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Chapter 14

Chapter 14. Process-Costing Systems. Explain the basic ideas underlying process costing and how they differ from job costing. Learning Objective 1. Introduction to Process Costing. What is a process-costing system?. It is a costing system in which the cost

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Chapter 14

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  1. Chapter 14 Process-Costing Systems

  2. Explain the basic ideas underlying process costing and how they differ from job costing. Learning Objective 1

  3. Introduction to Process Costing What is a process-costing system? It is a costing system in which the cost of a product or service is obtained by assigning costs to masses of like or similar units and then computing unit costs on an average basis.

  4. Process Costing Compared With Job Costing Direct Materials Direct Labor Indirect Resource Cost Job 100 Job 101 Finished Goods Cost of Goods Sold

  5. Process Costing Compared With Job Costing Direct Materials Direct Labor Indirect Resource Cost Process A Process B Assembly Finished Goods Cost of Goods Sold

  6. Compute output in terms of equivalent units. Learning Objective 2

  7. Physical Units and EquivalentUnits Step 1 Track the physical flow in units. Step 2 Compute output in terms of equivalent units.

  8. Compute Output in Terms of Equivalent Units Step 2 Flow of Physical Direct Conv. Units Mtls. Costs Step 1 Started and completed 20,000 20,000 20,000 Ending WIP 5,0005,000 1,250 Units to account for: 25,000 Equivalent units 25,000 21,250 100% 25%

  9. Compute costs and prepare journal entries for the principal transactions in a process-costing system. Learning Objective 3

  10. Calculation of Product Costs Step 3 Summarize total costs to account for. Step 4 Compute the cost per equivalent unit. Step 5 Assign costs to units completed and to units in ending work in process.

  11. Production Cost Report Steps 3 and 4 TotalDirect Conversion CostsMaterialsCosts Costs to account for $112,500 $70,000 $42,500 ÷ Equivalent units 25,000 21,250 = Cost per EU $ 4.80 $ 2.80 $ 2.00

  12. Production Cost Report Step 5 Units completed and transferred out: 20,000 × (2.80 + 2.00) $ 96,000 Units in ending inventory: Materials: 5,000 × 2.80 14,000 Conversion: 1,250 × 2.00 2,500 Total costs $112,500

  13. Journal Entries Work in Process – Forming 70,000 Direct-materials Inventory 70,000 Materials added to production during the month Work in Process – Forming 10,625 Accrued Payroll 10,625 Direct labor during the month

  14. Journal Entries Work in Process – Forming 31,875 Factory Overhead 31,875 Factory overhead applied during the month Work in Process – Finishing 96,000 Work in Process – Forming 96,000 Costs of goods completed and transferred during the month from Forming to Assembly

  15. Forming Department Work in Process – Forming Direct materials $ 70,000 Transferred Direct labor 10,625 out to Factory overhead 31,875 finishing $96,000 Costs to account for 112,500 Month-end balance $ 16,500

  16. Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method and the FIFO method. Learning Objectives 4 and 5

  17. Weighted-Average Method Focus is on the total work done to date regardless of whether that work was done during the period preceding or during the current period.

  18. First-In, First-Out Method Beginning inventory is treated as if it were separate and distinct from goods started and completed during the current period. Equivalent units computations are for only work done during the current period.

  19. Weighted-Average Method Example Consider the Cooking Department of Ricky Foods, a food-processing company. Beginning WIP: 5,000 units 100% materials 40% conversion costs Ending WIP: 2,000 units 100% materials 50% conversion costs Started: 28,000 units

  20. Weighted-Average Method Example Step 1 Physical Units Beginning WIP 5,000 Started 28,000 Units to account for: 33,000 Ending WIP 2,000 Completed 31,000

  21. Weighted-Average Method Example Step 2 Direct Conversion Materials Costs Completed 31,000 31,000 + Ending WIP 2,000 1,000 = Equivalent units 33,000 32,000

