1. 5-1 Product and Service Costing: A Process Systems Approach Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University

2. 5-2 1.Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report. 2.Describe process costing for settings without work-in-process inventories. 3.Define equivalent units, and explain their role in process costing. 4.Prepare a departmental production report using the FIFO method. ObjectivesObjectives After studying this chapter, you should be able to:

3. 5-3 5.Prepare a departmental production report using the weighted average method. 6.Prepare a departmental production report with transferred-in goods and changes in output measures. 7.Describe the basic features of operating costing. 8.Explain how spoilage is treated in a process costing system. ObjectivesObjectives

4. 5-4 Tableting Mixing An Operational Process System Bottling Selecting Sifting Measuring Blending Loading Pressing Costing Loading Counting Capping Packaging

5. 5-5 Job-Order Costing Direct Materials Direct Labor Applied Overhead Job 206 Job 205 Job 207 Finished Goods Manufacturing Costs Estrella Company

6. 5-6 Process Costing Direct Materials Direct Labor Applied Overhead TabletingPickingBottling Finished Goods Manufacturing Costs Estrella Company

7. 5-7 Cost Flows 1.Work-in-Process—Tableting600 Work-in-Process—Mixing600 To transfer goods to Tableting. 2.Work-in-Process—Tableting400 Materials100 Payroll125 Overhead Control175 To record additional manufacturing costs. 3.Work-in-Process—Bottling800 Work-in-Process--Tableting800 To transfer goods to Bottling.

8. 5-8 Characteristics of Process Costing  Homogeneous units pass through a series of similar processes.  Each unit in each process receives a similar dose of manufacturing costs.  Manufacturing costs are accumulated by a process for a given period of time.

9. 5-9  There is a work-in-process account for each process.  Manufacturing cost flows and the associated journal entries are generally similar to job- order costing.  The departmental production report is the key document for tracking manufacturing activity and costs.  Unit costs are computed by dividing the departmental costs of the period by the output for the period. Characteristics of Process Costing

10. 5-10 Service Organization Without Work-in- Process Inventories To illustrate how services without work in process inventories are costed using a process costing approach, consider the teeth- cleaning process offered by most dentists. The production costs and the number of cleanings (patients served) for the month of March are given below: Direct materials$ 400 Hygienist salary3,500 Overhead 2,100 Total production cost$6,000 Number of cleanings300 Unit cost = $6,000/300 = $20 per cleaning

11. 5-11 1.Analysis of the flow of physical units 2.Calculation of equivalent units 3.Computation of unit cost 4.Valuation of inventories (goods transferred out and ending work in process) 5.Cost reconciliation Cost of Production Report

12. 5-12 Cost of Production Report Unit Information Units to account for: Units in beginning work in process0 Units started24,000 Total units to account for24,000 Physical Flow Equivalent Units Units accounted for: Units completed20,00020,000 Units in ending work in process (25% complete) 4,000 1,000 Units accounted for24,000 Work completed21,000 ContinuedContinued

13. 5-13 Cost of Production Report Cost Information Costs to account for: Beginning work in process $ 0 Incurred during the period 168,000 Total costs to account for168,000 Divided by equivalent units÷ 21,000 Cost per equivalent unit$ 8 Cost accounted for: Goods transferred out ($8 x 20,000)$160,000 Ending work in process ($8 x 1,000) 8,000 Total costs accounted for$168,000

14. 5-14 Under the FIFO costing method, the equivalent units and manufacturing costs in beginning work in process are excluded from the current-period unit cost calculation. Thus, FIFO recognizes that the work and costs carried over from the prior period legitimately belong to that period. FIFO Costing Method

15. 5-15 FIFO Costing Method Estrella Company Mixing Department Production and Cost Data for October Production: Units in process, October 1, 70% complete10,000 Units completed and transferred out60,000 Units in process, October 31, 40% complete20,000 Costs: Work in process, October 1: Direct materials$1,000 Conversion costs 350 Total work in process$1,350 Continued

16. 5-16 Costs: Current costs: Direct materials$12,600 Conversion costs 3,050 Total current costs$15,650 Estrella Company Mixing Department Production and Cost Data for October

17. 5-17 FIFO Costing Method Step 1: Physical Flow Analysis Units accounted for: Units completed and transferred out: Started and completed50,000 From beginning work in process10,00060,000 Units in ending work in process (40% complete)20,000 Total units accounted for80,000 Units to account for: Units, beginning work in process10,000 Units started during October70,000 Total units to account for80,000

18. 5-18 FIFO Costing Method Step 2: Calculation of Equivalent Units Units started and completed50,00050,000 Add: Units in beginning work in process x percentage to complete: 10,000 x 0% materials--- 10,000 x 30% conversion3,000 Add: Units in ending work in process x percentage complete: 20,000 x 100% materials20,000 20,000 x 40% conversion8,000 Equivalent units of output70,00061,000 Direct Materials Conversion Costs

19. 5-19 FIFO Costing Method Step 3: Computation of Unit Cost Unit direct materials costs= $12,600/70,000 = $0.18 Unit conversion costs= $3,500/61,000 = $0.05 Unit cost= Unit materials cost + Unit conversion costs = $0.18 + $0.05 = $0.23 per ounce

