Cost Acc. Chptr4

8/3/2019 Cost Acc. Chptr4

1/46

Systems Design:Process Costing2/23/04

Chapter 4


2/46

The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Job-orderCosting

ProcessCosting

Many units of a single, homogeneous productflow evenly through a continuous productionprocess.

One unit of product is indistinguishable from anyother unit of product.

Each unit of product is assigned the sameaverage cost.

Types of Costing Systems Usedto Determine Product Costs


3/46


Types of Costing Systems Usedto Determine Product Costs

Job-orderCosting

ProcessCosting

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill


4/46


Job order costing

Many products areproduced during the

period.

Costs are accumulatedby individual jobs.

Job cost sheet is the

key document. Unit cost computed by

job.

Process costing

A single product isproduced for a long

period of time.

Costs are accumulatedby departments.

Department production

report is key document. Unit costs are computed

by department.

Differences Between Job-Order and Process Costing


5/46


Process Costing

Type of Product Cost

DollarAmo

unt Conversion

So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials


6/46


Comparing Job-Orderand Process Costing

FinishedGoods

Cost ofGoodsSold

Direct Labor

ManufacturingOverhead

Jobs

Costs are traced andapplied to individualjobs in a job-order

cost system.

DirectMaterials


7/46 The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Comparing Job-Orderand Process Costing

FinishedGoods

Cost ofGoodsSold

Direct Labor


ProcessingDepartments

Costs are traced andapplied to departments

in a process costsystem.

DirectMaterials



Process Cost Systems

Exh. 4-2 Sequential Processing,p.152

Exh. 4-3 Parallel Processing, p. 153

Exh. 4-4 T-Account Model, p. 154

Exh. 4-5 Double Diamond, p. 156



Process Cost Flows

Lets look at cost flows in a

process cost system withDepartments A and B.

We will useT-accounts andstart withmaterials.



Raw MaterialsPurchases Direct

Materials

Process Cost Flows

Indirect

Materials

DirectMaterials

Work in ProcessDepartment B

Work in ProcessDepartment A

OtherOverhead


Actual Applied

IndirectMaterials

DirectMaterials



Process Cost Flows


DirectLabor


OtherOverhead


Actual Applied

IndirectMaterialsIndirect

Labor

Wages Payable

DirectLabor

IndirectLabor

DirectMaterials

Direct

Labor

DirectMaterials



Process Cost Flows(MOH is applied using Departmental rates)



OverheadApplied to

Work inProcess

POHR

AppliedOverhead

Applied

Overhead

OtherOverhead


Actual Applied

IndirectMaterialsIndirect

Labor

DirectLabor

DirectMaterials

Direct

Labor

DirectMaterials



Process Cost Flows

Next, transfer workfrom Department A

to Department B.


14/46


Process Cost Flows



DirectMaterialsDirectLabor

AppliedOverhead

DirectMaterials

DirectLaborApplied

Overhead

Transferredto Dept. B

Transferredfrom Dept. A


15/46


Process Cost Flows

Now lets completethe goods in

Department Band sell them.


16/46


Finished Goods

Cost of Goods Sold

Process Cost Flows


Cost of

GoodsManufactured

DirectMaterialsDirectLabor

AppliedOverhead

Transferred

from Dept. A

Cost ofGoodsSold

Cost of

GoodsSold

Cost of

GoodsManufactured


17/46


Equivalent Units of Production(Accounting for partially completed units in WIP)

Equivalent unitsare partially completeand are part of work in process

inventory. Partially completedproducts are expressed in terms of asmaller number of fully completed

units.


18/46


Equivalent Units of Production

Two half completed products areequivalent to one completed product.

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

+ = 1


19/46


For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process 30 percent complete.

How many equivalent units of production didJones have for the period?

a. 10,000

b. 11,500c. 13,500

d. 15,000

Quick Check


20/46


For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process 30 percent complete.

How many equivalent units of production didJones have for the period?

a. 10,000

b. 11,500c. 13,500

d. 15,000

10,000 units + (5,000 units 0.30)= 11,500 equivalent units

Quick Check

C l l ti d U i


21/46


Calculating and UsingEquivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units of productionfor the period


22/46


Now assume that Jones incurred$27,600 in production costs for the11,500 equivalent units of production.

