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Chapter 4

Chapter 4. System Design: Process Costing. Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost.

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Chapter 4

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  1. Chapter 4 System Design: Process Costing

  2. Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost. 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. 4-2 Similarities Between Job-Orderand Process Costing

  3. 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 are worked on each period. Process costing systems accumulate costs by department. Job-order costing systems accumulate costs by individual jobs. Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet. 4-3 Differences Between Job-Orderand Process Costing

  4. 4-4 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.

  5. 4-5 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.

  6. 4-6 Processing Departments Any location in an organization where materials, labor, or overhead are added to the product. The activities performed in a processingdepartment are performed uniformly on allunits of production. Furthermore, the outputof a processing department must behomogeneous.

  7. 4-7 Learning Objective 1 Record the flowof materials, labor, andoverhead through aprocess costing system.

  8. FinishedGoods Work inProcess Cost of GoodsSold 4-8 Flow of Materials, Labor, and Overhead Costs Direct Materials Direct Labor ManufacturingOverhead

  9. 4-9 Flow of Materials, Labor, and Overhead Costs Costs are traced andapplied to individualjobs in a job-ordercost system. Direct Materials FinishedGoods Jobs Direct Labor ManufacturingOverhead Cost of GoodsSold

  10. 4-10 Flow of Materials, Labor, and Overhead Costs Costs are traced and applied to departments in a process cost system. Direct Materials FinishedGoods Processing Department Direct Labor ManufacturingOverhead Cost of GoodsSold

  11. 4-11 T-Account and Journal EntryViews of Process 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.

  12. Direct Materials • DirectMaterials • Direct Materials 4-12 The Flow of Raw Materials(in T-Account form) Work in Process Department A Raw Materials Work in Process Department B

  13. 4-13 The Flow of Raw Materials(in journal entry form)

  14. Direct Labor • Direct Labor • Direct Labor 4-14 The Flow of Labor Costs(in T-Account form) Work in Process Department A Salaries and Wages Payable • Direct Materials Work in Process Department B • Direct Materials

  15. 4-15 The Flow of Labor Costs(in journal entry form)

  16. 4-16 The Flow of Manufacturing Overhead Costs(in T-Account form) Work in Process Department A • Direct Materials Manufacturing Overhead • Direct Labor • Actual Overhead • OverheadApplied to Work inProcess • AppliedOverhead Work in Process Department B • Direct Materials • Direct Labor • AppliedOverhead

  17. 4-17 The Flow of Manufacturing Overhead Costs(in journal entry form)

  18. Transferred to Dept. B • Transferred from Dept. A 4-18 Partially Completed Units Transferred(in T-Account form) Work in ProcessDepartment A Work in Process Department B • Direct Materials • Direct Materials • Direct Labor • Direct Labor • AppliedOverhead • AppliedOverhead

  19. 4-19 Partially Completed Units Transferred(in journal entry form)

  20. Cost of GoodsManufactured 4-20 Transfer of Cost of Completed Units(in T-Account form) Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Direct Labor • AppliedOverhead • Transferred from Dept. A

  21. 4-21 Transfer of Cost of Completed Units (in journal entry form)

  22. 4-22 Cost of Finished Goods Sold(in T-Account form) Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Cost of GoodsManufactured • Cost of GoodsSold • Direct Labor • AppliedOverhead • Transferred from Dept. A Cost of Goods Sold • Cost of GoodsSold

  23. 4-23 Cost of Finished Goods Sold(in journal entry form)

  24. 4-24 Equivalent Units of Production Equivalent units are the product of the numberof partially completed units and the percentageof 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.

  25. + = 1 4-25 Equivalent Units – The Basic Idea Two half completed products are equivalent to one completed product. So, 10,000 units 70% completeare equivalent to 7,000 complete units.

  26. 4-26 Quick Check  For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process that are 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

  27. 4-27 Quick Check  For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process that are 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

  28. 4-28 Calculating Equivalent Units Equivalent units can be calculated two ways: The First-In, First-Out Method – FIFO is covered in the appendix available on the web. The Weighted-Average Method – This method will be covered in the main portion of the chapter.

  29. 4-29 Learning Objective 2 Compute the equivalentunits of production using theweighted-average method.

  30. 4-30 Characteristics of the Weighted 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. The equivalent units of production for a department are the number of units transferred to the next department (or Finished Goods) plus the equivalent units in the department’s ending Work in Process inventory.

  31. 4-31 Treatment of Direct Labor DirectMaterials Direct labor costsmay be smallin comparison toother product costs in processcosting systems. Conversion Dollar Amount DirectLabor Type of Product Cost

  32. 4-32 Treatment of Direct Labor DirectMaterials Direct labor costsmay be smallin comparison toother product costs in processcosting systems. Conversion Dollar Amount Type of Product Cost Direct labor and manufacturing overhead may becombined into one product cost called conversion.

  33. 4-33 Weighted-Average – An Example Smith Company reported the following activity in the Assembly Department for the month of June:

  34. 4-34 Weighted-Average – An Example The first step in calculating the equivalent units is to identify the units completed and transferred out of Assembly Department in June (5,400 units)

  35. 4-35 Weighted-Average – An Example The second step is to identify the equivalent unitsof production in ending work in processwith respect to materialsfor the month (540 units) and adding this to the 5,400 units from step one.

  36. 4-36 Weighted-Average – An Example The third step is to identify the equivalent unitsof production in ending Work in Processwith respect to conversion for the month (270 units) and adding this to the 5,400 units from step one.

  37. 4-37 Weighted-Average – An Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in Work in Process

  38. 4-38 Weighted-Average – An Example Materials 6,000 Units Started EndingWork in Process900 Units60% Complete BeginningWork in Process300 Units40% Complete 5,100 Units Startedand Completed 5,400 Units Completed 5,400 Units Completed 900 × 60% 540 Equivalent Units 5,940 Equivalent units of production

  39. 4-39 Weighted-Average – An Example Conversion 6,000 Units Started EndingWork in Process900 Units30%Complete BeginningWork in Process300 Units20%Complete 5,100 Units Startedand Completed 5,400 Units Completed 900 × 30% 270 Equivalent Units 5,670 Equivalent units of production

  40. 4-40 Learning Objective 3 Compute the cost per equivalent unit using the weighted-average method.

  41. 4-41 Compute and Apply Costs Beginning Work in Process Inventory: 400 units Materials: 40% complete $ 6,119 Conversion: 20% complete $ 3,920 Production started during June 6,000 units Production completed during June 5,400 units Costs added to production in June Materials cost $ 118,621 Conversion cost $ 81,130 Ending Work in Process Inventory: 900 units Materials: 60% complete Conversion: 30% complete

  42. Cost of beginningWork in Processinventory Cost perequivalent unit + Cost added during the period = Equivalent units of production 4-42 Compute and Apply Costs The formula for computing the cost per equivalent unit is:

  43. 4-43 Compute and Apply Costs Here is a schedule with the cost and equivalent unit information.

  44. 4-44 Compute and Apply Costs Here is a schedule with the cost and equivalent unit information. $124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00 Cost per equivalent unit = $21.00 + $15.00 = $36.00

  45. 4-45 Learning Objective 4 Assign costs to units using the weighted-average method.

  46. 4-46 Applying Costs

  47. 4-47 Applying Costs

  48. 4-48 Applying Costs

  49. 4-49 Computing the Cost of Units Transferred Out

  50. 4-50 Computing the Cost of Units Transferred Out

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