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Process Costing

Process Costing. Chapter 17. Feb 21, 2005. Learning Objective 1. Identify the situations in which process-costing systems are appropriate. When process cost systems are appropriate. When masses of identical or similar units are produced

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Process Costing

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  1. Process Costing Chapter 17 Feb 21, 2005

  2. Learning Objective 1 Identify the situations in which process-costing systems are appropriate.

  3. When process cost systems are appropriate • When masses of identical or similar units are produced • Each unit would receive the same, or similar amounts of direct material, direct labor and manufacturing overhead • Examples would include potato chips, paper, gasoline, chemicals or semiconductors

  4. Illustrating Process Costing(Use Potato Chip example) Direct Materials, Direct Labor Indirect Manufacturing Costs Department A Department B Finished Goods Cost of Goods Sold

  5. Illustrating Process Costing • Normally, only two costs are tracked, direct material and conversion cost • Direct materials are normally added to the process at one time at the beginning • All other costs to “convert” the material into product, including direct labor and overhead, are generally added evenly through time

  6. Learning Objective 2 Process costing with zero beginning and ending work-in-process inventory.

  7. Process Costing – No Inventory • Beginning WIP units 0 • Units started 400 • Units completed 400 • Ending WIP units 0 • Direct Material cost $32,000 • Conversion cost $24,000 • Total costs added $56,000

  8. Process Costing – No Inventory • Direct material cost $32,000 / 400 units = $80 • Conversion cost $24,000 / 400 units = 60 • Dept cost per unit $140 • Total costs transferred out: 400 units x $140 = $56,000

  9. Learning Objective 3 Calculate equivalent units and understand how to use them.

  10. Assume no beginning WIP inventory, but some ending WIP inventory • Assume not all units started were completed during the month. Some units were started and completed, and others were only partially completed. • We need to determine the degree (%) of completion for the partially completed units • Because conversion costs are added evenly during the process, we can infer that the % of completion times the units in process will approximate equivalent units of completed product

  11. Physical Units (Step 1) Physical units Work in process, beginning 0 Started during current period 35,000 To account for 35,000 Completed and transferred out during current period 30,000 Work in process, ending (100% materials, 20% conversion) 5,000 Units accounted for 35,000

  12. Compute Equivalent Units(Step 2) Equivalent units Direct Conversion Flow of Production Materials Costs Completed and transferred out 30,000(100%) 30,000(100%) Work in process, ending (5,000) 5,000 (100%) 1,000 (20%) Current period work 35,000 31,000

  13. Compute Equivalent Unit Costs(Step 3) Total production costs are $146,050. Direct Conversion MaterialsCosts Costs added $84,050 $62,000 Equivalent units 35,000 31,000 Cost per equivalent unit $2.4014 $2.00

  14. Summarize and Assign TotalCosts (Steps 4 and 5) Step 4: Total costs to account for: $146,050 Step 5: Assign total costs: Completed and transferred out 30,000 × $4.4014 $132,043 Work in process, ending (5,000 units) Direct materials 5,000 × $2.4014 12,007 Conversion costs 1,000 × $2.00 2,000 Total $146,050

  15. Learning Objective 5 Use the weighted-average method of process costing.

  16. Weighted Average Method • Assumes that all the work on units transferred out is done in the current month • Ignores the % of completion in the beginning invemtory • Equivalent units of production equals: Units completed and transferred out + equivalent units in ending inventory

  17. Physical Units (Step 1) Work in process, beginning: 1,000 100% material 60% conversion costs Units started in process 35,000 Total units in process 36,000 Units transferred out: 31,000 Units in ending inventory: 5,000 100% material 20% conversion costs

  18. Compute Equivalent Units (Step 2) MaterialsConversion Completed and transferred 31,000 31,000 Ending inventory 5,000 1,000 Equivalent units 36,000 32,000 100% 20%

  19. Compute EquivalentUnit Costs (Step 3) MaterialsConversion Beginning inventory $ 2,350 $ 5,200 Current costs 84,050 62,000 Total $86,400 $67,200 Equivalent units 36,000 32,000 Cost per unit $2.40 $2.10

  20. Summarize and Assign TotalCosts (Steps 4 and 5) Work in process beginning inventory: Materials $ 2,350 Conversion 5,200 Total beginning inventory $ 7,550 Current costs in Assembly Department: Materials $ 84,050 Conversion 62,000 Costs to account for $153,600

  21. Summarize and Assign Total Costs (Steps 4 and 5) This step distributes the department’s costs to units transferred out: 31,000 units × $4.50 = $139,500 And to units in ending work in process inventory: 5,000 units x $2.40 = $12,000 + 1,000 units x $2.10 = $2,100 = $14,100

  22. Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out: 31,000 × ($2.40 + $2.10) $139,500 Costs in ending inventory: Materials 5,000 × $2.40 12,000 Conversion 1,000 × $2.10 2,100 Total costs accounted for: $153,600

  23. Key T-Account:Weighted-Average Work in Process Inventory, Assembly Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,500 Balance 14,100

  24. Learning Objective 6 Use the first-in, first-out (FIFO) method of process costing.

  25. FIFO Method • Includes only the work done in the current month, including cost to complete the beginning inventory • Equivalent units of production = Cost to complete beginning equivalent units + Cost of complete units started during month + Equivalent units in ending inventory

  26. Compute EquivalentUnits (Steps 1 and 2) Quantity schedule (Step 1) is the same as the weighted-average method. MaterialsConversion Prior End. Balance 1,000 1,000 600 Started new 35,000 Completed and transferred: From begin. inventory 1,000 0 400 Started and completed 30,000 30,000 30,000 Ending inventory 5,000 5,000 1,000 35,000 31,400

  27. Compute EquivalentUnit Costs (Step 3) MaterialsConversion Current costs $84,050 $62,000 Equivalent units 35,000 31,400 Cost per unit $2.40 14 $1.9745

  28. Summarize and Assign TotalCosts (Steps 4 and 5) Work in process beginning inventory: $ 7,550 Current costs: Material 84,050 Conversion 62,000 Total $153,600 Same as using weighted-average

  29. Summarize and Assign TotalCosts (Steps 4 and 5) Costs transferred out: From beginning inventory: $7,550 Conversion costs added: 1,000 × 40% × $1.9745 = $ 790 $ 8,340 From current production: 30,000 × $4.3759 131,278 Total $139,618

  30. Summarize and Assign TotalCosts (Steps 4 and 5) Work in process ending inventory: Materials: 5,000 × $2.40 $12,007 Conversion: 5,000 × 20% × $1.975 = 1,975 Total $13,982

  31. Summarize and Assign TotalCosts (Steps 4 and 5) Costs transferred out $139,618 + Cost in ending inventory $ 13,982 = $153,600 An alternative approach: Costs to account for $153,600 – Cost in ending inventory $ 13,982 Costs transferred out $139,618 =

  32. Key T-Account: FIFO Work in Process Inventory, Assembly Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,618 Balance 13,982

  33. Comparison of Weighted-Average and FIFO Methods Weighted AverageFIFODifference Costs of units completed and transferred out $139,500 $139,618 +$118 Work in process, ending 14,100 13,982 –$118 Total costs accounted for $153,600 $153,600 0

  34. End of Chapter 17

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