Principles of Accounting Chapter 18 ppt

Copyright © 2012 The McGraw-Hill Companies, Inc.

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Process CostingProcess Costing

Chapter 18

18-2

Production of Goods and Production of Goods and Services and Costing Services and Costing SystemsSystems

18-3

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.


Typical process cost applications:

Petrochemical refinery Paint manufacturer Paper mill

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DirectMaterials

FinishedGoods

Cost per unit for

each job

DirectLabor

FactoryOverhead

Jobs

The Work in Process account consists of

individual jobs in job costing.

Tracking the Physical Flow Tracking the Physical Flow and Related Production and Related Production CostsCosts

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DirectMaterials

FinishedGoods

Direct Labor and Factory Overhead

(Conversion)

Processes

The Work in Process account consists of specific processes in

process costing.

Cost per unit

processed


18-6

Same objective: to determine the cost of products

Same inventory accounts: raw materials, work in process, and finished goods

Same overhead assignment method:predetermined rate times actual activity


18-7

Work in Process

Assembly

Labor

MaterialsIn

dir

ect

FinishedGoods

Conversion Costs

Direct

Deliveredto

Customers

Work in Process

Packaging

Understanding Cost FlowsUnderstanding Cost Flows

Factory Overhead

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Costs are accumulated for a periodof time by process or department.

Costs are accumulated for a periodof time by process or department.

Unit cost is computed by dividing the accumulated costs by the number of units

produced in the period.

Unit cost is computed by dividing the accumulated costs by the number of units

produced in the period.

Understanding Cost FlowsUnderstanding Cost Flows

If partially complete units remain in process, we must use equivalent units as

the divisor to obtain unit costs.

If partially complete units remain in process, we must use equivalent units as

the divisor to obtain unit costs.

18-9

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

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

Two one-half full pitchers are equivalent to one full pitcher.

+ = 1

Process Costing andProcess Costing andEquivalent UnitsEquivalent Units

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For the current period, PencilCo 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 PencilCo have for the period?a. 10,000

b. 11,500

c. 1,500

d. 15,000


b. 11,500

c. 1,500

d. 15,000


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b. 11,500

c. 1,500

d. 15,000


b. 11,500

c. 1,500

d. 15,000


10,000 units + (5,000 units × .30) = 11,500 equivalent units

18-12

Cost perequivalent

unit

=Product costs for the period

Equivalent units for the period

Cost per Equivalent UnitCost per Equivalent Unit

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Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?a. $1.84

b. $2.40

c. $2.76

d. $2.90


b. $2.40

c. $2.76

d. $2.90


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b. $2.40

c. $2.76

d. $2.90


b. $2.40

c. $2.76

d. $2.90


$27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit

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Equivalent units may be different for material and

conversion at different stages of a process.

Equivalent units may be different for material and

conversion at different stages of a process.

At completion of Stage 1 of the process,material is 40% complete, but conversion

is only 25% complete.

At completion of Stage 1 of the process,material is 40% complete, but conversion

is only 25% complete.


Stage 1

40% ofMaterial

25% ofConversion

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=

=

100%

50%


Stage 2

25% ofConversion

60% ofMaterial

Stage 1

40% ofMaterial

25% ofConversion

+

+

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Stage 3

50% ofConversion

The process is now complete.

Stage 2

25% ofConversion

60% ofMaterial

Stage 1

40% ofMaterial

25% ofConversion


18-18

Owl Inc. uses FIFO process costing in its Fabrication

Department where a product called Strata is made.


18-19


Owl Inc Fabrication Department Data For AprilBeginning Inventory:

Units of product 30,000

Percentage of completion - direct material 100%

Percentage of completion - conversion 40%

Units started in April 90,000

Units transferred from fabrication to mixing 100,000

Ending Inventory:

Units of product 20,000

Percentage of completion - direct material 100%

Percentage of completion - conversion 25%

Material is added at the beginning of theprocess so it is always 100% complete.

