work with the Cutting and Stitching Department.

35. Subsequent Departments Work In Process Inventory: Stitching Department Work In Process Inventory: Cutting Department Direct material Conversion: Direct labor Manufacturing overhead Cost of goods completed and transferred out Transferred- in costs Direct material Conversion: Direct labor Manufacturing overhead Cost of goods completed and transferred out

36. MVP Sports - Additional Facts In Stitching, DM are added at the end of production process. 40,000 units from Cutting are transferred in to Stitching during March 10,000 units are in Stitching’s Beginning WIP (March 1) 30,000 units are transferred to Finished Goods in March With respect to Stitching’s Ending WIP (March 31) Transferred In: 100% complete Direct Material: None Conversion: 90% complete

37. Transferred-In Costs The costs assigned to the units completed in each department and transferred to the next department’s work in process inventory account.

38. Equivalent Units for Stitching Step 1 Physical Units % comp w/r/tTransferred conversionInDMCC Step 2 Equivalent Units

39. For Thursday Finish Chapter 14 - reading and homework problems! Quiz covering Chapter 6 and Chapter 13 and 14!