Systems Design: Process Costing Chapter 4. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Job-order Costing Process Costing F Many units of.

Systems Design:Process Costing

Chapter 4

© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Job-orderCosting

ProcessCosting

Many units of a single, homogeneous product flow evenly through a continuous production process.

One unit of product is indistinguishable from any other unit of product.

Each unit of product is assigned the same average cost.

Many units of a single, homogeneous product flow evenly through a continuous production process.

One unit of product is indistinguishable from any other unit of product.

Each unit of product is assigned the same average cost.

Types of Costing Systems Used to Determine Product Costs


Types of Costing Systems Used to Determine Product Costs

Job-orderCosting

ProcessCosting

Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill


Job order costing Many jobs are worked

during the period.

Costs are accumulated by individual jobs.

Job cost sheet is the key document.

Unit cost computed by job.

Job order costing Many jobs are worked

during the period.

Costs are accumulated by individual jobs.

Job cost sheet is the key document.

Unit cost computed by job.

Process costing A single product is

produced for a long period of time.

Costs are accumulated by departments.

Department production report is key document.

Unit costs are computed by department.

Process costing A single product is

produced for a long period of time.

Costs are accumulated by departments.

Department production report is key document.

Unit costs are computed by department.

Differences Between Job-Order and Process Costing


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












Quick Check


Process Costing

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


Process Costing

Type of Product Cost

Do

llar

Am

ou

nt Conversion

So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.

So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.







DirectMaterials


Comparing Job-Orderand Process Costing

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold

Work inProcess

Direct Materials

Direct Materials

Direct LaborDirect Labor

ManufacturingOverhead




FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




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



FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




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


Process Cost Flows

Let’s look at cost flows in a process cost system with

Departments A and B.We will use

T-accounts andstart with materials.


Raw Materials•Purchases •Direct

Materials

Process Cost Flows

•Indirect Materials

•Direct Materials

Work in Process Department B

Work in Process Department A

•OtherOverhead

Manufacturing Overhead

Actual Applied

•IndirectMaterials

•Direct Materials

•Direct Labor


Process Cost Flows


•Direct Labor


•OtherOverhead


Actual Applied

•IndirectMaterials•Indirect

Labor

Wages Payable

•Direct Labor

•IndirectLabor

•Direct Materials

•Direct Labor

•Direct Materials


Process Cost Flows



•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•OtherOverhead


Actual Applied

•IndirectMaterials•Indirect

Labor

•Direct Labor

•Direct Materials

•Direct Labor

•Direct Materials


Process Cost Flows

Next, transfer workfrom Department Ato Department B.


Process Cost Flows


Work in ProcessDepartment A

•Direct Materials

•Direct Labor

•AppliedOverhead

•Direct Materials

•Direct Labor

•AppliedOverhead

Transferred to Dept. B

•Transferred from Dept. A


Process Cost Flows

Now let’s completethe goods in

Department Band sell them.


Finished Goods

Cost of Goods Sold

Process Cost Flows


•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of GoodsSold

•Cost of GoodsSold

•Cost of Goods

Manufactured


Equivalent Units of Production

Equivalent units are partially complete and are part of work in process inventory. Partially completed

products are expressed in terms of a smaller number of fully completed

units.


Equivalent Units of Production

Two half completed products are equivalent to one completed product.

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

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

+ = 1


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


a. 10,000

b. 11,500

c. 13,500

d. 15,000

Quick Check



a. 10,000

b. 11,500

c. 13,500

d. 15,000


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


Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units of productionfor the period


Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90

Quick Check



a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Quick Check


Equivalent Units of Production –Weighted Average Method

The weighted average method . . .Makes no distinction between work done in prior

and current period.Blends together units and costs from prior

period and current period.

Let’s see how this works!