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April Fabrication Department Physical Flow

Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000

Units accounted for as:Units transferred from Fabrication to Mixing 100,000 Ending inventory 20,000 Total number of units 120,000

Physical Flow of UnitsPhysical Flow of Units

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Fabrication DepartmentDirect Material Equivalent Units of Production - April

Units of Percent Added EquivalentProduct This Period Units

Beginning goods in process 30,000 0% 0

Goods started and completed 70,000 100% 70,000

Ending work in process 20,000 100% 20,000

Total units 120,000 90,000

Computing EquivalentComputing EquivalentUnits of ProductionUnits of Production

Since materials are added at the beginning of the process, no additional materials are necessary to complete the

beginning inventory.

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Fabrication DepartmentDirect Material Equivalent Units of Production - April


Beginning goods in process 30,000 0% 0



Total units 120,000 90,000

} 100,000

100,000 units completed and transferred.


18-23

Fabrication Department Conversion Equivalent Units of Production - April


Beginning goods in process 30,000 60% 18,000



Total units 120,000 93,000


Since conversion is 40 percent complete in the beginning inventory, 60 percent of the

work must be completed in April.

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Fabrication Department Conversion Equivalent Units of Production - April


Beginning goods in process 30,000 60% 18,000



Total units 120,000 93,000

} 100,000Transferred


18-25

Summary of Fabrication DepartmentEquivalent Units of Production - April

DirectActivities during April Material ConversionUnits from beginning inventory

processed in current period 0 18,000

Units started and completedin current period 70,000 70,000

Units in ending inventory at end of current period 20,000 5,000

Equivalent units of productionfor period 90,000 93,000


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Fabrication DepartmentApril Work in Process Costs

Beginning work in process 22,380$ Costs added in April: Direct material 45,000 Conversion 55,800 Total costs to account for 123,180$


18-27

Fabrication DepartmentCost Per Equivalent Unit - April

Materials ConversionTotal cost of resource for

April 45,000$ 55,800$

Equivalent units of productionin April ÷ 90,000 ÷ 93,000

Cost per equivalent unit forApril = 0.50$ = 0.60$

Direct


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Cost of Completed UnitsCost of Completed Units

Fabrication Department Work in ProcessCost Summary for April

Cost of completed unitsFrom beginning work in process

April 1 balance 22,380$ Costs to complete April 1 inventory

Direct materialConversion

Started and completed Total completed and transferred

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Direct material 0$ Conversion (18,000 × $0.60) 10,800 10,800

Started and completed Total completed and transferred


18-30





Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$

$0.50 + $0.60 = $1.10


18-31

We will account for all costs incurred

by assigning unit costs to the: A. 100,000 units completed and

transferred.

B. 20,000 units remaining in ending work in process inventory.

We will account for all costs incurred

by assigning unit costs to the: A. 100,000 units completed and

transferred.

B. 20,000 units remaining in ending work in process inventory.

Tracking Costs Using a Tracking Costs Using a Process Costing Production Process Costing Production ReportReport

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Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion

Total cost accounted for

18-33






Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion (5,000 × $0.60) 3,000 13,000

Total cost accounted for 123,180$


All costs accounted for

18-34

Evaluating Departmental Evaluating Departmental EfficiencyEfficiency

Only those costs incurred within a department are considered for efficiency analysis. Costs transferred in from other departments should not be allowed to

cloud the picture.

Comparing the current period’s unit costs, for material and conversion, with budgeted unit costs or with last period’s unit costs are common efficiency measures.

18-35

Ethics, Fraud and Ethics, Fraud and Corporate GovernanceCorporate Governance

Overstating the number of equivalent units of production understates the cost per

equivalent, resulting in an understatement of cost of goods manufactured and sold, and

an overstatement of income.

Overstating the number of equivalent units in ending inventory understates cost of

goods sold and overstates income.

18-36

End of Chapter 18End of Chapter 18

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Principles of Accounting Chapter 18 ppt