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Chapter 4

Chapter 4. Systems Design: Process Costing. Job-order Costing. Process Costing. Many units of a single, homogeneous product flow evenly through a continuous production process. One unit of product is indistinguishable from any other unit of product.

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Chapter 4

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  1. Chapter 4 Systems Design: Process Costing

  2. Job-orderCosting ProcessCosting • Many units of a single, homogeneous product flow evenly through a continuous production process. • One unit of product is indistinguishable from any other unit of product. • Each unit of product is assigned the same average cost. Types of Costing Systems Usedto Determine Product Costs

  3. Types of Costing Systems Usedto Determine Product Costs Job-orderCosting ProcessCosting • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill

  4. Job order costing Many jobs are worked during the period. Costs are accumulated by individual jobs. Job cost sheet is the key document. Unit cost computed by job. Process costing A single product is produced for a long period of time. Costs are accumulated by departments. Department production report is the key document. Unit costs are computed by department. Differences Between Job-Orderand Process Costing

  5. Basic raw materials Processing costs Processing costs Processing Department 2 Processing costs Processing Department 3 Finished Goods Sequential Processing Departments Start Processing Department 1 Partially completed goods Partially completed goods Completed goods

  6. Basic raw materials Processing costs Processing costs Processing Department 2 Processing Department A Processing costs Processing Department 3 Finished Goods Parallel Processing Departments Start Processing Department 1 Partially completed goods Partially completed goods Completed goods

  7. Direct Material FinishedGoods Direct Labor ManufacturingOverhead Cost of GoodsSold Flow of Materials, Laborand Overhead Costs Processing Department

  8. Direct Material Direct Material Flow of Materials, Laborand Overhead Costs Work in ProcessMixingDepartment Raw Materials DirectMaterial Purchases IndirectMaterial Manufacturing Overhead Work in ProcessFinishingDepartment Actual Applied OtherOverhead IndirectMaterial

  9. Direct Labor Direct Labor Flow of Materials, Laborand Overhead Costs Work in ProcessMixingDepartment Wages Payable Direct Material Direct Labor IndirectLabor Manufacturing Overhead Work in ProcessFinishing Department Actual Applied Direct Material OtherOverhead IndirectMaterial IndirectLabor

  10. AppliedOverhead AppliedOverhead Flow of Materials, Laborand Overhead Costs Work in ProcessMixing Department Wages Payable Direct Material Direct Labor Direct Labor IndirectLabor Manufacturing Overhead Work in ProcessFinishing Department Actual Applied Direct Material OtherOverhead OverheadApplied to Work inProcess Direct Labor Indirect Material IndirectLabor

  11. Flow of Materials, Laborand Overhead Costs Now, let’s transfer the partially completed goods fromthe Mixing Departmenttothe Finishing Department.

  12. Transferred to Finishing Transferred from Mixing Flow of Materials, Laborand Overhead Costs Work in ProcessFinishingDepartment Work in ProcessMixingDepartment Direct Material Direct Material Direct Labor Direct Labor AppliedOverhead AppliedOverhead

  13. Flow of Materials, Laborand Overhead Costs The goods have been completed in the Finishing Department and will be transferred to Finished Goods Inventory when they are ready to be sold.

  14. Cost of Goods Manufactured Cost of GoodsManufactured Cost of GoodsSold Cost of GoodsSold Flow of Materials, Laborand Overhead Costs Work in ProcessFinishingDepartment Finished Goods Direct Material Direct Labor AppliedOverhead Transferred from Dept. A Cost of Goods Sold

  15. Materials, Labor, and OverheadCost Entries

  16. Flow of Materials, Labor andOverhead Costs

  17. Flow of Materials, Labor andOverhead Costs

  18. Flow of Materials, Labor andOverhead Costs

  19. Flow of Materials, Labor andOverhead Costs

  20. Flow of Materials, Labor andOverhead Costs

  21. + = Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. It is the concept of expressing partially completed products as a smaller number of fully completed units. Two one-half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 completed units.

  22. Quick Check  For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

  23. Quick Check  For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units

  24. Cost perequivalent unit Costs for the periodEquivalent units of productionfor the period = Equivalent Units of Production To calculate the cost perequivalent unit for the period:

  25. Quick Check  Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

  26. Quick Check  Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent 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

  27. Weighted Average Method Using the weighted-average method, equivalentunits will always be calculated as follows:

  28. Weighted Average Method Matrix, Inc. reported the following activity in Mixing Department for the month of June:

  29. Weighted Average Method Equivalent units are calculated as follows:

  30. Weighted Average Method Equivalent units are calculated as follows:

  31. Weighted Average Method Equivalent units are calculated as follows:

  32. Weighted Average Method Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Equivalent units are calculated as follows:

  33. Weighted Average Method 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

  34. Weighted Average Method Conversion 6,000 Units Started EndingWork in Process900 Units30% Complete BeginningWork in Process300 Units40% Complete 5,100 Units Startedand Completed 5,400 Units Completed 900 × 30% 270 Equivalent Units 5,670 Equivalent units of production

  35. Quantity schedule with computation of equivalent units. • A computation of cost per equivalent unit. • A reconciliation of cost flows for the period. Production Report Production Report Section 1 Section 2 Section 3

  36. Production Report Example • Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. • Double Diamond uses the weighted average cost procedure. • Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

  37. Production Report Example Cost Work in process, May 1: 200 units Materials: 55% complete. $ 9,600 Conversion: 30% complete. 5,575 Units started into production in May: 5,000 Units completed and transferred out in May: 4,800 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.

  38. Production Report Example Section: Quantity Schedule with Equivalent Units

  39. Production Report Example Section: Quantity Schedule with Equivalent Units

  40. Production Report Example Section: Compute cost per equivalent unit

  41. $378,200 ÷ 4,960 units = $76.25 Production Report Example Section: Compute cost per equivalent unit

  42. Production Report Example Section: Compute cost per equivalent unit $356,475 ÷ 4,900 units = $72.75

  43. Production Report Example Section : Cost Reconciliation

  44. 4,800 units @ $149.00 Production Report Example Section : Cost Reconciliation

  45. All costs accounted for Production Report Example Section : Cost Reconciliation 160 units @ $76.25 100 units @ $72.75

  46. End of Chapter 4

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