Chapter Four

1. Systems Design:Process Costing Chapter Four

2. Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost. Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods. The flow of costs through the manufacturing accounts is basically the same in both systems. Similarities Between Job-Order and Process Costing

3. Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each period. Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs. Process costing systems use department production reports to accumulate costs. Job-order costing systems use job cost sheets to accumulate costs. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job. Differences Between Job-Order and Process Costing

4. What is a Processing Department? Any location in an organization where materials, labor or overhead are added to the product. The activities performed in a processingdepartment are performed uniformly on allunits of production. Furthermore, the output ofa processing department must behomogeneous.

5. Sequential vs. Parallel Processing Sequential processing means that unitsflow in a sequence from onedepartment to another. Parallel processing is used whenafter a point, some units go throughdifferent processing departments than others. For example, apetroleum refinery separates crudeoil into products like gasoline, jetfuel, and heating oil.

6. Sequential Processing Cotton prep. department Thread prod. department Packaging. department Parallel Processing

7. FinishedGoods Work inProcess Cost of GoodsSold Comparing Job-Orderand Process Costing Direct Materials Direct Labor ManufacturingOverhead

8. Comparing Job-Orderand Process Costing Costs are traced andapplied to individualjobs in a job-ordercost system. Direct Materials FinishedGoods Jobs Direct Labor ManufacturingOverhead Cost of GoodsSold

9. Comparing Job-Orderand Process Costing Costs are traced and applied to departments in a process cost system. Direct Materials FinishedGoods Processing Department Direct Labor ManufacturingOverhead Cost of GoodsSold

10. T-Account Views of Cost Flows For purposes of this example, assume there are two processing departments – Departments A and B. We will use T-accounts.

11. Mixing Department Packaging Department Chewing gums Completed and Sent for packaging Raw Materials Arrive from Warehouse Packed chewing Gums are ready For sale

12. Equivalent Units of Production Equivalent units are the product of the number of partially completed units and the percentage completion of those units. We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory.

13. + = 1 Equivalent Units – The Basic Idea Two half completed products are equivalent to one completed product. So, 10,000 units 70% completeare equivalent to 7,000 complete units.

14. Quick Check  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

15. Quick Check  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 × 0.30) = 11,500 equivalent units

16. Calculating Equivalent Units Equivalent units can be calculated two ways: The First-In, First-Out Method – FIFO is covered in the appendix to this chapter. The Weighted-Average Method – This method will be covered in the main portion of the chapter.

17. Costs for the periodEquivalent units of productionfor the period Cost perequivalent unit = Equivalent Units of ProductionWeighted-Average Method • The weighted-average method . . . • Makes no distinction between work done in prior or current periods. • Blends together units and costs from prior and current periods.

18. Process Costing and Direct Labor DirectMaterials Direct labor costsmay be smallin comparison toother product costs in processcost systems. Overhead Dollar Amount DirectLabor Type of Product Cost

19. Process Costing and Direct Labor DirectMaterials Direct labor costsmay be smallin comparison toother product costs in processcost systems. Conversion Dollar Amount Type of Product Cost Direct labor and manufacturing overhead may becombined into one product cost called conversion.

20. Weighted-Average Example Smith Company reported the following activity in Department A for the month of June:

21. Weighted-Average Example The first step in calculating the equivalent units is to identify the units completed and transferred out of Department A in June (5,400 units)

22. Weighted-Average Example The second step is to identify the equivalent units of production in ending work in process with respect to materials for the month (540 units) and add this to the 5,400 units from step one.

23. Weighted-Average Example The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month (270 units) and add this to the 5,400 units from step one.

