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Chapter Four
Systems Design:Process Costing
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4-2Similarities 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 cost.
• 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.
• Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost.
• 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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4-3Differences Between Job-Order and Process Costing
• Process costing is used when a single product is Process costing is used when a single product is produced on a continuing basis or for a long period of produced on a continuing basis or for a long period of time. Job-order costing is used when many different time. Job-order costing is used when many different jobs are worked on each period.jobs are worked on each period.
• Process costing systems accumulate costs by Process costing systems accumulate costs by department. Job-order costing systems accumulated department. Job-order costing systems accumulated costs by individual jobs.costs by individual jobs.
• Process costing systems compute unit costs by Process costing systems compute unit costs by department. Job-order costing systems compute unit department. Job-order costing systems compute unit costs by job on the job cost sheet.costs by job on the job cost sheet.
• Process costing is used when a single product is Process costing is used when a single product is produced on a continuing basis or for a long period of produced on a continuing basis or for a long period of time. Job-order costing is used when many different time. Job-order costing is used when many different jobs are worked on each period.jobs are worked on each period.
• Process costing systems accumulate costs by Process costing systems accumulate costs by department. Job-order costing systems accumulated department. Job-order costing systems accumulated costs by individual jobs.costs by individual jobs.
• Process costing systems compute unit costs by Process costing systems compute unit costs by department. Job-order costing systems compute unit department. Job-order costing systems compute unit costs by job on the job cost sheet.costs by job on the job cost sheet.
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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
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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
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4-6
Processing Departments
Any unit in an organization where materials, labor or overhead are added to the product.
The activities performed in a processingThe activities performed in a processingdepartment are department are performed uniformlyperformed uniformly on all on all
units of production. Furthermore, the output ofunits of production. Furthermore, the output ofa processing department must bea processing department must be
homogeneoushomogeneous..
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4-7
Learning Objective 1
Record the flow of Record the flow of materials, labor, and materials, labor, and overhead through a overhead through a
process cost system.process cost system.
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4-8 Comparing Job-Orderand Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Materials
Direct LaborDirect Labor
ManufacturingOverhead
ManufacturingOverhead
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4-9 Comparing Job-Orderand Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
ManufacturingOverhead
ManufacturingOverhead
JobsJobs
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
Materials
Direct Materials
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4-10 Comparing Job-Orderand Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Direct LaborDirect Labor
ManufacturingOverhead
ManufacturingOverhead
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
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4-11
T-Account and Journal Entry Views of Cost Flows
For purposes of this example, For purposes of this example, assume there are two assume there are two
processing departments processing departments –– Departments A and B.Departments A and B.
We will use T-accounts and We will use T-accounts and journal entries.journal entries.
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4-12
Raw Materials
Process Cost Flows(in T-account form)
Work in Process Department B
Work in Process Department A
•DirectMaterials
•Direct Materials
•Direct Materials
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4-13 Process Cost Flows(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
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4-14 Process Cost Flows(in T-account form)
Work in Process Department B
Work in Process Department A Wages Payable
•Direct Materials
•Direct Materials
•Direct Labor
•Direct Labor •Direct
Labor
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4-15 Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
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4-16 Process Cost Flows(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
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4-17 Process Costing(In journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
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4-18 Process Cost Flows(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
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4-19 Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
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4-20
Finished Goods
Process Cost Flows(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
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4-21 Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
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4-22
Finished Goods
Cost of Goods Sold
Process Cost Flows(in journal entry 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
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4-23 Process Costing(in journal entry form)
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.
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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.
We need to calculate equivalent units because a department usually has some partially completed units
in its beginning and ending inventory.
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4-25
Equivalent Units – The Basic Idea
Two half completed products are equivalent to one completed product.
Two half completed products are equivalent to one completed 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
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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
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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
Quick Check
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4-28
Calculating Equivalent Units
Equivalent units can be calculated two Equivalent units can be calculated two ways:ways:
The First-In, First-Out Method – The First-In, First-Out Method – FIFO is FIFO is covered in the appendix to this chapter.covered in the appendix to this chapter.
The Weighted-Average Method – The Weighted-Average Method – This This method will be covered in the main portion of the method will be covered in the main portion of the chapter.chapter.
