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Process-Costing Systems. 7. Process Costing. Accumulate costs by departments and allocate costs to products based on broad, average costs Process costing systems are usually simpler and less expensive than job-order costing systems. Equivalent Units. - PowerPoint PPT Presentation
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© 2007 Pearson Education Canada Slide 7-1
Process-CostingSystems
7
© 2007 Pearson Education Canada Slide 7-2
Process Costing
• Accumulate costs by departments and allocate costs to products based on broad, average costs
• Process costing systems are usually simpler and less expensive than job-order costing systems
© 2007 Pearson Education Canada Slide 7-3
Equivalent Units
• Basic unit of measurement to convert work on "units started in previous period" and "units not completed" to equivalent whole units
• 100 units 40% complete = 40 units 100% complete
© 2007 Pearson Education Canada Slide 7-4
Five Steps in Process Costing
1. Track the flow of physical units2. Determine number of equivalent whole
units 3. Summarize relevant costs4. Determine cost per equivalent unit5. Allocate costs to units completed and
to units in ending work in process
© 2007 Pearson Education Canada Slide 7-5
Job-Order versus Process Costing
Direct materials
Direct labour
Factory overhead
Direct materials
Direct labour
Factory overhead
Job 100
Job 101
Job 102
FinishedGoods
Inventory
Cost of GoodsSold
Process A
FinishedGoods
Inventory
Cost of GoodsSold
Process B
Process C
Process Costing
Job-Order Costing
© 2007 Pearson Education Canada Slide 7-6
Process Costing Terminology
Direct materials• Materials applied to the production process at specific points in time
Conversion costs• Labour and overhead costs which are assumed to be applied
uniformly throughout the production process
Transferred-In costs• Value of materials and conversion costs carried forward to
subsequent departments
To FinishedGoods Inventory
DirectMaterial
DirectMaterialTransferred-In
Costs
Conversion Costs Conversion Costs
FormingDepartment
FinishingDepartment
© 2007 Pearson Education Canada Slide 7-7
FIFO and Weighted Average Methods
Weighted Average
• Underlying assumption of weighted average is that goods produced in different time periods are indistinguishable
• Combine the cost of all work done in the current period with work done in the preceding period on goods carried forward on work in process
• Divide total costs by total work done regardless of when the work was performed
© 2007 Pearson Education Canada Slide 7-8
FIFO ( First-in, First-out )
• Underlying assumption of FIFO is that all goods in beginning work in process must now have left the department
• Equivalent units are determined considering work done this period only
• Only current costs are considered in determining the cost per equivalent unit
• Costs carried forward from the previous period (in beginning work in process) are assigned directly to completed goods
© 2007 Pearson Education Canada Slide 7-9
Backflush Costing• As companies achieve JIT inventory control and Total Quality
Management, less costs are carried in inventory• Less attention is given to systems which sequentially track the flow of
product costs from material inventory to work in process and finished goods
• Use backflush costing when• Levels of inventory are minimal• Production process / technology is relatively stable • Standard costs are clear
• When finished goods inventory is minimal, it is possible to eliminate this account and transfer costs directly to cost of goods sold
Materials
Cost ofGoods Sold
Finished GoodsInventory
Conversion Costs
© 2007 Pearson Education Canada Slide 7-10
Operation Costing
• Operation Costing is a hybrid costing system combining aspects of job-order and process costing
• Products are usually produced in batches• While many of the products share common characteristics
each batch has its own unique features
Wool Blazers Polyester Blazers
Direct materials $2,500 $3,100Conversion costs:Cutting cloth 600 1,200Checking edges 300Sewing body 500 1,000Checking seams 600Machine sewing 800Hand sewing 700
Total costs $5,200 $6,100