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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
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Process CostingChapter 4
4-2
Similarities Between Job-Order and Process Costing
• Both systems assign material, labor, and overhead costs to products and they provide a mechanism for computing unit product costs.
• Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
• The flow of costs through the manufacturing accounts is basically the same in both systems.
4-3
Differences Between Job-Order and Process Costing
Process costing:
1.Is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs having different production requirements are worked on each period.
2.Systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.
3.Systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.
4-4
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Quick Check
4-5
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.
Quick Check
4-6
Processing DepartmentsAny unit in an organization where materials, labor, or overhead are added to the product.
The activities performed in a processingdepartment are performed uniformly on allunits of production. Furthermore, the output ofa processing department must be homogeneous. Products in a process costing environment typically flow in a sequence from one department to another.
The activities performed in a processingdepartment are performed uniformly on allunits of production. Furthermore, the output ofa processing department must be homogeneous. Products in a process costing environment typically flow in a sequence from one department to another.
4-7
Learning Objective 1
Record the flow of materials, labor, and overhead through a
process costing system.
4-8
The Flow of Materials, Labor, and Overhead Costs
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Materials
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
4-9
The Flow of Costs in a Job-Order Costing System
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
JobsJobsJobsJobs
Costs are traced andapplied to individualjobs in a job-order
cost system.
Costs are traced andapplied to individualjobs in a job-order
cost system.Direct
MaterialsDirect
Materials
4-10
The Flow of Costs in a Processing Costing System
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
ProcessingDepartmentProcessingDepartment
Costs are traced and applied to departments
in a process cost system.
Costs are traced and applied to departments
in a process cost system.
Direct Materials
Direct Materials
4-11
T-Account and Journal Entry Views of Process Cost Flows
For purposes of this example, assume there are two processing departments –
Departments A and B. We will use T-accounts and journal entries.
4-12
Raw Materials
Process Cost Flows: The Flow of Raw Materials (in T-account form)
Work in Process Department B
Work in Process Department A
•DirectMaterials
•Direct Materials
•Direct Materials
4-13
Process Cost Flows: The Flow of Raw Materials (in journal entry form)
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
4-14
Process Cost Flows: The Flow of Labor Costs (in T-account form)
Work in Process Department B
Work in Process Department A
Salaries and Wages Payable
•Direct Materials
•Direct Materials
•Direct Labor
•Direct Labor •Direct
Labor
4-15
Process Costing: The Flow of Labor Costs (in journal entry form)
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
4-16
Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)
Work in Process Department B
Work in Process Department A
Manufacturing Overhead
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•Direct Labor
•Direct Materials
•Direct Labor
•Direct Materials
•Actual Overhead
4-17
Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form)
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
4-18
Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process Department B
Work in ProcessDepartment A
•Direct Materials
•Direct Labor
•AppliedOverhead
•Direct Materials
•Direct Labor
•AppliedOverhead
Transferred to Dept. B
•Transferred from Dept. A
DepartmentA
DepartmentA
DepartmentB
DepartmentB
4-19
Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form)
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
4-20
Finished Goods
Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)
Work in Process Department B
•Cost of Goods
Manufactured
•Direct Materials
•Direct Labor
•AppliedOverhead
•Transferred from Dept. A
•Cost of Goods
Manufactured
4-21
Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form)
Finished Goods XXXXX
Work in Process - Department B XXXXX
4-22
Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form)
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
4-23
Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form)
Cost of Goods Sold XXXXX
Finished Goods XXXXX
4-24
Equivalent Units of Production
Equivalent units are the product of the number of partially completed
units and the percentage completion
of those units.
These partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to
that output.
4-25
Equivalent Units – The Basic IdeaTwo half completed products are
equivalent to one complete product.Two half completed products are
equivalent to one complete product.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
+ = 1
4-26
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
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
4-27
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
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 10,000 units + (5,000 units × 0.30) = 11,500 equivalent units
Quick Check
4-28
Calculating Equivalent Units
Equivalent units can be calculatedtwo ways:
The First-In, First-Out Method – FIFO is covered in the appendix to this chapter.
The Weighted-Average Method – This method
will be covered in the main portion of the chapter.
Equivalent units can be calculatedtwo ways:
The First-In, First-Out Method – FIFO is covered in the appendix to this chapter.