What was Jones cost per equivalent unitfor the period?

a. $1.84

b. $2.40c. $2.76

d. $2.90

Quick Check


23/46


Now assume that Jones incurred$27,600 in production costs for the11,500 equivalent units of production.

What was Jones cost per equivalent unitfor the period?

a. $1.84

b. $2.40c. $2.76

d. $2.90

$27,600 11,500 equivalent units

= $2.40 per equivalent unit

Quick Check

E i l t U it f P d ti


24/46


Equivalent Units of ProductionWeighted Average Method

The weighted average method . . .

Makes no distinction between work done in priorand current period.

Blends together units and costs from priorperiod and current period.

Lets see how this works!


25/46

Weighted Average Method

Equivalent units of production =Units completed and transferred

to the next department +equivalent units in ending WIP


26/46


Weighted Average Example

Smith Company reported the following activityin Department A for the month of June:

Percent Completed

Units Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units Available 6,300Units completed and transferred out

of Department A during June 5400

Work in process, June 30 900 60% 30%


27/46


Equivalent units are calculated as follows:


Materials Conversion

Units completed and transferred

out of Department A in June 5,400 5,400


28/46







Work in process, June 30:

900 units 60% 540

Equivalent units of Production in

Department A during June 5,940


29/46








900 units 60% 540

900 units 30% 270


Department A during June 5,940 5,670


30/46






900 units 60% 540

900 units 30% 270


Department A during June 5,940 5,670

Equivalent units of production always equals:Units completed and transferred

+ Equivalent units remaining in work in process



31/46


Production Report

ProductionReport

Helps managerscontrol theirdepartments

Provides costinformation for

financialstatements

Shows the flowof units and coststhrough work in

process

Becomes thejob cost sheet

in processcosting


32/46


Production Report

A computation ofcost per equivalent unit.

Section 1

Section 2

Section 3

Production ReportA quantity schedule

showing the flow of unitsand the computation of

equivalent units.


33/46


Production Report

A reconciliation of costflows for the period,including:

Total cost for unitscompleted andtransferred from theprocessing department.

Total cost for partiallycompleted unitsremaining in work inprocess.

Section 1

Section 2

Section 3

Production Report


34/46


Double Diamond Skis uses process costing todetermine unit costs in its Shaping and MillingDepartment.

Double Diamond uses the weighted averagecost procedure.

Using the following information for the month of

May, lets prepare a production report forShaping and Milling.

Production Report ExamplePage 160


35/46


Work in process, May 1: 200 units

Materials: 55% complete. $ 9,600

Conversion: 30% complete. 5,575

Production started during May: 5,000 unitsProduction 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.

Production Report Example


36/46


Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for:

Work in process, May 1 200

Started into production 5,000Total units 5,200

Equivalent units


Units accounted for as follows:

Completed and transferred 4,800 4,800 4,800



37/46






Equivalent units





Materials 40% complete 160

5,200 4,960



38/46






Equivalent units





Materials 40% complete 160

Conversion 25% complete 100

5,200 4,960 4,900



39/46


Section 2: Compute cost per equivalent unit


Total

Cost 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


40/46


Total






Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$



$378,200 4,960 units = $76.25


41/46


Total






Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$ 72.75$

Total cost per equivalent unit = $76.25 + $72.75 = $149.00


$356,475 4,900 units = $72.75



42/46


Section 3: Cost Reconciliation


Total Equivalent Units


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 31

Total cost accounted for


43/46





Transferred out during May 715,200$ 4,800 4,800


Materials 160

Conversion 100

Total work in process, May 31

Total cost accounted for

4,800 units @ $149.00




44/46





Transferred out during May 715,200$ 4,800 4,800


Materials 12,200 160

Conversion 7,275 100Total work in process, May 31 19,475

Total cost accounted for 734,675$

160 units @ $76.25



All costsaccounted for(See VG 42)

100 units @ $72.75

Do You Want to See


45/46


Im going to end this chapter and

process some leisure time, unlessyou want to see some journal

entries. Noooo!

Do You Want to SeeJournal Entries?


46/46

End of Chapter 4

Documents

Cost Acc. Chptr4