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Topic 5: Process Costing

Topic 5: Process Costing. Outline. 1. The basic characteristics and cost flows associated with process manufacturing. The definition of equivalent units and their role in process costing. Accounting for process costing using: the weighted average method, and the FIFO method.

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Topic 5: Process Costing

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  1. Topic 5: Process Costing

  2. Outline 1. The basic characteristics and cost flows associated with process manufacturing. • The definition of equivalent units and their role in process costing. • Accounting for process costing using: • the weighted average method, and • the FIFO method. • Departmental production report using: • the weighted average method, and • The FIFO method • How process costing is affected by nonuniform application of manufacturing inputs and the existence of multiple processing departments.

  3. Healthblend Nutritional Supplements Finished Goods Encapsulating Bottling Sequential Processing Picking

  4. Process 2 Process 4 Finished Goods Assembly Parallel Processing (hard disk drives for personal computers) Production and assembly of write-head and disk drive Testing of write-head and disk drive Process 1 Process 3 Testing of circuit board Production of circuit board

  5. Encapsulating Dept. Work in Process Bottling Dept. Work in Process Transferred-in from Encapsulating Materials: Bottles Bottling labor Applied OH Transferred-in from Picking Materials: Capsules Encapsulating labor Applied OH Flow of Manufacturing Costs Through the Accounts of a Process-Costing Firm (Healthblend) Picking Department Work in Process Materials: Herbs Vitamins Minerals Picking labor Applied OH

  6. Healthblend Nutritional Supplements Healthblend decides to produce 2,000 bottles of multivitamins. The Picking Department costs are: Direct materials $1,700 Direct labor 50 Applied overhead 450 Work in Process (Encapsulating) 2 200 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Work in Process (Picking) 2 200 00 The mixture is transferred from picking to Encapsulating.

  7. Healthblend Nutritional Supplements The Encapsulating Department costs are: Direct materials $1,000 Direct labor 60 Applied overhead 500 Work in Process (Bottling) 3 760 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. $2,200 + $1,000 + $60 + $500 Work in Process (Encapsulating) 3 760 00 The cost is transferred from Encapsulating to Bottling.

  8. Healthblend Nutritional Supplements The Bottling Department costs are: Direct materials $800 Direct labor 300 Applied overhead 600 Finished Goods 5 460 00 The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. $3,760 + $800 + $300 + $600 Work in Process (Bottling) 5 460 00 The cost is transferred to the finished goods warehouse.

  9. In process costing, costs are summarized by department for a period of time in a production report. A production report provides information about the physical units processed in a department and the manufacturing costs.

  10. Equivalent Units of Production Equivalent units of output are the complete units that could have been produced given the total amount of manufacturing effort expended for the period under consideration.

  11. = 200 units, 50% completed = 100 equivalent units Equivalent Units of Production Concept: = 100 units completed = 100 equivalent units Continued

  12. 1000 units completed = 1,000 equivalent units = 150 equivalent units 600 units, EWIP, 25% completed Equivalent Units of Production Example: 1000 units completed + 600 units 25% completed = 150 equivalent units Total = 1,150 equivalent units

  13. Preparing a Production Report • Physical units flow analysis • Calculation of equivalent units • Computation of unit cost • Valuation of inventories (goods transferred out and ending work in process) • Cost reconciliation

  14. Healthblend Nutritional Supplements Weighted Average Method: Example Production: Units in process, July 1, 75% complete 20,000 Units completed and transferred out 50,000 Units in process, July 31, 25% complete 10,000 Costs: Work in process, July 1 $ 3,525 Cost added during July 10,125

  15. Healthblend Nutritional Supplements $3,525 $10,125 Weighted Average Method: Example BWIP Cost July Cost $13,650 Total Manufacturing Cost

  16. Production Report (Weighted Average Method)

  17. Healthblend Company Picking Department Production Report for July 2004 Equivalent Units Units completed 50,000 Units in ending work in process 2,500 Total equivalent units 52,500 Weighted average UNIT INFORMATION Physical Flow Units to account for: Units accounted for: Units in beginning Units completed 50,000 work in process 20,000 Units in ending Units started 40,000 work in process 10,000 Total units to Total units account for 60,000 accounted for 60,000 Continued

  18. Cost per equivalent unit $ 0.26 COST INFORMATION Costs to account for: Beginning work in process $ 3,525 Incurred during period 10,125 Total cost to account for $13,650 Continued

  19. Transferred Ending Out WIP Total Costs accounted for: Goods transferred out ($0.26 x 50,000) $13,000 --- $13,000 Goods in ending work in process ($0.26 x 2,500) ---$650 650 Total cost accounted for $13,000 $650 $13,650

  20. Production Report (FIFO Method)

  21. $3,525 $10,125 FIFO Method: Example BWIP Cost July Cost Current- Period Units BWIP Units

  22. 5,000 + 30,0000 units Started and Completed 30,000 + 2,500 FIFO Method: Example Output for July: 60,000 Total Physical Units Become 37,500 Equivalent Units 20,000 units BWIP (75% complete) 10,000 units EWIP (25% complete) 37,500