  22. Weighted-Average Method Example Steps 3 and 4 Total Direct Conversion Costs Materials Costs Beginning WIP $ 9,360 $ 8,060 $ 1,300 Costs added 56,140 41,440 14,700 Costs to account for $65,500 $49,500 $16,000 ÷ Equivalent units 33,000 32,000 = Cost per EU $ 2.00 $ 1.50 $ .50

  23. Weighted-Average Method Example Step 5 Units completed and transferred out: 31,000 × (1.50 + .50) $62,000 Units in ending inventory: Materials: 2,000 × 1.50 3,000 Conversion: 1,000 × .50 500 Total costs $65,500

  24. FIFO Method Example Step 1 Physical Units Beginning WIP 5,000 Started 28,000 Units to account for: 33,000 Ending WIP 2,000 Completed 31,000

  25. FIFO Method Example Step 2 Direct Conversion Materials Costs Completed 31,000 31,000 + Ending WIP 2,000 1,000 – Beginning WIP 5,000 2,000 = Equivalent units 28,000 30,000

  26. FIFO Method Example Step 3 Current direct materials cost $41,440 Current conversion costs 14,700 Total current costs $56,140 Beginning work in process $9,360 + Total costs $65,500 =

  27. FIFO Method Example Step 4 Cost per equivalent unit Direct materials cost: $41,440 ÷ 28,000 = $1.48 Conversion costs: $14,700 ÷ 30,000 = $ .49

  28. FIFO Method Example Step 5 Units in ending inventory: Materials: 2,000 × 1.48 $ 2,960 Conversion: 1,000 × .49 490 Total $ 3,450 Transferred out: ($65,500 – $3,450) $62,050

  29. Differences Between FIFO and Weighted-Average Methods The key difference is how equivalent units are computed. Another difference is the definition of cost.

  30. Transferred-in Costs inProcess Costing... • treat transfers from a previous department similar to direct material added at the beginning of processing.

  31. Use backflush costing with a JIT production system. Learning Objective 6

  32. Process Costing in a JIT System JIT is a philosophy about when to do something. The “when”is as needed. The “something” is a production, purchasing, or delivery activity.

  33. Industry Characteristics • Sequential arrangement of production activities • Reduction of set-up times • Scheduling of production as needed, by use of a “demand-pull” system • Cross-training of employees

  34. Process Costing in a JIT System • In just-in-time production systems, inventory of work in process is typically small compared to the costs of goods produced and sold. • The cost of tracking work in process exceeds the benefits for many companies.

  35. Backflush Costing • What is backflush costing? • It is an accounting system that applies costs to products only when the production is complete.

  36. Principles of Backflush Costing Backflush costing has only two categories of costs: Materials Conversion There is no work in process account.

  37. Backflush Costing Example • Speaker Technology, Inc., recently introduced backflush costing and JIT. Model AX27 Standard material cost: $14 Standard conversion cost: $21 Actual production for the month: 400 units Actual materials purchased: $5,600 Actual conversion costs: $8,400

  38. Backflush Costing Example • The backflush costing system has only three accounts related to production: • Materials and parts inventory • Conversion costs • Finished goods inventory

  39. Backflush Costing Example What are the journal entries? Materials Inventory 5,600 Accounts Payable or Cash 5,600 To record material purchases Conversion Costs 8,400 Accrued Wages 8,400 To record conversion costs incurred

  40. Backflush Costing Example Finished Goods Inventory 14,000 Material Inventory 5,600 Conversion Costs 8,400 To record costs of completed production Cost of Goods Sold 14,000 Finished Goods Inventory 14,000 To record costs of 400 units sold

  41. Backflush Costing Example Cost of Goods Sold 14,000 Material Inventory 5,600 Conversion Costs 8,400

  42. Understand how a process- costing system tracks costs to products. Objective 7

  43. How Process-Costing SystemsTrack Costs to Products A process-costing system tracks costs to products using broad averages. These averages represent equivalent unit costs incurred in each of several departments or processes.

  44. How Process-Costing SystemsTrack Costs to Products Unit costs from one department or process becomes the transferred-in material for downstream departments or processes until the product is finished.

  45. End of Chapter 14

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