CHAPTER 3CHAPTER 3

Process CostingProcess Costing

Difference Between Job-Order Difference Between Job-Order and Process Costing Systemsand Process Costing Systems

Job-Order Costing Each unique product or batch is considered

a job Manufacturing costs are traced to specific

jobs

Process Costing Used when homogenous items are produced Total costs are divided by total units

produced

Process Costing ExampleProcess Costing Example

Job-Order Costing SystemJob-Order Costing System

Process Costing SystemProcess Costing System

Product and Cost FlowsProduct and Cost FlowsProduct Flows Through Departments A product typically passes through

multiple departments Conversion Costs (Labor and

Overhead)

Product and Cost FlowsProduct and Cost FlowsCost Flows Through Accounts Direct Material

Direct Labor

Manufacturing Overhead

Transferred-in Cost

Flow of Cost Between Flow of Cost Between Processing DepartmentsProcessing Departments

Study Break #1Study Break #1Which one(s) of the following characteristics are associated with a process costing system?a. Heterogeneous productsb. Homogeneous productsc. Continuous productiond. Discontinuous productione. Costs are traced to jobsf. Costs are traced to processing

departments

Answer:b, c, and f

Study Break #2Study Break #2The best example of a business requiring a process costing system would be a(n):a. Custom cabinet shopb. Antique furniture restorerc. Soap manufacturerd. Automobile repair shop

Answer:c. Soap manufacturer

Study Break #3Study Break #3The costs in a process cost system are traced to:

a. Specific jobsb. Specific customersc. Specific company administratorsd. Specific production departments

Answer:d. Specific production departments

Calculating Unit CostCalculating Unit CostEquivalent Units Partially completed units are

converted to a comparable number of completed units

Equivalent units – Material Equivalent units – Material and Converision costsand Converision costs

Example Exercise #1Example Exercise #1McMillian Tire Company produces tires used on small trailers. The month of June ended with 300 tires in process, 85% complete as to direct materials and 50% complete as to conversion costs; 2,500 tires were transferred to finished goods during the month and 2,300 were started during the month. The beginning WIP inventory was 65% complete as the direct materials and 45% complete as to conversion costs.

1. Determine the denominators to be used in the calculations of cost per equivalent unit for materials and conversion costs.

Example Exercise #1 Example Exercise #1 SolutionSolution

Materials Units completed 2,500 Equivalent units (300*85%) 255

2,755 units

Labor Units completed 2,500 Equivalent units (300*50%) 150

2,650 units

Calculating Unit CostCalculating Unit CostCost Per Equivalent Unit Average unit cost

Formula

Cost in Beginning WIP + Cost incurred in current period

Units completed + Equivalent units in Ending WIP

Example Exercise #2Example Exercise #2The balance in beginning WIP at Bing Rubber Company for direct labor was $135,000. During the month of March, an additional $650,000 of direct labor was incurred, and 25,000 pounds of rubber were produced. At the end of March, 8,000 pounds of rubber were in process and the units were 50% complete. At the start of March, the company had 5,000 pounds of rubber that were 30% complete.

1. Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process.

Example Exercise #2 Example Exercise #2 SolutionSolution

Direct Labor Beginning WIP $135,000 March labor $650,000 Total Labor Cost $785,000

Units Units completed 25,000 Equivalent units (8,000*50%) 4,000 Total Units 29,000

Cost per Equivalent Unit $785,000 / 29,000 pounds = $27.07 per

pound

Production Cost ReportProduction Cost Report Reconciliation of Units

Reconciliation of Costs

Details of Cost per Equivalent Unit Calculations

Reconciliation of UnitsReconciliation of Units

Reconciliation of CostsReconciliation of Costs

Basic Steps in Process Basic Steps in Process CostingCosting

Account for the number of physical units

Calculate the cost per equivalent unit for materials, labor, and overhead

Assign cost to items completed and items in ending Work in Process

Account for the amount of product cost

Dealing with Transferred-In Dealing with Transferred-In CostCost

Process Costing Systems generally use multiple processes

Items completed in one processing department, costs are transferred to the next department

When units are completed in the final process, the costs are transferred to finished goods

Process Costing and Process Costing and Incremental AnalysisIncremental Analysis

Incremental Analysis Compare change in revenue with

change in cost

Process Costing Utilizes an average of fixed and

variable costs Could impact decision making when

considering additional production

Full and Incremental CostFull and Incremental Cost