  23. FIFO Method Cost Assignment: Unit Cost = $10,125 ÷ 37,500 = $0.27 Transferred Out: From beginning work in process $ 3,525 Complete BWIP ($0.27 x 5,000) 1,350 Started and Completed in July ($0.27 x 30,000) 8,100 EWIP ($0.27 x 2,500) 675 Total Cost Assigned $13,640

  24. Healthblend Company Picking Department Production Report for July 2004 FIFO UNIT INFORMATION Units accounted for: Units in beginning work in process 20,000 Units started during the period 40,000 Total units to account for 60,000 Continued

  25. Physical Equivalent Flow Units • Units accounted for: • Units started and completed 30,000 30,000 • Units completed from beginning work • in process 20,000 5,000 • Units in ending work in process 10,000 2,500 • Total units accounted for 60,000 37,500 Continued

  26. Cost per equivalent unit $ 0.27 COST INFORMATION Costs to account for: Beginning work in process $ 3,525 Incurred during period 10,125 Total cost to account for $13,650 Continued

  27. Transferred Ending Out WIP Total Costs accounted for: Units in beginning work in process: From prior period $ 3,525 --- $ 3,525 From current period ($0.27 x 5,000) 1,350 --- 1,350 Units started and completed ($0.27 x 30,000) 8,100 --- 8,100 Goods in ending work in process ($0.27 x 2,500) ---$675 675 Total cost accounted for $12,975 $675 $13,650

  28. Healthblend Nutritional Supplements Nonuniform Application of Manufacturing Inputs

  29. Healthblend Nutritional Supplements 60,000 equivalent units of material and conversion cost transferred out 10,000 units Beginning WIP inventory 50,000 units Started and completed Equivalent Units Picking Department Materials, 100% complete; conversion cost, 50% complete 100% complete as to both materials and conversion cost

  30. Healthblend Nutritional Supplements 10,000 units Beginning WIP inventory 20,000 units 50,000 units Ending WIP inventory Started and completed September Equivalent Units Picking Department • Conversion • MaterialsCosts 60,000 60,000 Materials, 100% complete; conversion cost, 40% complete

  31. Healthblend Nutritional Supplements 10,000 units Beginning WIP inventory 20,000 units 50,000 units Ending WIP inventory Started and completed September Equivalent Units Picking Department • Conversion • MaterialsCosts 60,000 60,000 20,000 8,000

  32. Healthblend Nutritional Supplements 10,000 units Beginning WIP inventory 50,000 units 20,000 units Started and completed Ending WIP inventory September Equivalent Units Picking Department • Conversion • MaterialsCosts 60,000 60,000 September 20,000 8,000 Equivalent units 80,000 68,000

  33. Materials $12,000 Conversion cost $3,200 Materials $1,600 Conversion cost $200 Healthblend Nutritional Supplements Materials $13,600 EU 80,000 Conver. Cost $3,400 EU 68,000 10,000 units Beginning WIP inventory 50,000 units 20,000 units Started and completed Ending WIP inventory = Cost per EU $0.22 = Cost per EU $0.05 September August October

  34. Healthblend Company Picking Department Production Report for September 2004 Weighted average UNIT INFORMATION Physical Flow Units to be accounted for: Units accounted for: Units in beginning Units completed 60,000 work in process 10,000 Units in ending Units started 70,000 work in process 20,000 Total units to Total units account for 80,000 accounted for 80,000 Continued

  35. Equivalent Units Materials Conversion Cost Units completed 60,000 60,000 Units in ending work in process 20,000 8,000 Total equivalent units 80,000 68,000 Continued

  36. COST INFORMATION Conversion Materials Cost Total Costs to account for: Beginning work in process $ 1,600 $ 200 $ 1,800 Incurred during the period 12,000 3,200 15,200 Total costs to account for $13,600 $3,400 $17,000 Cost per equivalent unit $ 0.17 $ 0.05 $ 0.22 Continued

  37. Transferred Ending Out WIP Total Costs accounted for: Goods transferred out ($0.22 x 60,000) $13,200 --- $13,200 Goods in ending work in process: Materials ($0.17 x 20,000) --- $3,400 3,400 Conversion ($0.05 x 8,000) --- 400 400 Total cost accounted for $13,200 $3,800 $17,000

  38. Units to account for: Units in beginning work in process 15,000 Units transferred in during September60,000 Total units to account for 75,000 Multiple Departments: Example Units accounted for: Units completed and transferred out: Started and completed 55,000 From beginning work in process 15,000 Units in ending work in process 5,000 Total units accounted for 75,000

  39. Multiple Departments: Example Transferred in: Units completed 70,000 Add: Units in ending work in process X Fraction complete (5,000 x 100%) 5,000 Equivalent units of output 75,000 Unit cost (transferred-in category) = ($13,200 ÷ $3,000/75,000) = $16,200/75,000 = $0.216

  40. Summary PROCESS COSTING Homogeneous units passes through a series of similar processes Costs are accumulated by processing department Unit costs are computed by dividing the processing departments’ costs by output (measured in equivalent units) The production report provides the details for the WIP account for each processing department JOB ORDER COSTING Unique jobs are worked on during a time period Costs are accumulated by individual job Unit costs are determined by dividing total costs on the job-order cost sheet by the number of units in the job The job-order cost sheet provides details for the WIP account

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