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Process Costing: Types, Steps, and Calculations

process costing, types, steps, calculations

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Process Costing: Types, Steps, and Calculations

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  1. Chapter 11 Process Costing

  2. Learning Objectives • Identify the types of firms or operations for which a process costing system is most suitable • Explain and calculate equivalent units • Describe the five steps in process costing • Demonstrate the weighted-average method of process costing

  3. Learning Objectives • Demonstrate the FIFO method of process costing • Analyze process costing with multiple departments • Prepare journal entries to record the flow of costs in a process costing system

  4. Learning Objectives • Explain how process costing systems are implemented and enhanced in practice • Account for spoilage in process costing

  5. Learning Objective One Identify the types of firms or operations for which a process costing system is most suitable

  6. Types of Businesses Using Process Costing • Chemicals • Oil refining • Textiles • Paints • Flour • Canneries • Rubber • Steel • Food processing

  7. Characteristics of Process Costing DirectMaterials Direct labor costsare usually smallin comparison toother product costs in processcost systems. FactoryOverhead Dollar Amount DirectLabor Type of Product Cost

  8. Characteristics of Process Costing DirectMaterials Direct labor costsare usually smallin comparison toother product costs in processcost systems. Conversion Dollar Amount Type of Product Cost So, direct labor and factory overhead are oftencombined into one product cost called conversion.

  9. Job costing Costs accumulated by thejob. Work in process has a job cost record for each job. Many uniquejobs. Jobs built tocustomerorder. Process costing Costs accumulated by department or process. Work in process has a production report for each batch of products. Homogenous products. Unitscontinuouslyproduced for inventory in automated process. Comparing Job Costing andProcess Costing

  10. Comparing Job Costing and Process Costing Work in process contains individual jobs in ajobcost system. Direct Materials FinishedGoods Work inProcess Direct Labor FactoryOverhead Cost of GoodsSold

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

  12. Comparing Job Costing andProcess 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. Process costsEquivalent units produced Unit cost = Characteristics of Process Costing Process costing accumulates costs by process or department and then assigns them to a large number of nearly identical products. Similarprocesses Continuousmass production Homogeneousproducts

  14. Learning Objective Two Explain and calculate equivalent units

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

  16. + = Equivalent Units Two one-half filled cups areequivalent to one full cup. 1 So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

  17. Equivalent Units During its first month of business, 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 month? a. 10,000 b. 11,500 c. 13,500 d. 15,000

  18. Equivalent Units During its first month of business, 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 month? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units

  19. Cost per Equivalent Units Now assume that Jones incurred $27,600in production costs for the 11,500equivalent units. What was Jones’ costper equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

  20. Cost per Equivalent Units Now assume that Jones incurred $27,600in production costs for the 11,500equivalent units. What was Jones’ costper 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

  21. Learning Objective Three Describe the five steps in process costing

  22. Five Steps in Process Costs • Analyze the physical flow of physical units. • Calculate equivalent units of production for all manufacturing cost elements. • Determine total cost for each manufacturing cost element. • Compute cost per equivalent unit for each manufacturing cost element. • Assign the total manufacturing costs to units completed and units of work in process at the end of the period. These five steps are thebasis for the production cost report as we will see inthe following examples.

  23. Learning Objective Four Demonstrate the weighted-average method of process costing

  24. Let’s look at an example using datafrom the Molding Department of HsuToy Company for the month of June. Weighted-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.

  25. Example for Weighted-Average Costing

  26. Weighted-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.

  27. 44,000 unitscompleted EndingInventory6,000 units Now let’s examine the five-step process. Step 1: Analyze the Physical Units Weighted-Average Costing Beginning Inventory10,000 units 50,000 unitsin process 40,000 unitsstarted

  28. Step 2: Calculate Equivalent Units Weighted-Average Costing

  29. Step 2: Calculate Equivalent UnitsWeighted-Average Costing Units completed and transferred are 100%complete for material, labor, and overhead.

  30. Step 2: Calculate Equivalent UnitsWeighted-Average Costing 100% of 6,000 units 50% of 6,000 units 60% of 6,000 units

  31. Step 2: Calculate Equivalent UnitsWeighted-Average Costing

  32. Step 3: Determine Total CostsWeighted-Average Costing

  33. Step 4: Calculate Unit CostsWeighted-Average Costing $54,000 ÷ 50,000 equivalent units $23,500 ÷ 47,000 equivalent units $45,220 ÷ 47,600 equivalent units

  34. Step 5: Assign Total CostsWeighted-Average Costing 44,000 equivalent units @ $1.08 44,000 equivalent units @ $0.50 44,000 equivalent units @ $0.95

  35. Step 5: Assign Total CostsWeighted-Average Costing 6,000 equivalent units @ $1.08 3,000 equivalent units @ $0.50 3,600 equivalent units @ $0.95

  36. Step 5: Assign Total CostsWeighted-Average Costing

  37. Learning Objective Five Demonstrate the FIFO method of process costing

  38. First-In, First-Out (FIFO) Costing FIFO costing Distinguishes between work done in the priorperiod and work done inthe current period. Assumes units inbeginning work inprocess inventory arecompleted and transferred first.

  39. FIFO Costing Advantages ofFIFO costing Managers can betteridentify and manage current period costs. Inventory costs aremore current as currentperiod costs are assignedto units in processand units completed.

  40. FIFO Costing Let’s revisit the Molding Department of Hsu Toy company for the month of June. We will use the same data as before, but now we will use FIFO costing.

  41. Example for FIFO Costing

  42. FIFO Costing (continued) First let’s look at a flow chart showing the flow of units in beginning work in process inventory and the flow of units started during the month.

  43. Step 1: Analyze the Physical UnitsFIFO Costing Beginning Inventory10,000 units 10,000 units completed 44,000 unitscompleted 40,000 unitsstarted 34,000 units completed EndingInventory6,000 units Now let’s examine the five-step process.

  44. Step 2: Calculate Equivalent UnitsFIFO Costing

  45. Step 2: Calculate Equivalent UnitsFIFO Costing All material added in prior periodfor units in beginning WIP 70% of 10,000 units 60% of 10,000 units

  46. Step 2: Calculate Equivalent UnitsFIFO Costing 100% of material, labor, and overhead is incurredin June for units started and completed in June.

  47. Step 2: Calculate Equivalent UnitsFIFO Costing 50% of 6,000 units 60% of 6,000 units 100% of 6,000 units

  48. Step 2: Calculate Equivalent UnitsFIFO Costing

  49. Step 3: Determine Total CostsFIFO Costing

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