Equivalent units can be calculated two Equivalent units can be calculated two ways:ways:
The First-In, First-Out Method – The First-In, First-Out Method – FIFO is FIFO is covered in the appendix to this chapter.covered in the appendix to this chapter.
The Weighted-Average Method – The Weighted-Average Method – This This method will be covered in the main portion of the method will be covered in the main portion of the chapter.chapter.
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4-29
Learning Objective 2
Compute the equivalent Compute the equivalent units of production using units of production using
the weighted-average the weighted-average method.method.
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4-30 Equivalent Units of ProductionWeighted-Average Method
The weighted-average method . . .
• Makes no distinction between work done in prior or current periods.
• Blends together units and costs from prior and current periods.
• 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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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
Conversion
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4-32
Treatment of Direct Labor
Type of Product Cost
Do
llar
Am
ou
nt Conversion
Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may becombined into one product cost called combined into one product cost called conversionconversion..Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may be
combined into one product cost called combined into one product cost called conversionconversion..
DirectMaterials Direct labor costs
may be smallin comparison to
other productcosts in process
cost systems.
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
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4-33
Weighted-Average Example
Double Diamond Skis reported the following activity in Shaping and Milling Department for the month of May:
Percent Completed
Shaping and Milling Department Units Materials Conversion
Beginning work in process 200 55% 30%
Units started into production in May 5,000
Units completed during May and 4,800 100% 100% transferred to the next department
Ending working process 400 40% 25%
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4-34
The first step in calculating the equivalent units is to identify the units completed and transferred
out of the Department in May (4,800 units)
Weighted-Average Example
Materials Conversion
Units completed and transferred to the next department 4,800 4,800
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4-35
The second step is to identify the equivalent units of production in ending work in process with respect to
materials for the month (160 units) and add this to the 4,800 units from step one.
Weighted-Average Example
Materials Conversion
Units completed and transferred to the next department 4,800 4,800
Work in process, June 30:
400 units × 40% 160
Equivalent units of Production in during the month of May 4,960
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4-36
Weighted-Average Example
The third step is to identify the equivalent units of production in ending work in process with respect to
conversion for the month (100 units) and add this to the 4,800 units from step one.
Materials Conversion
Units completed and transferred to the next department 4,800 4,800
Work in process, June 30:
400 units × 40% 160
400 units × 25% 100
Equivalent units of Production in during the month of May 4,960 4,900
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4-37
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 Example
Materials Conversion
Units completed and transferred to the next department 4,800 4,800
Work in process, June 30:
400 units × 40% 160
400 units × 25% 100
Equivalent units of Production in during the month of May 4,960 4,900
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4-38
BeginningWork in Process
200 Units55% Complete
EndingWork in Process
400 Units40% Complete
5,000 Units Started
4,800 Units Startedand Completed
Weighted-Average Example
MaterialsMaterials
4,800 Units Completed 160 Equivalent Units 400 × 40%
4,960 Equivalent units of production
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4-39
5,000 Units Started
4,800 Units Completed
4,800 Units Startedand Completed
100 Equivalent Units 400 × 25%
4,900 Equivalent units of production
BeginningWork in Process
200 Units30% Complete
EndingWork in Process
400 Units25% Complete
Weighted-Average Example
ConversionConversion
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4-40
Learning Objective 3
Compute the cost per Compute the cost per equivalent unit using the equivalent unit using the
weighted-average method.weighted-average method.
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4-41
Beginning work in process: 200 units
Materials: 55% complete $ 9,600Conversion: 30% complete 5,575
Production started during May 5,000 unitsProduction completed during May 4,800
units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Ending work in process 400 unitsMaterials: 40% completeConversion: 25% complete
Beginning work in process: 200 units
Materials: 55% complete $ 9,600Conversion: 30% complete 5,575
Production started during May 5,000 unitsProduction completed during May 4,800
units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Ending work in process 400 unitsMaterials: 40% completeConversion: 25% complete
Compute and Apply Costs
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4-42
Compute and Apply Costs
The 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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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, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit
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4-44
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00
Compute and Apply Costs
$356,475 ÷ 4,900 units = $72.75$356,475 ÷ 4,900 units = $72.75 $378,200 ÷ 4,960 units = $76.25
Here is a schedule with the cost and equivalent unit information.
