Product costing

1-1

PRODUCT PRODUCT COSTINGCOSTING

JOIN KHALID AZIZ• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,

B.COM.• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4

ICAP MODULE B, B.COM, BBA, MBA & PIPFA.• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP

MODULE D, BBA, MBA & PIPFA.

• CONTACT:• 0322-3385752• 0312-2302870• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,

KARACHI, PAKISTAN.

JOIN KHALID AZIZo CRASH CLASSESo ICMAP STAGE 3o FINANCIAL ACCOUNTING & COST ACCOUNTING PERFORMANCE APPRAISAL

o INDIVIDUAL & GROUPS

JOIN KHALID AZIZ

• CRASH CLASSES• ICMAP STAGE 1 & 2

•FUNDAMENTALS OF FINANCIAL ACCOUNTING & COST ACCOUNTING

• INDIVIDUAL & GROUPS

JOIN KHALID AZIZ• FRESH CLASSES• CA MODULE B & D

•FINANCIAL ACCOUNTING & COST ACCOUNTING

• INDIVIDUAL & GROUPS

1-6

Comparison of Job-Order Costing Comparison of Job-Order Costing and Process Costingand Process Costing

ProcessCostingProcessCosting

Job-orderCosting

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.

1-7

ProcessCostingProcessCosting

Job-orderCosting

Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

Comparison of Job-Order Costing Comparison of Job-Order Costing and Process Costingand Process Costing

1-8

Job-order costing– Costs accumulated by

the job.– Work in process has a

job-cost sheet for each job.

– Many unique, high cost jobs.

– Jobs built to customer order.

Process costing– Costs accumulated by

department or process.– Work in process has a

production report for each batch of products.

– A few identical, low cost products.

– Units continuously produced for inventory in automated process.

Comparison of Job-Order Costing Comparison of Job-Order Costing and Process Costingand Process Costing

1-9

Direct Material

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

Jobs

The work-in-process account consists of individual jobs in a

job-order cost system.

Differences Between Job-Order Differences Between Job-Order and Process Costingand Process Costing

1-10

Direct Material

FinishedGoods

Cost of GoodsSold

Products

The work-in-process account consists of

individual products in a process cost system.

Differences Between Job-Order Differences Between Job-Order and Process Costingand Process Costing

Direct Labor& Overhead

(Conversion)

When direct labor is a relatively small amount compared to material and overhead, it is often

combined with overhead.

1-11

Process Cost FlowsProcess Cost Flows

Direct materialDirect laborApplied manufacturing and transferred to during currentoverhead finished goods period

Cost of goods completed Cost of goods sold

Work-in-Process Finished Goods Cost of Goods Sold

One Production Department

Inventory Inventory

1-12

Process Cost FlowsProcess Cost Flows

Direct materialDirect laborApplied manufacturing transferred to and transferred tooverhead department B finished goods

Direct materialDirect laborApplied manufacturing

overhead

during current period

Cost of goods sold

Cost of goods completed in department A and Cost of goods completed

Finished Goods Inventory Cost of Goods Sold

Two Sequential Production DepartmentsWork-in-Process Inventory Work-in-Process InventoryProduction Department A Production Department B

1-13

Equivalent Units: A Key ConceptEquivalent Units: A Key Concept

• Costs are accumulated for a period of time for products in work-in-process inventory.

• Products in work-in-process inventory at the beginning and end of the period are only partially complete.

• Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

1-14

Equivalent Units of ProductionEquivalent Units of Production

Equivalent units are partially complete and are part of work in process inventory. Partially completed

products are expressed in terms of a smaller number of fully completed

units.

1-15

Finished Goods

Cost of Goods Sold

Process Cost FlowsProcess Cost Flows

Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of GoodsSold

•Cost of GoodsSold

•Cost of Goods

Manufactured

1-16

Equivalent Units of ProductionEquivalent Units of Production

Two half completed products are equivalent to one completed product.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

+ = 1

1-17

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

Quick Check Quick Check

1-18

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

Quick Check Quick Check

1-19

Calculating and Using Equivalent Calculating and Using Equivalent Units of ProductionUnits of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

= Costs for the periodEquivalent units of production

for the period

1-20

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

Quick Check Quick Check

1-21

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

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Quick Check Quick Check

1-22

Equivalent Units of Production –Equivalent Units of Production –Weighted Average MethodWeighted Average Method

The weighted average method . . .– Makes no distinction between work done in prior

and current period.– Blends together units and costs from prior

period and current period.

