Systems Design: Process Costing Chapter 4 McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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Systems Design: Process Costing
Chapter 4
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
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 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.
Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.
Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.
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Comparing Job-Order and Process Costing
FinishedGoods
FinishedGoods
Cost of GoodsSold
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Materials
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
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Comparing Job-Order and Process Costing
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
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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 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
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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
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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
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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
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Equivalent Units – The Basic Idea
Two 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
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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.
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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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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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 attributes process costing because it possesses attributes
of both approachesof both approaches
Operation costing is Operation costing is commonly used when commonly used when
batches of many different batches of many different products pass through the products pass through the
same processing same processing department.department.
Operation costing is Operation costing is commonly used when commonly used when
batches of many different batches of many different products pass through the products pass through the
same processing same processing department.department.
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End of Chapter 4
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