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4-45
Learning Objective 4
Assign costs to units using Assign costs to units using the weighted-average the weighted-average
method.method.
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4-46
Applying Costs
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.25$ 72.75$ Cost of ending work in process inventory 12,200$ 7,275$ 19,475$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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4-47
Applying Costs
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.25$ 72.75$ Cost of ending work in process inventory 12,200$ 7,275$ 19,475$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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4-48
Applying Costs
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.25$ 72.75$ Cost of ending work in process inventory 12,200$ 7,275$ 19,475$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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4-49
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.25$ 72.75$ Cost of ending work in process inventory 12,200$ 7,275$ 19,475$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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4-50
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.25$ 72.75$ Cost of ending work in process inventory 12,200$ 7,275$ 19,475$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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4-51
Computing the Cost of Units Transferred Out
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.25$ 72.75$ Cost of ending work in process inventory 12,200$ 7,275$ 19,475$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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4-52
Reconciling Costs
Costs to be accounted for: Cost of beginning work in process inventory 15,175$ Costs added to production during the period 719,500 Total cost to be accounted for 734,675$
Cost accounted for as follows: Cost of ending work in process inventory 19,475$ Cost of units transferred out 715,200 Total cost accounted for 734,675$
Shaping and Milling DepartmentCost Reconciliation
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4-53
Reconciling Costs
Costs to be accounted for: Cost of beginning work in process inventory 15,175$ Costs added to production during the period 719,500 Total cost to be accounted for 734,675$
Cost accounted for as follows: Cost of ending work in process inventory 19,475$ Cost of units transferred out 715,200 Total cost accounted for 734,675$
Shaping and Milling DepartmentCost Reconciliation
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4-54
Operation Costing
Operation cost is a hybrid of job-order and Operation cost is a hybrid of job-order and process costing because it possesses process costing because it possesses
attributes of both approachesattributes of both approaches
Operation costing is Operation costing is commonly used when commonly used when
batches of many batches of many different products pass different products pass
through the same through the same processing department.processing department.
Operation costing is Operation costing is commonly used when commonly used when
batches of many batches of many different products pass different products pass
through the same through the same processing department.processing department.
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4-56
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more accurate that the weighted-average method) differs from the weighted-average method in
two ways:
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated in the cost inventory are treated in the cost reconciliation report.reconciliation report.
1.1. The computation of equivalent units.The computation of equivalent units.
2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated in the cost inventory are treated in the cost reconciliation report.reconciliation report.
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4-57
Learning Objective 5
Compute the equivalent Compute the equivalent units of production using units of production using
the FIFO method.the FIFO method.
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4-58
Equivalent Units – FIFO Method
Let’s revisit the Double Diamond Skis example. Assume the following activity is reported in Shaping and Milling Department for May:
Percent Completed
Shaping and Milling Department Units Materials Conversion
Beginning work in process 200 55% 30%
Units started into production in May 5,000
Units completed during May and 4,800 100% 100% transferred to the next department
Ending working process 400 40% 25%
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4-59
Equivalent Units – FIFO Method
Step 1Step 1: Determine equivalent units needed to complete beginning inventory.
Materials Conversion
To complete beginning work in process: Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160 Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840
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4-60
Equivalent Units – FIFO Method
Step 2Step 2: Determine units started and completed during the period.
Materials Conversion
To complete beginning work in process: Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160 Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840
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4-61
Equivalent Units – FIFO Method
Step 3Step 3: Add the equivalent units in ending working in process inventory.
Materials Conversion
To complete beginning work in process: Materials: 200 units × (100% - 55%) 90
Conversion: 200 units × (100% - 30%) 140
Units started and completed during May 4,600 4,600
Ending work in process
Materials: 400 units × 40% complete 160 Conversion: 400 units × 25% complete 100
Equivalent units of production 4,850 4,840
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4-62
BeginningWork in Process
200 Units55% Complete
EndingWork in Process
400 Units40% Complete
5,000 Units Started
4,600 Units Startedand Completed
FIFO Example
MaterialsMaterialsMaterialsMaterials
4,600 Units Completed 160 Equivalent Units
400 × 40%
4,850 Equivalent units of production
90 Equivalent Units200 × 45%
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BeginningWork in Process
200 Units30% Complete
EndingWork in Process
400 Units25% Complete
5,000 Units Started
4,600 Units Startedand Completed
FIFO Example
ConversionConversion
4,600 Units Completed 100 Equivalent Units
400 × 25%
4,840 Equivalent units of production
140 Equivalent Units200 × 70%
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Equivalent Units: Weighted Average vs. FIFO
Materials ConversionEquivalent units - weighted average method 4,960 4,900Less equivalent units in beginning inventory: 200 units × 55% 110 200 units × 30% 60 Equivalent units - FIFO method 4,850 4,840
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.
