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Process-Costing Systems

8. Process-Costing Systems. Learning Objective 1. Production environment Homogenous units Mass produced Automated Continuous flow. Process Costing. Production environment Homogenous units Mass produced Automated Continuous flow. Process Costing. Costing procedure

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Process-Costing Systems

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  1. 8 Process-CostingSystems

  2. Learning Objective 1

  3. Production environment Homogenous units Mass produced Automated Continuous flow Process Costing

  4. Production environment Homogenous units Mass produced Automated Continuous flow Process Costing Costing procedure • Costs are recorded for a department. • Department costs are assigned equally to units produced.

  5. Learning Objective 2

  6. How are unitcosts used? Why Process Costing Is Useful To helpset prices To evaluateproducts To evaluateproductionefficiency To determinebalance sheetinventory

  7. Process Costing – The Cost Inputs DirectMaterials Direct labor costsare usually smallin comparison toother product costs in processcost systems.(high level of automation) ManufacturingOverhead Dollar Amount DirectLabor Type of Product Cost

  8. Process Costing – Conversion Costs DirectMaterials Direct labor costsare usually smallin comparison toother product costs in processcost systems.(high level of automation) Conversion Dollar Amount Type of Product Cost So, direct labor and manufacturing overhead are oftencombined into one product cost calledconversion.

  9. Job costing Costs accumulated by thejob. Work in process has a job cost record for each job. Many unique, high cost jobs. Jobs built tocustomerorder. Process costing Costs accumulated by department orprocess. Work in process has a production report for each batch ofproducts. A few identical,low cost products. Units continuouslyproduced for inventory in automated process. Comparing Job Costingand Process Costing

  10. Comparing Job Costingand Process Costing Work in process contains individual jobs in ajobcost system. Direct Materials FinishedGoods Direct Labor Jobs ManufacturingOverhead Cost of GoodsSold

  11. Comparing Job Costingand Process Costing Work in process contains homogenous productsin a process cost system. Direct Materials Direct Labor& Overhead(Conversion) FinishedGoods Products Cost of GoodsSold

  12. Comparing Job Costingand Process Costing Same objective: determine the cost of products Same objective: determine the cost of products Same Inventory accounts: raw materials, work in process, and finished goods Same Inventory accounts: rawmaterials, work in process, and finished goods Same overhead assignment method:predetermined rate times actual activity Same overhead assignment method:predetermined rate times actual activity

  13. Learning Objective 3

  14. Manufacturing costs for a periodUnits produced for the period Cost perunit = Department With No Beginning or Ending WIP Inventory Same objective: determine the cost of products No beginning or endingWork in Process Inventory Common when a company issuccessful at just-in-time production Same Inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method:predetermined rate times actual activity

  15. Department With No Beginning or Ending WIP Inventory Spirit Beverages produces a sport drink. During October, the Blending Department had the following manufacturing costs: Spirit started and completed 8,000 four-bottle packages during October. Spirit had no beginning work in process inventory. Compute the manufacturing unit costs for October.

  16. Department With Ending WIP Inventory Same objective: determine the cost of products No beginning Work in Process Inventory Same Inventory accounts: raw materials, work in process, and finished goods Ending Work in Process Inventory consistsof incomplete units at the end of the period. Same overhead assignment method:predetermined rate times actual activity We must now deal with the conceptof equivalent units.

  17. Cost perequivalent unit Manufacturing costs for a periodEquivalent units for the period = Department With Ending WIP Inventory Same objective: determine the cost of products We must now deal with the conceptofequivalent units. Equivalent units is a concept expressing partially complete units as a smaller numberof fully complete units. Same Inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method:predetermined rate times actual activity

  18. + = Equivalent Units Example Two one-half filled cups areequivalent to one full cup. So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

  19. Assigning Costs to Products Let’s look at the five-step process for assigning costs to units produced, followed by an example using the five steps.

  20. Assigning Costs to Products –The Five-step Process • Summarize the flow of physical units (number of units completed and number of units remaining in process). • Compute the number of equivalent units produced. • Summarize the total costs to be accounted for (costs in beginning work in process inventory and the costs incurred in the current period). • Compute costs per equivalent unit. • Assign unit costs from  to units completed and to units in ending work-in-process inventory.