20. 5-20 FIFO Costing Method Step 4: Valuation of Inventories Cost of ending work in process: Direct materials ($0.18 x 20,000)$ 3,600 Conversion costs ($0.05 x 8,000) 400 Total$ 4,000 Units started and completed ($0.23 x 50,000)$11,500 Units, beginning work in process: Prior period costs$1,350 Cost to finish ($0.05 x 3,000) 150 1,500 Total$13,000

21. 5-21 FIFO Costing Method Step 5: Cost Reconciliation Costs to account for: Beginning work in process$1,350 Incurred during the period: Direct materials$12,600 Conversion costs 3,050 15,650 Total costs to account for$17,000 Costs accounted for Goods transferred out: Units, beginning work in process$ 1,500 Units started and completed11,500 Goods in ending work in process 4,000 Total costs accounted for$17,000

22. 5-22 Estrella Company Mixing Department Production Report for October (FIFO Method) Unit Information Units to account for:Units accounted for: Units, beginning workUnits completed60,000 in process10,000 Units started70,000Units, EWIP20,000 Total units to account for80,000Total units accounted for80,000 Equivalent Units Direct Materials Conversion Costs Units started and completed50,00050,000 Units, beginning work in process---3,000 Units, ending work in process20,000 8,000 Equivalent units of output70,00061,000 ContinuedContinued

23. 5-23 Costs to account for: DirectConversion MaterialsCostsTotal Beginning work in process$ 1,000$ 350$ 1,350 Incurred during the period 12,600 3,050 15,650 Total costs to account for$13,600$ 3,400$17,000 Cost Information Costs per equivalent unit: Current costs$12,600$ 3,050 Divided by equivalent units÷70,000÷61,000 Cost per equivalent unit$ 0.18$ 0.05$ 0.23ContinuedContinued

24. 5-24 Costs accounted for: Units transferred out: Units, beginning work in process: From prior period$ 1.350 From current period ($0.05 x 3,000)150 Units started and completed ($0.23 x 50,000) 11,500$13,000 Ending work in process: Direct materials (20,000 x $0.18)$ 3,600 Conversion costs (8,000 x $0.05) 400 4,000 Total costs accounted for$17,000

25. 5-25 Work in Process--Mixing12,600 Materials12,600 To record requisitions of materials for October. Work in Process--Mixing3,050 Conversion Cost Control3,050 To record the application of overhead and incurrence of direct labor. Work in Process--Tableting13,000 Work in Process--Mixing13,000 To record the transfer of cost of goods completed from Mixing to Tableting. Journal Entries

26. 5-26 Weighted Average Costing Method Step 1: Physical Flow Analysis Units accounted for: Units completed and transferred out: Started and completed50,000 From beginning work in process10,00060,000 Units in ending work in process (40% complete)20,000 Total units accounted for80,000 Units to account for: Units, beginning work in process10,000 Units started during October70,000 Total units to account for80,000

27. 5-27 Weighted Average Costing Method Step 2: Calculation of Equivalent Units Direct Materials Conversion Costs Units completed60,00060,000 Add: Units in ending work in process x percentage complete: 20,000 x 100% materials20,000---- 20,000 x 40% conversion----8,000 Equivalent units of output80,00068,000

28. 5-28 Step 3: Computation of Unit Cost Unit materials costs = ($1,000 + $12,600)/80,000 = $0.17 Unit conversion costs = ($350 +$3,050)/68,000 = $0.05 Total unit cost = Unit materials cost + Unit conversion costs = $0.17 + $0.05 = $0.22 per completed unit Weighted Average Costing Method

29. 5-29 Weighted Average Costing Method Step 4: Valuation of Inventories Cost of goods transferred out = $0.22 x 60,000 = $13,200 Direct materials: $0.17 x 20,000$3,400 Conversion costs: $0.05 x 8,000 400 Total cost$3,800

30. 5-30 Weighted Average Costing Method Step 5: Cost Reconciliation Costs to account for: Beginning work in process$ 1,350 Incurred during the period: 15,650 Total costs to account for$17,000 Costs accounted for: Goods transferred out$13,200 Ending work in process 3,800 Total costs accounted for$17,000

31. 5-31 Estrella Company Mixing Department Production Report for October (Weighted Method) Units completed60,00060,000 Units, ending work in process20,000 8,000 Equivalent units of output80,00068,000 Equivalent Units Direct Materials Conversion Costs ContinuedContinued Units to account for:Units accounted for: Units, beginning workUnits completed60,000 in process10,000 Units started70,000Units, EWIP20,000 Total units to account for80,000Total units accounted for80,000 Unit Information

32. 5-32 Cost Information Divided by equivalent units÷80,000÷68,000 Cost per equivalent unit$ 0.17$ 0.05$ 0.22 Costs to account for: DirectConversion MaterialsCostsTotal Beginning work in process$ 1,000$ 350$ 1,350 Incurred during the period 12,600 3,050 15,650 Total costs to account for$13,600$ 3,400$17,000 Costs accounted for: Units transferred out (60,000 x $0.22)$13,200 Ending work in process: Direct materials (20,000 x $0.17)$ 3,400 Conversion costs (8,000 x $0.05) 400 3,800 Total costs accounted for$17,000

