P ROCESS C OST S YSTEMS

1. CHAPTER 19 PROCESS COST SYSTEMS

2. Process Costing • Used for production of small, identical, low-cost items. • Mass produced in automated continuous production process. • Costs cannot be directly traced to each unit of product.

3. Sameobjective: to determine the cost of products Sameinventory accounts: raw materials, work in process, and finished goods Sameoverhead assignment method:predetermined rate times actual activity Similarities forJob and Process Costing

4. Job costing Process costing Differences for Job and Process Costing Costs accumulated by the job Costs accumulated by department or process Work in process account for each job Work in process account for each department or process A few identical, low-cost products Many unique, high cost jobs Jobs are built to customer order Units continuously produced for inventory in automated process Relatively large direct labor cost component Relatively small direct labor cost component

5. DirectMaterial ManufacturingOverhead Dollar Amount DirectLabor Type of Product Cost Process Costing So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion. Direct labor costs are small compared to other productcosts because of the high level of automation.

6. Process Costing DirectMaterial So, direct labor and manufacturing overhead are oftencombined into one product cost calledconversion. Conversion Dollar Amount Type of Product Cost Direct labor costs are small compared to other productcosts because of the high level of automation.

7. Direct Material FinishedGoods Work inProcess Direct Labor ManufacturingOverhead Cost of GoodsSold Comparing Cost Flows for Job and Process Costing From Previous Chapter

8. Comparing Cost Flows for Job and Process Costing The work in process account consists of individual jobsin ajob cost system. Direct Material FinishedGoods Direct Labor Jobs ManufacturingOverhead Cost of GoodsSold

9. Comparing Cost Flows for Job and Process Costing The work in process account consists of individual productsin a process cost system. Direct Material FinishedGoods Direct Labor Products ManufacturingOverhead Cost of GoodsSold

10. Comparing Cost Flows for Job and Process Costing Direct Material Direct Labor& Overhead(Conversion) FinishedGoods Products Cost of GoodsSold When direct labor is a relatively smallamount compared to material and overhead, it is often combined with overhead.

11. Process Costing Cost Flows Let’s examine the cost flows in a process cost system with two departments. We will start with materials.

12. Process Costing Cost Flows Raw Materials Work in Process-A Purchases Work in Process-B Mfg. Overhead Transferredfrom Dept. A

13. Process Costing Cost Flows Raw Materials Work in Process-A DirectMaterial DirectMaterial Purchases Work in Process-B Mfg. Overhead Transferredfrom Dept. A DirectMaterial

14. Process Costing Cost Flows Raw Materials Work in Process-A DirectMaterialIndirectMaterial DirectMaterial Purchases Work in Process-B Mfg. Overhead Transferredfrom Dept. A DirectMaterial ActualOverheadCosts

15. Process Costing Cost Flows Next, let’s add labor costs to the process cost flows. Are you with me?

16. Process Costing Cost Flows Work in Process-A Payroll Summary DirectMaterial Actual Wages Work in Process-B Mfg. Overhead Transferredfrom Dept. A DirectMaterial ActualOverheadCosts

17. Process Costing Cost Flows Work in Process-A Payroll Summary DirectMaterialDirectLabor DirectLabor Actual Wages Work in Process-B Mfg. Overhead Transferredfrom Dept. A DirectMaterialDirectLabor ActualOverheadCosts

18. Process Costing Cost Flows Work in Process-A Payroll Summary DirectMaterialDirectLabor DirectLaborIndirect Labor Actual Wages Work in Process-B Mfg. Overhead Transferredfrom Dept. A DirectMaterialDirectLabor ActualOverheadCosts

19. Process Costing Cost Flows Work in Process-A Payroll Summary DirectMaterialDirectLaborOverhead DirectLaborIndirect Labor Actual Wages Work in Process-B Mfg. Overhead Transferredfrom Dept. A DirectMaterialDirectLaborOverhead OverheadApplied to Work inProcess ActualOverheadCosts

20. Process Costing Cost Flows Work in Process-A Payroll Summary DirectMaterialDirectLaborOverhead Current Transfers to Dept. B DirectLaborIndirect Labor Actual Wages Work in Process-B Mfg. Overhead Transferredfrom Dept. ADirectMaterialDirectLaborOverhead OverheadApplied to Work inProcess ActualOverheadCosts

21. Process Costing Cost Flows Now, let’s complete the goods and sell them. Still with me?

22. Process Costing Cost Flows Work in Process-B Finished Goods Transferredfrom Dept. ADirectMaterialDirectLaborOverhead Cost of Goods Sold

23. Process Costing Cost Flows Work in Process-B Finished Goods Transferredfrom Dept. ADirectMaterialDirectLaborOverhead Cost of Goods Mfg. Cost ofGoodsMfg. Cost of Goods Sold

24. Process Costing Cost Flows Work in Process-B Finished Goods Transferredfrom Dept. ADirectMaterialDirectLaborOverhead Cost of Goods Mfg. Cost ofGoodsMfg. Cost ofGoodsSold Cost of Goods Sold Cost ofGoodsSold

25. Process Costing Equivalent Units Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of equivalentunits produced in the period.

26. Process Costing Equivalent Units Equivalent units is a conceptexpressing a number of partially completed units as a smallernumber of fully completed units.

27. Equivalent UnitsExample Twoone-half full pitchers are equivalent to one full pitcher. + = So, 10,000 units 70 percent complete is the equivalent of 7,000 complete units.

28. Equivalent UnitsQuestion For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

29. Equivalent UnitsQuestion For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units

30. Cost perequivalent unit Product costs for the periodEquivalent units for the period = Cost Per Equivalent Unit

31. Equivalent UnitsQuestion Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

32. Equivalent UnitsQuestion Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit

33. Shows the flowof units and coststhrough work inprocess. Provides costinformation forfinancial statements. ProductionCost Report Helps managerscontrol theirdepartments. Production Cost Report Shows division ofcosts between unitstransferred and unitsremaining in process.

