Process Costing and Hybrid Product-Costing Systems

CHAPTER 4

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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.

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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

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Direct Material

FinishedGoods

Cost of GoodsSold

Direct Labor

Manufacturing Overhead

Jobs

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

job-order cost system.

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

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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 and Differences Between Job-Order and Process CostingProcess Costing

Direct Labor& Overhead

(Conversion)

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

combined with overhead.4-5

Process Cost FlowsProcess Cost Flows

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

One Production Department

Inventory Inventory

Cost of goods completed Cost of goods sold

Work-in-Process Finished Goods Cost of Goods Sold

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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

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Equivalent Units: A Key ConceptEquivalent Units: A Key Concept

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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.

Equivalent Units ExampleEquivalent Units Example

Two half completed products are equivalent to one completed product.

So, 10,000 units that are 70% completeare equivalent to 7,000 complete units.

+ = l

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

To calculate the direct materials and conversion costs per equivalent unit for the period:

Materials cost per

equivalent

unit

=Materials cost for the periodMaterials equivalent units for

the period

Conversion cost per

equivalent

unit

=Conversion cost for the periodConversion equivalent units for

the period4-10

Departmental Production ReportDepartmental Production Report

ProductionReport

Analysis of physical flow

of units.

Calculationof equivalent

units.

Computationof unit costs.

Analysis of total costs.

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

The weighted-average method . . .Makes no distinction between work done in the

prior period and work done in the current period.Blends together units and costs from the prior

period and the current period.

The FIFO method is a morecomplex method and israrely used in practice.

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Production Report ExampleProduction Report ExampleMVP Sports Equipment Company makes baseball

gloves in two departments, Cutting and Stitching.

MVP uses weighted-average process costing.

Material is added at the beginning of the Cutting Department, while 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.

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Production Report ExampleProduction Report ExampleWork 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

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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

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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

50% of 10,000 units

Beginning inventory % is not used in weighted-average method.4-16

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

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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

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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$

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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$

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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

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Operation CostingOperation CostingOperation costing employs some aspects

of both job-order and process costing.

Job-order Operation CostingOperation Costing Process Costing (Products produced in batches)(Products produced in batches) Costing

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Operation CostingOperation CostingOperation costing employs some aspects

of both job-order and process costing.

Job-order Operation CostingOperation Costing Process Costing (Products produced in batches)(Products produced in batches) Costing

Conversion costsare assigned to batchesas in process costing.

Material costs are chargedto batches as in

job-order costing.

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I’m ready to processsome leisure time.

End of Chapter 4End of Chapter 4

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