24. Weighted-Average Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process

25. Weighted-Average Example Materials 6,000 Units Started EndingWork in Process900 Units60% Complete BeginningWork in Process300 Units40% Complete 5,100 Units Startedand Completed 5,400 Units Completed 5,400 Units Completed 900 × 60% 540 Equivalent Units 5,940 Equivalent units of production

26. Weighted-Average Example Conversion 6,000 Units Started EndingWork in Process900 Units30% Complete BeginningWork in Process300 Units20% Complete 5,100 Units Startedand Completed 5,400 Units Completed 900 × 30% 270 Equivalent Units 5,670 Equivalent units of production

27. Production Report • A quantity schedule showing the flow of units and the computation of equivalent units. Section 1 • A computation ofcost per equivalent unit. Section 2 Section 3 Production Report – Weighted-Average

28. Production Report Section 1 Section 2 Section 3 Production Report • Cost Reconciliation section shows the reconciliation of all cost flows into and out of the department during the period.

29. Production Report Example • Assume that Double Diamond Skis uses the weighted-average method of process costing to determine unit costs in it Shaping and Milling Department.

30. Production Report Example Work in process, May 1: 200 units Materials: 55% complete $ 9,600 Conversion: 30% complete 5,575 Production started during May 5,000 units Production completed during May 4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Work in process, May 31 400 units Materials: 40% complete Conversion: 25% complete

31. Production Report Example Step1: Prepare Quantity Schedule with Equivalent Units.

32. Production Report Example Step1: Prepare Quantity Schedule with Equivalent Units.

33. Production Report Example Step1: Prepare Quantity Schedule with Equivalent Units.

34. Costs for the periodEquivalent units of productionfor the period Cost perequivalent unit = Step 2: Calculating the Costs Per Equivalent Unit To calculate the cost per equivalent unit for the period:

35. Production Report Example Step 2: Compute the cost per equivalent unit.

36. $378,200 ÷ 4,960 units = $76.25 Production Report Example Step 2: Compute the cost per equivalent unit.

37. $356,475 ÷ 4,900 units = $72.75 Production Report Example Step 2: Compute the cost per equivalent unit.

38. Production Report Example Step 3: Prepare a Cost Reconciliation

39. 4,800 units @ $149.00 Production Report Example Step 3: Prepare a Cost Reconciliation

40. 100 units @ $72.75 Production Report Example Step 3: Prepare a Cost Reconciliation 160 units @ $76.25 All costs accounted for

41. Operation Costing Operation costing is a hybrid of job-order and process costing because it possesses attributes of both approaches. Job-order Costing Operation Costing (Products produced in batches) Process Costing Material Costs chargedto batches as injob-order costing. Conversion costsassigned to batchesas in process costing.

42. FIFO Method Appendix 4A

43. FIFO vs. Weighted-Average Method The FIFO method (generally considered more accurate that the weighted-average method) differs from the weighted-average method in two ways: • The computation of equivalent units. • The way in which the costs of beginning inventory are treated in the cost reconciliation report.

44. Equivalent Units – FIFO Method Let’s revisit the Smith Company example. Assume the following activity is reported in Department A for the month of June:

45. Equivalent Units – FIFO Method Step 1: Determine the number of units completed and transferred out of Department A in June.

46. Equivalent Units – FIFO Method Step 2: Add the equivalent units of production in ending work in process inventory (540 units for material and 270 units for conversion) to the units completed and transferred our during June.

47. Equivalent Units – FIFO Method Step 3: Subtract the equivalent units in beginning work in process inventory (120 units for materials and 60 units for conversion) from the sum of the units completed and transferred out and the equivalent units in ending work in process inventory.

48. Equivalent Units – FIFO Method Materials 6,000 Units Started EndingWork in Process900 Units60% Complete BeginningWork in Process300 Units40% Complete 5,400 Units Startedand Completed

49. Equivalent Units – FIFO Method Conversion 6,000 Units Started EndingWork in Process900 Units30% Complete BeginningWork in Process300 Units20% Complete 5,400 Units Startedand Completed

50. Equivalent Units: Weighted Average vs. FIFO As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under the FIFO method.