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CHAPTER 3CHAPTER 3CHAPTER 3CHAPTER 3
Process CostingProcess CostingProcess CostingProcess Costing
Difference Between Job-Order Difference Between Job-Order and Process Costing Systemsand Process Costing Systems
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 ExampleProcess Costing ExampleProcess Costing Example
Job-Order Costing SystemJob-Order Costing SystemJob-Order Costing SystemJob-Order Costing System
Process Costing SystemProcess Costing SystemProcess Costing SystemProcess Costing System
Product and Cost FlowsProduct and Cost FlowsProduct and Cost FlowsProduct and Cost Flows
Product Flows Through Departments A product typically passes through
multiple departments Conversion Costs (Labor and
Overhead)
Product and Cost FlowsProduct and Cost FlowsProduct and Cost FlowsProduct and Cost Flows
Cost Flows Through Accounts Direct Material
Direct Labor
Manufacturing Overhead
Transferred-in Cost
Flow of Cost Between Flow of Cost Between Processing DepartmentsProcessing Departments
Flow of Cost Between Flow of Cost Between Processing DepartmentsProcessing Departments
Study Break #1Study Break #1Study Break #1Study Break #1
Which 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 #2Study Break #2Study Break #2
The 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 #3Study Break #3Study Break #3
The 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 CostCalculating Unit CostCalculating Unit Cost
Equivalent Units Partially completed units are
converted to a comparable number of completed units
Equivalent units – Material Equivalent units – Material and Converision costsand Converision costs
Equivalent units – Material Equivalent units – Material and Converision costsand Converision costs
Example Exercise #1Example Exercise #1Example 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
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 CostCalculating Unit CostCalculating Unit Cost
Cost 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 #2Example 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
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 ReportProduction Cost ReportProduction Cost Report
Reconciliation of Units
Reconciliation of Costs
Details of Cost per Equivalent Unit Calculations
Reconciliation of UnitsReconciliation of UnitsReconciliation of UnitsReconciliation of Units
Reconciliation of CostsReconciliation of CostsReconciliation of CostsReconciliation of Costs
Basic Steps in Process Basic Steps in Process CostingCosting
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
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 AnalysisProcess 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 CostFull and Incremental CostFull and Incremental Cost
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