34. Production Cost Report Preparation includes four major steps: • Trace the physical flow of units • Convert actual units to equivalent units • Compute cost per equivalent unit for each cost element (material, conversion) • Use unit costs to determine cost of ending Work in Process (WIP) inventory and cost of goods transferred to Finished Goods.

35. Production Cost Report At this point, we need to look at an example to illustrate the concepts.

36. Production Cost ReportExample Sipp-Fizz Cola uses process costingto determine unit costs. It has onlyone processing department. Sipp-Fizz uses the average cost procedure: The number of equivalent units for each costelement equals the number of units completed and transferred to finished goods plus the number of equivalent units in ending work in process inventory for that cost element.

37. Production Cost ReportExample The following information is from Sipp-Fizzrecords for the month of August. • Using this information, compute: • Equivalent units. • Cost per equivalent unit. • Cost of goods completed and transferred. • Cost of ending work in process inventory. One 12-can case equals one unit.

38. Production Cost ReportExample Beginning work in process, August 1 Units, conversion 50% complete 4,000 cases/units Costs: Direct materials $ 12,000 Direct labor $ 6,120 Manufacturing overhead applied $ 8,000 12,000 units were started in August. Costs incurred in August Direct materials $ 36,000 Direct labor $ 48,000 Manufacturing overhead applied $ 60,000 Ending work in process inventory, August 31 Units, conversion 70% complete 6,000 cases/units All materials are added at the beginning of processing

39. Production Cost ReportExample • Our first two steps are . . . • Trace the physical flow of units. • Convert actual units to equivalent units. • Because material is added at the beginning of the process, the Sipp-Fizzies are 100 percent complete as to material when the process starts.

40. Trace the Physical Flow of Units Production Cost ReportExample 1 Units in beginning inventory 4,000 Units started during month 12,000 Units to account for 16,000 Less: Units in ending inventory 6,000 10,000 Units completed & transferred

41. Convert Actual Units to Equivalent Units Materials Conversion Production Cost ReportExample 2 Actual Equivalent Units Units Units completed & transferred 10,000 Units in ending inventory* 6,000 Units accounted for 16,000 *Units in ending inventory are 100% complete as to materials and 70%complete as to conversion.

42. Convert Actual Units to Equivalent Units Materials Conversion Production Cost ReportExample 2 Actual Equivalent Units Units Units completed & transferred 10,000 10,000 10,000 Units in ending inventory* 6,000 6,000 4,200** Units accounted for 16,000 16,000 14,200 *Units in ending inventory are 100% complete as to materials and 70%complete as to conversion. ** 6,000 units x 70%complete = 4,200

43. Production Cost ReportExample Now that we havecalculated equivalentunits for Sipp-Fizz, let’scalculate the cost perequivalent unit.

44. 3 Production Cost ReportExample Our next two steps are . . . • Using equivalent units for each cost item, compute the cost per equivalent unit for • Materials • Conversion • Total • Use cost per equivalent unit from to determine cost of goods completed and transferred and cost of ending work in process inventory.

45. Production Cost ReportExample Materials Conversion Total Beginning inventory $ 12,000 $ 14,120 $ 26,120 Cost added in August 36,000 108,000 144,000 Costs to account for $ 48,000 $ 122,120 $ 170,120

46. Equivalent units from and 1 2 Production Cost ReportExample Materials Conversion Total Beginning inventory $ 12,000 $ 14,120 $ 26,120 Cost added in August 36,000 108,000 144,000 Costs to account for $ 48,000 $ 122,120 $ 170,120 Equivalent units 16,000 14,200

47. Production Cost ReportExample Materials Conversion Total Beginning inventory $ 12,000 $ 14,120 $ 26,120 Cost added in August 36,000 108,000 144,000 Costs to account for $ 48,000 $ 122,120 $ 170,120 Equivalent units 16,000 14,200 3 $ 3.00 $ 8.60 $ 11.60 Cost per unit Cost per unit for each cost element = Cost to account for ÷ Equivalent units

48. Production Cost ReportExample Materials Conversion Total Beginning inventory $ 12,000 $ 14,120 $ 26,120 Cost added in August 36,000 108,000 144,000 Costs to account for $ 48,000 $ 122,120 $ 170,120 Equivalent units 16,000 14,200 3 $ 3.00 $ 8.60 $ 11.60 Cost per unit Cost transferred out $ 30,000 $ 86,000 $ 116,000 4 Cost per unit for each cost element = Cost to account for ÷ Equivalent units Cost transferred out = 10,000 units completed × cost per unit

49. Production Cost ReportExample Materials Conversion Total Beginning inventory $ 12,000 $ 14,120 $ 26,120 Cost added in August 36,000 108,000 144,000 Costs to account for $ 48,000 $ 122,120 $ 170,120 Equivalent units 16,000 14,200 3 $ 3.00 $ 8.60 $ 11.60 Cost per unit Cost transferred out $ 30,000 $ 86,000 $ 116,000 4 Ending WIP inventory cost 18,000 36,120 54,120 Costs accounted for $ 48,000 $ 122,120 $ 170,120 Cost per unit for each cost element = Cost to account for ÷ Equivalent units Cost transferred out = 10,000 units completed × cost per unit Ending WIP inventory cost = equivalent units in ending inventory × cost per unit

50. Process CostingSpoilage Cost of goods lost during production Normal spoilageis an expectedamount in anefficient process. Abnormal spoilageexceeds the expectedamount in anefficient process. Cost ispart of costof good unitsproduced Cost isa loss in theperiod ofproduction