Process Costing - · PDF file4-2 Similarities Between Job-Order and Process Costing •Both systems assign material, labor, and overhead costs to products and they provide a mechanism

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 © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Process CostingChapter 4

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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.

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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.

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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 ✓

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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 ✓

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Processing DepartmentsAny unit in an organization where materials, labor,

or overhead are added to the product.The activities performed in a processing

department are performed uniformly on allunits of production. Furthermore, the output of

a processing department must be homogeneous. Products in a process costing environment

typically flow in a sequence from one departmentto another.

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Learning Objective 1

Record the flow of materials, labor, and overhead through a

process costing system.

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Comparing Job-Order and Process Costing

FinishedGoods

Cost of GoodsSold

Work inProcess

Direct Materials

Direct Labor

Manufacturing Overhead

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FinishedGoods

Cost of GoodsSold

Direct Labor


Jobs

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct

Materials

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FinishedGoods

Cost of GoodsSold

Direct Labor


ProcessingDepartment

Costs are traced and applied to departments

in a process cost system.

Direct Materials

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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.

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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

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Process Cost Flows: The Flow of Raw Materials (in journal entry form)

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Process Cost Flows: The Flow of Labor Costs (in T-account form)



Salaries and Wages Payable

•Direct Materials

•Direct Materials

•Direct Labor

•Direct Labor •Direct

Labor

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Process Costing: The Flow of Labor Costs (in journal entry form)

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Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)




•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•Direct Labor

•Direct Materials

•Direct Labor

•Direct Materials

•Actual Overhead

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Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form)

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Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)


Work in ProcessDepartment A

•Direct Materials

•Direct Labor•Applied

Overhead

•Direct Materials


Overhead

Transferred to Dept. B

•Transferred from Dept. A

DepartmentA

DepartmentB

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Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form)

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Finished Goods

Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)


•Cost of Goods

Manufactured

•Direct Materials


Overhead•Transferred from Dept. A

•Cost of Goods

Manufactured

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Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form)

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Finished Goods

Cost of Goods Sold

Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form)


•Cost of Goods

Manufactured

•Direct Materials


Overhead•Transferred from Dept. A

•Cost of Goods

Sold

•Cost of Goods

Sold

•Cost of Goods

Manufactured

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Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form)

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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.

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Equivalent Units – The Basic IdeaTwo half completed products are

equivalent to one complete product.

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

+ = 1

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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 ✓

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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

Quick Check ✓

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Calculating Equivalent UnitsEquivalent units can be calculated

two ways:

❶The First-In, First-Out Method – FIFO is covered in the appendix to this chapter.

❷The Weighted-Average Method – This method will be covered in the main portion of the chapter.

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Compute the equivalent units of production using

the weighted-average method.

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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.

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Treatment of Direct Labor

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials

Type of Product Cost

Dol

lar A

mou

nt

DirectLabor

ManufacturingOverhead

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Treatment of Direct Labor

Type of Product Cost

Dol

lar A

mou

nt

ConversionDirect labor and manufacturing

overhead may be combined into

one classification of product cost called

conversion costs.

DirectMaterials

DirectLabor

DirectLabor

ManufacturingOverhead

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Weighted-Average – An Example Smith Company reported the following activity in the Assembly Department for the month of June:

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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)

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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.

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Weighted-Average – An ExampleThe 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.

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Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process

Weighted-Average – An Example

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BeginningWork in Process

300 Units40% Complete

EndingWork in Process


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed


Materials

5,400 Units Completed 540 Equivalent Units 900 × 60%

5,940 Equivalent units of production

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6,000 Units Started

5,400 Units Completed


270 Equivalent Units 900 × 30%







Conversion

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Compute the cost per equivalent unit using the

weighted-average method.

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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

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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

+

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Here is a schedule with the cost and equivalent unit information.

Compute and Apply Costs

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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

Cost per equivalent unit = $21.00 + $15.00 = $36.00

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Assign costs to units using the weighted-

average method.

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Applying Costs

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Applying Costs

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Applying Costs

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Computing the Cost of Units Transferred Out

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Prepare a cost reconciliation report.

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Reconciling Costs

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Reconciling Costs

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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.



FIFO MethodAppendix 4A

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FIFO vs. Weighted-Average Method

The FIFO method (generally considered more accurate than the weighted-average method) differs

from the weighted-average method in two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning inventory are treated.

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Compute the equivalent units of production using

the FIFO method.

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Equivalent Units – FIFO MethodLet’s revisit the Smith Company example. Here is information concerning the Assembly Department

for the month of June.

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Equivalent Units – FIFO MethodStep 1: Determine equivalent units needed to complete

beginning Work in Process Inventory.

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Equivalent Units – FIFO MethodStep 2: Determine units started and completed during

the period.

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Equivalent Units – FIFO MethodStep 3: Add the equivalent units in ending Work in

Process Inventory.

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6,000 Units Started


FIFO Example

Materials



180 Equivalent Units300 × 60%

4-64





6,000 Units Started


FIFO Example

Conversion



240 Equivalent Units300 × 80%

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Equivalent Units:Weighted-Average vs. FIFO

As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of

production under the FIFO method.

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Compute the cost per equivalent unit using the

FIFO method.

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Beginning work in process: 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 900 unitsMaterials: 60% completeConversion: 30% complete

Cost per Equivalent Unit - FIFOLet’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.

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Cost per Equivalent Unit - FIFOThe formula for computing the cost per equivalent

unit under FIFO method is:

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Cost per Equivalent Unit - FIFO

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

$118,621 ÷ 5,820 $81,130 ÷ 5,610

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Assign costs to units using the FIFO method.

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Applying Costs - FIFOStep 1: Record the equivalent units of production in ending Work

in Process Inventory.

900 units × 60% 900 units × 30%

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Applying Costs - FIFOStep 2: Record the cost per equivalent unit.

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Applying Costs - FIFOStep 3: Compute the cost of ending Work in Process Inventory.

540 × $20.3816 270 × 14.4617

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Cost of Units Transferred OutStep 1: Record the cost in beginning Work in Process Inventory.

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Cost of Units Transferred OutStep 2: Compute the cost to complete the units in beginning

Work in Process Inventory.

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Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this

period.

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Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.

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Prepare a cost reconciliation report

using the FIFO method.

Prepare a cost reconciliation report

using the FIFO method.

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Reconciling Costs

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Reconciling Costs

* $1 rounding error.

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A Comparison of Costing MethodsIn a lean production environment, FIFO and

weighted-average methods yield similar unit costs.

When considering cost control, FIFO is superior to weighted-average because it

does not mix costs of the current period with costs of the prior period.



Service Department AllocationsAppendix 4B

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End of Chapter 4

Documents

Process Costing - · PDF file4-2 Similarities Between Job-Order and Process Costing •Both systems assign material, labor, and overhead costs to products and they provide a mechanism