  21. Department With Ending WIP Inventory Spirit incurred the following manufacturing costs in October (same data as before): Spiritstarted 8,000units andcompleted 6,000 units in October. Spirit had no beginning work in process inventory. All direct materials had been added to each unit still in process, but only 20 percent of conversion costs had been incurred for the 2,000 units still in process. Complete the five-step process to assigncosts to units produced in October.

  22. Department With Ending WIP Inventory – Equivalent Units

  23. Department With Ending WIP Inventory – Equivalent Units Units completed and transferred are 100%complete for both material and conversion.

  24. Department With Ending WIP Inventory – Equivalent Units All material had been added to units remaining in process.

  25. Department With Ending WIP Inventory – Equivalent Units 20% of 2,000 units

  26. Department With Ending WIP Inventory – Assigning Costs

  27. Department With Ending WIP Inventory – Assigning Costs $16,000 ÷ 8,000 equivalent units $5,600 ÷ 6,400 equivalent units

  28. Department With Ending WIP Inventory – Assigning Costs 6,000 equivalent units @ $2.00 6,000 equivalent units @ $0.875

  29. Department With Ending WIP Inventory – Assigning Costs 2,000 equivalent units @ $2.00 400 equivalent units @ $0.875

  30. Learning Objective 4

  31. Department with Beginning & Ending WIP Inventory When there is Beginning WIP, the determination of equivalent units becomes somewhat more complicated. Primary question to be answered: Which units were completed first during the period? (How you answer this question will affect the Total EU for the period.)

  32. Department with Beginning & Ending WIP Inventory Weighted Average vs. FIFO Weighted-Average All units and costs are considered together to determine average cost per EU, regardless of whether the costs were incurred last period or currently. FIFO Costs are accounted for by layer. Cost per EU for this period is computed separately from the Cost per EU for last period.

  33. Department with Beginning & Ending WIP Inventory Weighted Average vs. FIFO Weighted-Average All units and costs are considered together to determine average cost per EU, regardless of whether the costs were incurred last period or currently. Weighted-Average is the most commonly used method.

  34. Let’s revisit Spirit in Decemberwhere we have a beginning inventory from the previous month. Assigning Costs UsingWeighted-Average Costing The weighted average method . . . • Makes no distinction between work done in the prior period and work done in the current period. • Blends together units and costs in beginning inventory with units and costs in the current period. The FIFO method is covered in Appendix A.

  35. Beginning and Ending InventoryWeighted-Average Costing Spirit had the following cost andunit data for December: Complete the five-step process to assign costs to unitscompleted and to units left in process for December.

  36. Beginning and Ending InventoryWeighted-Average Costing First let’s look at a flow chart showing the blending of units in beginning work in process inventory with units started during the month.

  37. Beginning and Ending InventoryWeighted-Average Costing Beginning Inventory2,000 units 14,000 units 10,000 unitscompleted 12,000 unitsstarted EndingInventory4,000 units Now let’s examine the five-step process.

  38. Beginning and Ending InventoryWeighted-Average Costing

  39. Beginning and Ending InventoryWeighted-Average Costing Units completed and transferred are 100%complete for both material and conversion.

  40. Beginning and Ending InventoryWeighted-Average Costing 25% of 4,000 units 60% of 4,000 units

  41. Beginning and Ending InventoryWeighted-Average Costing

  42. Beginning and Ending InventoryWeighted-Average Costing $22,000 ÷ 11,000 equivalent units $8,000 ÷ 12,400 equivalent units

  43. Beginning and Ending InventoryWeighted-Average Costing 10,000 equivalent units @ $2.00 10,000 equivalent units @ $0.6452

  44. Beginning and Ending InventoryWeighted-Average Costing 1,000 equivalent units @ $2.00 2,400 equivalent units @ $0.6452

  45. Learning Objective 5

  46. Costs Transferred infrom Prior Departments • Multiple departments in a process result in units and costs that are transferred from a prior department to the current department. • These transferred-in costs are treated exactly like a direct material that is added at the beginning of a production process. • Let’s revisit Spirit. with the addition of transferred-in units and costs. We will use the December information and the weighted-average method.

  47. Costs Transferred infrom Prior Departments Complete the five-step process for Spirit to assign costs tounits completed and to units left in process for December.

  48. Costs Transferred infrom Prior Departments

  49. Costs Transferred infrom Prior Departments 100% complete for material,conversion, and transferred-in units.

  50. Costs Transferred infrom Prior Departments 60% of 4,000 units 25% of 4,000 units Transferred-in units are 100% complete

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