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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Learning Objective 6
Compute the cost per Compute the cost per equivalent unit using the equivalent unit using the
FIFO method.FIFO method.
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Cost per Equivalent Unit - FIFO
Let’s revisit the Double Diamond Skis Shaping and Milling Department for the Month of May to prepare our production report.
Beginning work in process: 200 unitsMaterials: 55% complete $ 9,600Conversion: 30% complete 5,575
$15, 175
Production started during May 5,000 unitsProduction completed during May 4,800 units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Ending work in process: 400 unitsMaterials: 40% completeConversion: 25% complete
Beginning work in process: 200 unitsMaterials: 55% complete $ 9,600Conversion: 30% complete 5,575
$15, 175
Production started during May 5,000 unitsProduction completed during May 4,800 units
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Ending work in process: 400 unitsMaterials: 40% completeConversion: 25% complete
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Cost per Equivalent Unit - FIFO
The formula for computing the cost per equivalent unit under FIFO method is :
Cost perequivalent
unit
=Cost added during the period
Equivalent units of production
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Cost per Equivalent Unit - FIFO
TotalCost Materials Conversion
Costs added in the Shaping and Milling Department 719,500$ 368,600$ 350,900$
Equivalent units 4,850 4,840
Cost per equivalent unit 76.00$ 72.50$ Total cost per equivalent unit = $76.00 + $72.50 = $148.50
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Learning Objective 7
Assign costs to units using Assign costs to units using the FIFO method.the FIFO method.
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Applying Costs - FIFO
Step 1Step 1: Record the equivalent units of production in ending work in process inventory.
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.25$ 72.75$ Cost of ending work in process inventory 12,200$ 7,275$ 19,475$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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Applying Costs - FIFO
Step 2Step 2: Record the cost per equivalent unit.
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.00$ 72.50$ Cost of ending work in process inventory 12,160$ 7,250$ 19,410$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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Applying Costs - FIFO
Step 3Step 3: Compute the cost of ending work in process inventory.
Materials Conversion TotalEnding work in process inventory: Equivalent units of production 160 100 Cost per equivalent unit 76.00$ 72.50$ Cost of ending work in process inventory 12,160$ 7,250$ 19,410$
Units completed and transferred out: Units transferred to the next department 4,800 4,800 Cost per equivalent unit 76.25$ 72.75$ Cost of units transferred out 366,000$ 349,200$ 715,200$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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Cost of Units Transferred Out
Step 1Step 1: Record the cost in beginning work in process inventory.
Materials Conversion TotalUnits transferred out: Cost in beginning work in process (WIP) 9,600$ 5,575$ 15,175$ Cost to complete beginning WIP: Equivalent units to complete 90 140 Cost per equivalent unit 76.00$ 72.50$ Cost to complete beginning WIP 6,840$ 10,150$ 16,990$ Cost of units started and completed in May Units started and completed in May 4,600 4,600 Cost per equivalent unit 76.00$ 72.50$ Cost of units started and completed in May 349,600$ 333,500$ 683,100$ Cost of units transferred out 715,265$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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Cost of Units Transferred Out
Step 2Step 2: Compute the cost to complete the units in beginningwork in process inventory.
Materials Conversion TotalUnits transferred out: Cost in beginning work in process (WIP) 9,600$ 5,575$ 15,175$ Cost to complete beginning WIP: Equivalent units to complete 90 140 Cost per equivalent unit 76.00$ 72.50$ Cost to complete beginning WIP 6,840$ 10,150$ 16,990$ Cost of units started and completed in May Units started and completed in May 4,600 4,600 Cost per equivalent unit 76.00$ 72.50$ Cost of units started and completed in May 349,600$ 333,500$ 683,100$ Cost of units transferred out 715,265$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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Cost of Units Transferred Out
Step 3Step 3: Compute the cost of units started and completed this period.