33. 5-33 FIFO Compared with Weighted Average FIFOWeighted Average Direct Materials Conversion Costs Direct Materials Conversion Costs Costs$12,600$3,050$13,600$3,400 Output (units)70,00061,00080,00068,000 Unit cost$0.18$0.05$0.17$0.05

34. 5-34 Treatment of Transferred-In Goods Step 1: Physical Flow Analysis Units accounted for: Units completed and transferred out: Started and completed234,000 From beginning work in process 16,000250,000 Units in ending work in process 30,000 Total units accounted for280,000 Units to account for: Units, beginning work in process16,000 Units transferred in during October264,000 Total units to account for280,000

35. 5-35 Treatment of Transferred-In Goods Step 2: Calculation of Equivalent Units Conversion Costs Direct Materials Transferred-in Materials Units completed250,000250,000250,000 Add: Units in ending work in process x percentage complete: 30,000 x 100% 30,000------ 30,000 x 100%---30,000--- 30,000 x 30%------ 9,000 Equivalent units of output280,000280,000259,000 Conversion Costs

36. 5-36 Treatment of Transferred-In Goods Step 3: Computation of Unit Costs Unit transferred-in cost = ($800 + $13,200)/280,000 = $0.05 Unit direct materials cost= ($300 + $2,500)/280,000 = $0.01 Unit conversion costs = ($180 + $5,000)/259,000 = $0.02 Total unit cost = $0.05 + $0.01 + $0.02 = $0.08

37. 5-37 Treatment of Transferred-In Goods Step 4: Valuation of Inventories Cost of goods transferred out = $0.08 x 250,000 = $20,000 Transferred-in materials: $0.05 x 30,000$1,500 Direct materials added: $0.01 x 30,000300 Conversion costs: $0.02 x 8,000 180 Total cost$1,980

38. 5-38 Estrella Company Tableting Department Production Report for October (Weighted Method) Units to account for:Units accounted for: Units, beginning workUnits completed250,000 in process16,000 Units started264,000Units, EWIP 30,000 Total units to account for280,000Total units accounted for280,000 Unit Information Equivalent Units Direct Materials Conversion Costs Units completed250,000250,000250,000 Units, ending work in process 30,000 30,000 9,000 Equivalent units of output280,000280,000259,000 ContinuedContinued Transferred-in Materials

39. 5-39 Cost Information Cost to account for: Transferred-In Direct Conversion Materials Materials Costs Total Beginning work in process$ 800$ 300$ 180$ 1,280 Incurred during the period 13,200 2,500 5,000 20,700 Total costs to account for$ 14,000$ 2,800$ 5,180$21,980 Divided by equiva- lent units÷280,000÷280,000÷259,000 Cost per equivalent unit$ 0.05$ 0.01$ 0.02$ 0.08 ContinuedContinued

40. 5-40 Cost accounted for: Units transferred out (250,000 x $0.08)$20,000 Ending work-in-process: Transferred-in materials ($0.05 x 30,000)$1,500 Direct materials (30,000 x $0.01)300 Conversion costs (9,000 x $0.02) 180 1,980 Total costs accounted for$21,980

41. 5-41 Basic Features of Operating Costing Direct Materials Process 1 Batch B (b) (c) Batch B (d) (a) (f) Batch B Batch A Process 2 Continued on the next slide

42. 5-42 Basic Features of Operating Costing Process 1 Batch B (b) (c) Batch B (d) Process 2 Batch A (g) Process 3 (h) Batch A (i) Finished Goods (e) (j)

43. 5-43 Opportunity Costing Example A company produces a variety of vitamin and mineral products as well as single vitamin and mineral products. The company produces different strengths of vitamins in different sizes of bottles. Work Order 100 Work Order 101 Direct materials:Ascorbic acidVitamin E CapsulesVitamin C Bottle (100 capsules)Vitamin B-1 Caps and labelsVitamin B-2

44. 5-44 Opportunity Costing Example The following cots are collected from work orders: Work Order 100 Work Order 101 Direct materials$4,000$15,000 Conversion costs: Picking1,0003,000 Encapsulating3,000--- Tableting---4,000 Bottling 1,500 2,000 Total production costs$9,500$24,000

45. 5-45 Opportunity Costing Example 1.Work in Process—Picking4,000 Materials4,000 2.Work in Process—Picking1,000 Conversion Costs Applied1,000 3.Work in Process—Encapsulating5,000 Work in Process—Picking5,000 4.Work in Process—Encapsulating3,000 Conversion Costs Applied3,000 ContinuedContinued

46. 5-46 Opportunity Costing Example 5.Work in Process—Bottling8,000 Work in Process—Encapsulating8,000 6.Work in Process—Bottling1,500 Conversion Costs Applied1,500 7.Finished Goods9,500 Work in Process—Bottling9,500 The journal entries for the other work order are not shown but would follow a similar pattern.

47. 5-47 Chapter End of

48. 5-48