1. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Financial & Managerial Accounting The Basis for Business Decisions FOURTEENTH EDITION Williams Haka Bettner Carcello

2. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin PROCESS COSTING Chapter 18

3. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 To distinguish production procedures that match with process costing from those that correspond with job order costing.

4. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Job Order Costing Custom orders Unique products Low production volume High product flexibility Low to medium standardization of labor and material Process Costing Repetitive operations Identical products High production volume Low product flexibility High standardization of labor and material Production of Goods and Services and Costing Systems

5. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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. Process Costing Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

6. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 To account for the physical flows and related cost flows when using process costing.

7. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Direct Materials Finished Goods Cost per unit for each job Direct Labor Factory Overhead Jobs The Work in Process account consists of individual jobs in job costing. Tracking the Physical Flow and Related Production Costs

8. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Direct Materials Finished Goods Direct Labor and Factory Overhead (Conversion) Processes The Work in Process account consists of specific processes in process costing. Cost per unit processed Tracking the Physical Flow and Related Production Costs

9. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 Tracking the Physical Flow and Related Production Costs

10. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Work in Process Assembly Labor Materials Indirect Finished Goods Conversion Costs Direct Delivered to Customers Work in Process Packaging Understanding Cost Flows Factory Overhead

11. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 units produced in the period. Understanding Cost Flows

12. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. If partially complete units remain in process, we must use equivalent units as the divisor to obtain unit costs. Understanding Cost Flows Costs are accumulated for a period of time by process or department.

13. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 To demonstrate how to calculate equivalent units.

14. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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. + = 1 Process Costing and Equivalent Units

15. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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? a.10,000 b.11,500 c. 1,500 d. 15,000 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? a.10,000 b.11,500 c. 1,500 d. 15,000 Process Costing and Equivalent Units

16. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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? a.10,000 b.11,500 c. 1,500 d. 15,000 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? a.10,000 b.11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Process Costing and Equivalent Units

17. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 To use the costs of resources consumed to calculate the cost per equivalent unit of production.

18. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Cost per equivalent unit = Product costs for the period Equivalent units for the period Cost per Equivalent Unit

19. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Cost per Equivalent Unit

20. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per 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 Cost per Equivalent Unit

21. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Equivalent units may be different for material and conversion at different stages of a process. At completion of Stage 1 of the process, material is 40% complete, but conversion is only 25% complete. Stage 1 40% of Material 25% of Conversion Process Costing and Equivalent Units

22. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stage 2 25% of Conversion 60% of Material Stage 1 40% of Material 25% of Conversion + + = = 100% 50% Process Costing and Equivalent Units

23. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stage 3 50% of Conversion The process is now complete. Stage 2 25% of Conversion 60% of Material Stage 1 40% of Material 25% of Conversion Process Costing and Equivalent Units

24. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Owl Inc. uses FIFO process costing in its Fabrication Department where a product called Strata is made. Process Costing

25. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Process Costing

26. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Material is added at the beginning of the process so it is always 100% complete. Process Costing

27. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Physical Flow of Units

28. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Computing Equivalent Units of Production

29. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Since materials are added at the beginning of the process, no additional materials are necessary to complete the beginning inventory. Computing Equivalent Units of Production

30. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin } 100,000 100,000 units completed and transferred. Computing Equivalent Units of Production

31. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Computing Equivalent Units of Production

32. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Since conversion is 40 percent complete in the beginning inventory, 60 percent of the work must be completed in April. Computing Equivalent Units of Production

33. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin } 100,000 Transferred Computing Equivalent Units of Production

34. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Computing Equivalent Units of Production

35. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Process Costing and Equivalent Units

36. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Cost per Equivalent Unit

37. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To use the cost per equivalent unit to assign costs to the work completed during the period.

38. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Cost of Completed Units

39. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Cost of Completed Units

40. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin $0.50 + $0.60 = $1.10 Cost of Completed Units

41. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To create a process costing production report and use the report for decision making.

42. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. We will account for all costs incurred by assigning unit costs to the: A. 100,000 units completed and transferred. B. 20,000 units remaining in ending work in process inventory. Tracking Costs Using a Process Costing Production Report

43. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Tracking Costs Using a Process Costing Production Report

44. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Tracking Costs Using a Process Costing Production Report

45. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin All costs accounted for Tracking Costs Using a Process Costing Production Report

46. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ethics, Fraud, and Corporate Governance Overstating equivalent units of resources in ending inventory will understate cost of goods sold, and thereby overstate income. Equivalent units of production can be overstated by inflating the application of direct labor and overhead (conversion costs) to work in process.

47. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 18