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Systems Design: Process Costing 2/23/04

Chapter 4. Systems Design: Process Costing 2/23/04. Types of Costing Systems Used to Determine Product Costs. Job-order Costing. Process Costing. Many units of a single, homogeneous product flow evenly through a continuous production process.

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Systems Design: Process Costing 2/23/04

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  1. Chapter 4 Systems Design:Process Costing2/23/04

  2. Types of Costing Systems Used to Determine Product Costs 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.

  3. Types of Costing Systems Used to Determine Product Costs Job-orderCosting ProcessCosting • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill

  4. Job order costing Many products are produced 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. Differences Between Job-Order and Process Costing

  5. Process Costing DirectMaterials Direct labor costsmay be smallin comparison toother product costs in processcost systems. Conversion Dollar Amount Type of Product Cost So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.

  6. Comparing Job-Orderand Process Costing Costs are traced andapplied to individualjobs in a job-ordercost system. Direct Materials FinishedGoods Jobs Direct Labor ManufacturingOverhead Cost of GoodsSold

  7. Comparing Job-Orderand Process Costing Costs are traced and applied to departments in a process cost system. Direct Materials FinishedGoods Processing Departments Direct Labor ManufacturingOverhead Cost of GoodsSold

  8. Process Cost Systems • Exh. 4-2 Sequential Processing, p.152 • Exh. 4-3 Parallel Processing, p. 153 • Exh. 4-4 T-Account Model, p. 154 • Exh. 4-5 Double Diamond, p. 156

  9. Process Cost Flows Let’s look at cost flows in a process cost system with Departments A and B.We will useT-accounts andstart withmaterials.

  10. Process Cost Flows Work in Process Department A Raw Materials • Direct Materials • DirectMaterials • Purchases • Indirect Materials Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • IndirectMaterials

  11. Process Cost Flows Work in Process Department A Wages Payable • Direct Materials • Direct Labor • Direct Labor • IndirectLabor Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • Direct Labor • IndirectMaterials • IndirectLabor

  12. Process Cost Flows(MOH is applied using Departmental rates) Work in Process Department A • Direct Materials • Direct Labor • AppliedOverhead Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • OverheadApplied to Work inProcess • POHR • Direct Labor • IndirectMaterials • AppliedOverhead • IndirectLabor

  13. Process Cost Flows Next, transfer workfrom Department Ato Department B.

  14. Process Cost Flows Work in Process Department B Work in ProcessDepartment A • Direct Materials Transferred to Dept. B • Direct Materials • Direct Labor • Direct Labor • AppliedOverhead • AppliedOverhead • Transferred from Dept. A

  15. Process Cost Flows Now let’s completethe goods inDepartment Band sell them.

  16. Cost of GoodsManufactured Process Cost Flows Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Cost of GoodsSold • Direct Labor • AppliedOverhead • Transferred from Dept. A Cost of Goods Sold • Cost of GoodsSold

  17. Equivalent Units of Production(Accounting for partially completed units in WIP) Equivalent unitsare 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.

  18. + = 1 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.

  19. 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

  20. 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

  21. Calculating and Using Equivalent Units of Production To calculate the cost perequivalent unit for the period: Cost perequivalent unit Costs for the periodEquivalent units of productionfor the period =

  22. Quick Check  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

  23. Quick Check  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 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit

  24. Let’s see how this works! 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.

  25. Weighted Average Method Equivalent units of production = Units completed and transferred to the next department + equivalent units in ending WIP

  26. Weighted Average Example Smith Company reported the following activity in Department A for the month of June:

  27. Weighted Average Example Equivalent units are calculated as follows:

  28. Weighted Average Example Equivalent units are calculated as follows:

  29. Weighted Average Example Equivalent units are calculated as follows:

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

  31. Shows the flowof units and coststhrough work inprocess Provides costinformation forfinancial statements ProductionReport Becomes thejob cost sheetin processcosting Helps managerscontrol theirdepartments Production Report

  32. Production Report • A quantity schedule showing the flow of units and the computation of equivalent units. Section 1 • A computation ofcost per equivalent unit. Section 2 Section 3 Production Report

  33. Production Report Section 1 Section 2 Section 3 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.

  34. Production Report ExamplePage 160 • 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.

  35. Production Report Example Work in process, May 1: 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 Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete.

  36. Production Report Example Section 1: Quantity Schedule with Equivalent Units

  37. Production Report Example Section 1: Quantity Schedule with Equivalent Units

  38. Production Report Example Section 1: Quantity Schedule with Equivalent Units

  39. Production Report Example Section 2: Compute cost per equivalent unit

  40. Production Report Example Section 2: Compute cost per equivalent unit $378,200 ÷ 4,960 units = $76.25

  41. Production Report Example Section 2: Compute cost per equivalent unit $356,475 ÷ 4,900 units = $72.75

  42. Production Report Example Section 3: Cost Reconciliation

  43. Production Report Example Section 3: Cost Reconciliation 4,800 units @ $149.00

  44. Production Report Example Section 3: Cost Reconciliation 160 units @ $76.25 100 units @ $72.75 All costs accounted for (See VG 42)

  45. I’m going to end this chapter and process some leisure time, unless you want to see some journal entries. Noooo! Do You Want to SeeJournal Entries?

  46. End of Chapter 4

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