The Weighted-Average Method – This method
will be covered in the main portion of the chapter.
4-29
Learning Objective 2
Compute the equivalent units of production using the weighted-
average method.
4-30
Equivalent Units of ProductionWeighted-Average Method
The weighted-average method . . .
1. Makes no distinction between work done in prior or current periods.
2. Blends together units and costs from prior and current periods.
3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.
The weighted-average method . . .
1. Makes no distinction between work done in prior or current periods.
2. Blends together units and costs from prior and current periods.
3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.
4-31
Treatment of Direct Labor
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
DirectMaterials
Type of Product Cost
Do
llar
Am
ou
nt
DirectLabor
ManufacturingOverhead
4-32
Treatment of Direct Labor
Type of Product Cost
Do
llar
Am
ou
nt Conversion
Direct labor and manufacturing
overhead may be combined into
one classification of product
cost called conversion costs.
Direct labor and manufacturing
overhead may be combined into
one classification of product
cost called conversion costs.
DirectMaterials
DirectLabor
DirectLabor
ManufacturingOverhead
4-33
Weighted-Average – An Example
Smith Company reported the following activity in the Assembly Department 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 completed and transferred out 5,400 of Department A during June
Work in process, June 30 900 60% 30%
4-34
Weighted-Average – An ExampleThe first step in calculating the equivalent units is to identify
the units completed and transferred out of Assembly Department in June (5,400 units)
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
4-35
Weighted-Average – An ExampleThe second step is to identify the equivalent units of production in
ending work in process with respect to materials for the month (540 units) and adding this to the 5,400 units from step one.
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
Equivalent units of Production inthe Department during June 5,940
4-36
Weighted-Average – An Example
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production inthe Department during June 5,940 5,670
The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month
(270 units) and adding this to the 5,400 units from step one.
4-37
Materials Conversion
Units completed and transferredout of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production inthe Department during June 5,940 5,670
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Weighted-Average – An Example
4-38
BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Weighted-Average – An Example
MaterialsMaterials
5,400 Units Completed 540 Equivalent Units 900 × 60%
5,940 Equivalent units of production
4-39
6,000 Units Started
5,400 Units Completed
5,100 Units Started5,100 Units Startedand Completedand Completed
270 Equivalent Units 900 × 30%
5,670 Equivalent units of production
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
Weighted-Average – An Example
ConversionConversion
4-41
Compute and Apply CostsBeginning Work in Process Inventory: 400 units
Materials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete
4-42
Compute and Apply CostsThe formula for computing the cost per equivalent
unit is:
Cost perequivalent
unit
=
Cost of beginningWork in Process
Inventory Cost added during
the period
Equivalent units of production
+
4-43
Here is a schedule with the cost and equivalent unit information.
Compute and Apply Costs
TotalCost Materials Conversion
Cost to be accounted for: Work in process, June 1 10,039$ 6,119$ 3,920$ Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
4-44
TotalCost Materials Conversion
Cost to be accounted for: Work in process, June 1 10,039$ 6,119$ 3,920$ Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
Cost per equivalent unit 21.00$ 15.00$
Compute and Apply Costs Here is a schedule with the cost and equivalent
unit information.$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00$85,050 ÷ 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00Cost per equivalent unit = $21.00 + $15.00 = $36.00
4-46
Applying Costs
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
4-47
Applying Costs
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
4-48
Applying Costs
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
4-49
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
4-50
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400 Cost per equivalent unit 21.00$ 15.00$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
4-51
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400 Cost per equivalent unit 21.00$ 15.00$ Cost of units transferred out 113,400$ 81,000$ 194,400$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
4-53
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Assembly DepartmentCost Reconciliation
4-54
Reconciling Costs
Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$
Cost accounted for as follows: Cost of ending Work in Process Inventory 15,390$ Cost of units transferred out 194,400 Total cost accounted for 209,790$
Assembly DepartmentCost Reconciliation
4-55
Operation CostingOperation cost is a hybrid of job-order and
process costing because it possesses attributes of both approaches.
Operation costing is commonly used when
batches of many different products pass
through the same processing department.
Operation costing is commonly used when
batches of many different products pass
through the same processing department.