Let’s see how this works!

1-23

• MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching.

• MVP uses the weighted-average cost procedure.

• Material is added at the beginning of the Cutting Department, and conversion is incurred uniformly throughout the process.

• Using the following information for the month of March, let’s prepare a production report for the Cutting Department.

EXP 1: Production Report ExampleEXP 1: Production Report Example

1-24

Work in process, March 1: 20,000 units Cost Materials: 100% complete. $ 50,000Conversion: 10% complete. 7,200

Units started into production in March: 30,000 unitsUnits completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 unitsMaterials 100% complete.Conversion 50% complete.

Costs incurred during MarchMaterials cost 90,000Conversion costs:

Direct labor $ 86,000Applied manufacturing overhead 107,500Total conversion costs 193,500

Total costs to account for $ 340,700

Production Report ExampleProduction Report Example

1-25

Analysis of Physical Flow of Units

PhysicalUnits

Work in process, March 1 20,000 Units started during March 30,000 Total units to account for 50,000

Units completed and transferred out during March 40,000 Work in process, March 31 10,000 Total units accounted for 50,000

Production Report ExampleProduction Report Example

1-26

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000 Total equivalent units 50,000 45,000

Production Report ExampleProduction Report Example Calculation of Equivalent Units

50% of 10,000 units

Beginning inventory % is not used in weighted-average method.

1-27

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000 Total equivalent units 50,000 45,000

Production Report ExampleProduction Report Example Calculation of Equivalent Units

100% of 10,000 units, allmaterial added at beginning

1-28

DirectMaterial Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$ Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$

Computation of unit costs

Production Report ExampleProduction Report Example

$140,000 ÷ 50,000 equivalent units

$200,700 ÷ 45,000 equivalent units

$2.80 + $4.46

1-29

Production Report ExampleProduction Report Example Analysis of total costs

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Convserion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$

1-30

Production Report ExampleProduction Report Example Analysis of total costs

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Convserion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$

1-31

Production Report ExampleProduction Report Example Analysis of total costs

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Convserion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$ All costs

accounted for

1-32

Percentage of Completion Equivalent Units

Physical with Respect to DirectUnits Conversion Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000 Total equivalent units 50,000 45,000

DirectMaterial Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$

Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Conversion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$

MVP SPORTS EQUIPMENT COMPANYProduction Report: Cutting Department

1-33

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.

EXP 2: Production Report ExampleEXP 2: Production Report Example

1-34

Work in process, May 1: 200 units Materials: 55% complete. $ 9,600Conversion: 30% complete. 5,575

Production started during May: 5,000 unitsProduction completed during May: 4,800 units

Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900

Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.

Production Report ExampleProduction Report Example

1-35

Section 1: Quantity Schedule with Equivalent Units

Production Report ExampleProduction Report Example

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400

1-36

Production Report ExampleProduction Report Example

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160

5,200 4,960

Section 1: Quantity Schedule with Equivalent Units

1-37

Production Report ExampleProduction Report Example

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900

Section 1: Quantity Schedule with Equivalent Units

1-38

Section 2: Compute cost per equivalent unit

Production Report ExampleProduction Report Example

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900 Cost per equivalent unit

1-39

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900 Cost per equivalent unit 76.25$

Production Report ExampleProduction Report Example

Section 2: Compute cost per equivalent unit

$378,200 ÷ 4,960 units = $76.25

1-40

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900 Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00

Production Report ExampleProduction Report Example

$356,475 ÷ 4,900 units = $72.75

Section 2: Compute cost per equivalent unit

1-41

Section 3: Cost Reconciliation

Production Report ExampleProduction Report Example

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31Total cost accounted for

1-42

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31Total cost accounted for

4,800 units @ $149.00

Production Report ExampleProduction Report Example

Section 3: Cost Reconciliation

1-43

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100 Total work in process, May 31 19,475 Total cost accounted for 734,675$

160 units @ $76.25

Production Report ExampleProduction Report Example

Section 3: Cost Reconciliation

All costs accounted for

100 units @ $72.75

JOIN KHALID AZIZ• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,

B.COM.• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4

ICAP MODULE B, B.COM, BBA, MBA & PIPFA.• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP

MODULE D, BBA, MBA & PIPFA.

• CONTACT:• 0322-3385752• 0312-2302870• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,

KARACHI, PAKISTAN.