Weighted Average Example

Smith Company reported the following activity in Department A for the month of June:

Percent Completed

Units Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900 60% 30%


Equivalent units are calculated as follows:


Materials Conversion

Units completed and transferred out of Department A in June 5,400 5,400






Work in process, June 30:

900 units × 60% 540

Equivalent units of Production in Department A during June 5,940







900 units × 60% 540

900 units × 30% 270

Equivalent units of Production in Department A during June 5,940 5,670





900 units × 60% 540

900 units × 30% 270

Equivalent units of Production in Department A during June 5,940 5,670

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



BeginningWork in Process

300 Units40% Complete

EndingWork in Process


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed


MaterialsMaterials

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

5,940 Equivalent units of production


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed

270 Equivalent Units 900 × 30%

5,670 Equivalent units of production

BeginningWork in Process


EndingWork in Process



ConversionConversion


Production Report

ProductionReport

Helps managerscontrol theirdepartments

Provides costinformation for

financial statements

Shows the flowof units and coststhrough work in

process

Becomes thejob cost sheet

in processcosting


Production Report

A computation ofcost per equivalent unit.

A computation ofcost per equivalent unit.

Section 1

Section 2

Section 3

Production Report A quantity schedule showing the flow of units and the computation of

equivalent units.

A quantity schedule showing the flow of units and the computation of

equivalent units.


Production Report

A reconciliation of cost flows for the period, including:

Total cost for units completed and transferred from the processing department.

Total cost for partially completed units remaining in work in process.

A reconciliation of cost flows for the period, including:

Total cost for units completed and transferred from the processing department.

Total cost for partially completed units remaining in work in process.

Section 1

Section 2

Section 3

Production Report


Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.

Double Diamond uses the weighted average cost procedure.

Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.

Double Diamond uses the weighted average cost procedure.

Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

Production Report Example


Work in process, May 1: 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

Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.

Work in process, May 1: 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

Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.



Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400





Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160

5,200 4,960






Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900



Section 2: Compute cost per equivalent unit


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




Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$



$378,200 ÷ 4,960 units = $76.25




Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$ 72.75$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00


$356,475 ÷ 4,900 units = $72.75



Section 3: Cost Reconciliation


Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100

Total work in process, May 31

Total cost accounted for



Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100

Total work in process, May 31

Total cost accounted for

4,800 units @ $149.00





Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100

Total work in process, May 31 19,475

Total cost accounted for 734,675$

160 units @ $76.25



All costs accounted for

100 units @ $72.75


Operation Costing

Operation costing employs some aspectsof both job-order and process costing.

Conversion costsassigned to batches

as in process costing.

Conversion costsassigned to batches

as in process costing.

Material Costs Chargedto batches as in

job-order costing.

Material Costs Chargedto batches as in

job-order costing.

Job-orderCosting

ProcessCosting

Operation Costing(Products produced in batches)


I’m going to end this chapter and process some leisure time, unless

you want to see some journal entries.

Do You Want to SeeJournal Entries?


Process CostingTypical Accounting Entries

Let’s look at the accounting journal entries for a process cost system. We’ll omit the

numbers so that we can focus on concepts.



GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Raw Materials XXXXX

Accounts Payable XXXXX

To record the purchase of material.





Raw Materials XXXXX

Accounts Payable XXXXX

To record the purchase of material.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Raw Materials XXXXX

To record the use of direct material.







Salaries and Wages Payable XXXXX

To record direct labor costs.







Manufacturing Overhead XXXXX

To apply overhead to departments.







To record the transfer of goods from

Department A to Department B.





Finished Goods XXXXX


To record the completion of goods

and their transfer from Department B

to finished goods inventory.





Accounts Receivable XXXXX

Sales XXXXX

To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX

To record cost of goods sold.


End of Chapter 4

Systems Design: Process Costing Chapter 4. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Job-order Costing Process Costing F Many units of.

Documents

process costing slide

unit of product

process costing chapter

process cost systems

unit costs

single product

continuous production

job cost sheet