Chapten 4

1. Chapten 4 System Design: Process Costing

2. Similarities Between Job-Order and Process Costing Both systems assign material, labour, 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. LO 1

3. Differences Between Job-Order and Process Costing Differences: 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 use department production reports to accumulate costs. Job-order costing systems use job cost sheets to accumulate costs. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet. LO 1

4. Quick Check  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. LO 1

5. Quick Check  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. LO 1

6. Processing Departments Any unit in an organization where materials, labour, or overhead are added to the product. The activities performed in a processingdepartment are performed uniformly on allunits of production. Furthermore, the output ofa processing department must be homogeneous. Products in a process costing environment typically flow in a sequence from one departmentto another. LO 1

7. Comparing Job-Order and Process Costing FinishedGoods Work inProcess Cost of GoodsSold Direct Materials Direct Labour Manufacturing Overhead LO 1

8. Comparing Job-Order and Process Costing Costs are traced andapplied to individualjobs in a job-ordercost system. Direct Materials FinishedGoods Jobs Direct Labour Manufacturing Overhead Cost of GoodsSold LO 1

9. Comparing Job-Order and Process Costing Costs are traced and applied to departments in a process cost system. Direct Materials Processing Department FinishedGoods Direct Labour Manufacturing Overhead Cost of GoodsSold LO 1

10. T-Account and Journal Entry Views of Cost Flows For purposes of this example, assume there are two processing departments – Departments A and B. We will use T-accounts and journal entries. LO 1

11. Process Cost Flows: The Flow of Raw Materials(in T-account form) • Direct Materials • DirectMaterials • Direct Materials Work in Process Department A Raw Materials Work in Process Department B LO 1

12. Process Cost Flows: The Flow of Raw Materials (in journal entry form) LO 1

13. Process Cost Flows: The Flow of Labour Costs (in T-account form) • Direct Labour • Direct Labour • Direct Labour Salaries and Wages Payable Work in Process Department A • Direct Materials Work in Process Department B • Direct Materials LO 1

14. Process Cost Flows: The Flow of Labour Costs (in journal entry form) LO 1

15. Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form) Work in Process Department A • Direct Materials Manufacturing Overhead • Direct Labour • Actual Overhead • OverheadApplied to Work inProcess • AppliedOverhead Work in Process Department B • Direct Materials • Direct Labour • AppliedOverhead LO 1

16. Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form) LO 1

17. Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form) Transferred to Dept. B • Transferred from Dept. A Work in Process Department B Work in ProcessDepartment A • Direct Materials • Direct Materials • Direct Labour • Direct Labour • AppliedOverhead • AppliedOverhead DepartmentA DepartmentB LO 1

18. Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form) LO 1

19. Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form) • Cost of GoodsManufactured Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Direct Labour • AppliedOverhead • Transferred from Dept. A LO 1

20. Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form) LO 1

21. Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form) Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Cost of GoodsManufactured • Cost of GoodsSold • Direct Labour • AppliedOverhead • Transferred from Dept. A Cost of Goods Sold • Cost of GoodsSold LO 1

22. Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form) LO 1

23. 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. LO 2

24. Equivalent Units – The Basic Idea + = 1 Two half completed products are equivalent to one complete product. So, 10,000 units 70% completeare equivalent to 7,000 complete units. LO 2

25. Quick Check  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 LO 2

26. Quick Check  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 LO 2

27. Calculating Equivalent Units Equivalent units can be calculated two ways: The First-In, First-Out Method – FIFO is covered in the appendix to this chapter. The Weighted-Average Method – This method will be covered in the main portion of the chapter. LO 2

28. 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. LO 2

29. Treatment of Direct Labour DirectMaterials Direct labour costsmay be smallin comparison toother product costs in processcost systems. ManufacturingOverhead Dollar Amount DirectLabour Type of Product Cost LO 2

30. Treatment of Direct Labour DirectMaterials Direct labour and manufacturing overhead may be combined into one classification of product cost called conversion costs. Conversion DirectLabour Dollar Amount DirectLabour ManufacturingOverhead Type of Product Cost LO 2

31. Weighted-Average Example Double Diamond Skis reported the following activity in Shaping and Milling Department for the month of May: LO 2

32. Weighted-Average Example 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) LO 2

33. Weighted-Average Example 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. LO 2

34. 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. LO 2

35. Weighted-Average Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process LO 2

36. Weighted-Average Example Materials 5,000 Units Started EndingWork in Process400 Units40% Complete BeginningWork in Process200 Units55% Complete 4,600 Units Startedand Completed 4,600 Units Completed 400 × 40% 160 Equivalent Units 4,960 Equivalent units of production LO 2

37. Weighted-Average Example Conversion 5,000 Units Started EndingWork in Process400 Units25% Complete BeginningWork in Process200 Units30% Complete 4,600 Units Startedand Completed 4,600 Units Completed 400 × 25% 100 Equivalent Units 4,900 Equivalent units of production LO 2

38. Compute and Apply Costs Beginning work in process: 200 units Materials: 55% complete $ 9,600 Conversion: 30% complete 5,575 Production started during May 5,000 units Production completed during May 4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Ending work in process 400 units Materials: 40% complete Conversion: 25% complete LO 3

39. Cost of beginningwork in processinventory Cost perequivalent unit + Cost added during the period = Equivalent units of production Compute and Apply Costs The formula for computing the cost per equivalent unit is : LO 3

40. Compute and Apply Costs Here is a schedule with the cost and equivalent unit information. LO 3

41. $378,200 ÷ 4,960 units = $76.25 $356,475 ÷ 4,900 units = $72.75 Compute and Apply Costs Here is a schedule with the cost and equivalent unit information. LO 3

42. Applying Costs LO 4

43. Applying Costs LO 4

44. Applying Costs LO 4

45. Computing the Cost of Units Transferred Out LO 4

46. Computing the Cost of Units Transferred Out LO 4

47. Computing the Cost of Units Transferred Out LO 4

48. Reconciling Costs LO 5

49. Reconciling Costs LO 5

50. Operation Costing Operation costing is a hybrid of job-order and process costing because it possesses attributes of both approaches. Job-order Costing Operation Costing (Products produced in batches) Process Costing Material Costs chargedto batches as injob-order costing. Conversion costsassigned to batchesas in process costing. Operation costing is commonly used when batches of many different products pass through the same processing department. LO 5