Materials Conversion TotalUnits transferred out: Cost in beginning work in process (WIP) 9,600$ 5,575$ 15,175$ Cost to complete beginning WIP: Equivalent units to complete 90 140 Cost per equivalent unit 76.00$ 72.50$ Cost to complete beginning WIP 6,840$ 10,150$ 16,990$ Cost of units started and completed in May Units started and completed in May 4,600 4,600 Cost per equivalent unit 76.00$ 72.50$ Cost of units started and completed in May 349,600$ 333,500$ 683,100$ Cost of units transferred out 715,265$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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Cost of Units Transferred Out
Step 4Step 4: Compute the total cost of units transferred out.
Materials Conversion TotalUnits transferred out: Cost in beginning work in process (WIP) 9,600$ 5,575$ 15,175$ Cost to complete beginning WIP: Equivalent units to complete 90 140 Cost per equivalent unit 76.00$ 72.50$ Cost to complete beginning WIP 6,840$ 10,150$ 16,990$ Cost of units started and completed in May Units started and completed in May 4,600 4,600 Cost per equivalent unit 76.00$ 72.50$ Cost of units started and completed in May 349,600$ 333,500$ 683,100$ Cost of units transferred out 715,265$
Shaping and Milling DepartmentCost of Ending Work in Porcess Inventory and the Units Transferred Out
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Reconciling Costs
Costs to be accounted for: Cost of beginning work in process inventory 15,175$ Costs added to production during the period 719,500 Total cost to be accounted for 734,675$
Cost accounted for as follows: Cost of ending work in process inventory 19,475$ Cost of units transferred out 715,200 Total cost accounted for 734,675$
Shaping and Milling DepartmentCost Reconciliation
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Reconciling Costs
Costs to be accounted for: Cost of beginning work in process inventory 15,175$ Costs added to production during the period 719,500 Total cost to be accounted for 734,675$
Cost accounted for as follows: Cost of ending work in process inventory 19,475$ Cost of units transferred out 715,200 Total cost accounted for 734,675$
Shaping and Milling DepartmentCost Reconciliation
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A Comparison of Costing Methods
In a lean production environment, FIFO and In a lean production environment, FIFO and weighted-average methods yield similar weighted-average methods yield similar
unit costs.unit costs.
In a lean production environment, FIFO and In a lean production environment, FIFO and weighted-average methods yield similar weighted-average methods yield similar
unit costs.unit costs.
When considering cost control, FIFO is superior When considering cost control, FIFO is superior to weighted-average because it does not mix to weighted-average because it does not mix costs of the current period with costs of the costs of the current period with costs of the
prior period.prior period.
When considering cost control, FIFO is superior When considering cost control, FIFO is superior to weighted-average because it does not mix to weighted-average because it does not mix costs of the current period with costs of the costs of the current period with costs of the
prior period.prior period.
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Appendix 4B
Service Department Allocations
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Operating Departments
AnAn operating departmentoperating department carries out carries out the central purpose of the organization the central purpose of the organization
AnAn operating departmentoperating department carries out carries out the central purpose of the organization the central purpose of the organization
The The Accounting Accounting Department Department
at your at your University.University.
The The Accounting Accounting Department Department
at your at your University.University.
An An Assembly Assembly
Department Department at General at General
Motors.Motors.
An An Assembly Assembly
Department Department at General at General
Motors.Motors.
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Service Departments
AA service departmentservice department does not directly does not directly engage in operating activities. engage in operating activities.
AA service departmentservice department does not directly does not directly engage in operating activities. engage in operating activities.
The Accounting Department
at Macys
The Accounting Department
at Macys
The Human Resources Department
at Walgreens.
The Human Resources Department
at Walgreens.
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Interdepartmental Services
ServiceServiceDepartmentDepartment
OperatingOperatingDepartmentDepartment
Costs of the service Costs of the service department become department become overhead costs to overhead costs to
the operating the operating departmentdepartment
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Allocation Approaches
DirectDirectMethodMethodDirectDirect
MethodMethod
Step-DownStep-DownMethodMethod
Step-DownStep-DownMethodMethod
ReciprocalReciprocalMethodMethod
ReciprocalReciprocalMethodMethod
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Reciprocal Services
ServiceServiceDepartment 1Department 1
ServiceServiceDepartment 2Department 2
When service When service departments provide departments provide
services to each services to each other we call them other we call them
reciprocal services.reciprocal services.
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Learning Objective 8
Allocate service Allocate service department costs to department costs to
operating departments operating departments using the direct method.using the direct method.
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Direct Method
Service Department(Cafeteria)
Service Department(Custodial)
Operating Department(Machining)
Operating Department(Assembly)
Interactionsbetween servicedepartments areignored and all
costs areallocated directly
to operatingdepartments.
Interactionsbetween servicedepartments areignored and all
costs areallocated directly
to operatingdepartments.
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Direct Method
Service Department Allocation Base
Cafeteria Number of employeesCustodial Square feet occupied
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Direct Method
How much of the Cafeteria and Custodial costs should be allocated to each operating department
using the direct method of cost allocation?
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Direct Method
Allocation base: Number of employees
$360,000 ×20
20 + 30= $144,000
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Direct Method
Allocation base: Number of employees
$360,000 ×30
20 + 30= $216,000
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Direct Method
Allocation base: Square feet occupied
$90,000 ×25,000
25,000 + 50,000 = $30,000
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Direct Method
Allocation base: Square feet occupied
50,000
25,000 + 50,000$90,000 × = $60,000
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Learning Objective 9
To allocate service To allocate service department costs to department costs to
operating departments operating departments using the step-down using the step-down
method.method.
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Operating Department(Machining)
Operating Department(Assembly)
Step Method
Once a servicedepartment’s costs
are allocated, other service
department costsare not allocated
back to it.
Service Department(Cafeteria)
Service Department(Custodial)
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Step Method
There are three key points to understand regarding the step method:
In both the direct and step methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.
Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.
Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.
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Step Method
Service Department Allocation Base
Cafeteria Number of employeesCustodial Square feet occupied
We will use the same data used in the direct method example.
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Step Method
Allocate Cafeteria costs first sinceit provides more service than Custodial.
Allocate Cafeteria costs first sinceit provides more service than Custodial.
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Step Method
$360,000 ×10
10 + 20 + 30= $60,000
Allocation base: Number of employees
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Step Method
$360,000 ×20
10 + 20 + 30= $120,000
Allocation base: Number of employees
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Step Method
$360,000 ×30
10 + 20 + 30= $180,000
Allocation base: Number of employees
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Step Method
New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria.
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Step Method
$150,000 ×25,000
25,000 + 50,000 = $50,000
Allocation base: Square feet occupied
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Step Method
$150,000 ×50,000
25,000 + 50,000 = $100,000
Allocation base: Square feet occupied
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Reciprocal Method
Interdepartmentalservices are given
full recognitionrather than partialrecognition as withthe step method.
Service Department(Cafeteria)
Service Department(Custodial)
Operating Department(Machining)
Operating Department(Assembly)
Because of its mathematical complexity, the reciprocal method is rarely used.
Because of its mathematical complexity, the reciprocal method is rarely used.
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4-106 Quick Check Datafor Direct and Step Methods
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business Administration computer services (BACS): Number of personal computers
The direct method of allocation is used.
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Quick Check
How much cost will be allocated from Administration to Accounting? a. $ 36,000b. $144,000c. $180,000d. $ 27,000
How much cost will be allocated from Administration to Accounting? a. $ 36,000b. $144,000c. $180,000d. $ 27,000
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How much cost will be allocated from Administration to Accounting? a. $ 36,000b. $144,000c. $180,000d. $ 27,000
How much cost will be allocated from Administration to Accounting? a. $ 36,000b. $144,000c. $180,000d. $ 27,000
Quick Check
$180,000 ×20
20 + 80= $36,000
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Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
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Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
$90,000 ×18
18 + 102= $13,500
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Quick Check Data
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business administration computer services (BACS): Number of personal computers
The step method of allocation is used.
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Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
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How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
Quick Check