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Process Costing

Process Costing. Chapter 6. chapter 6 Objectives. Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report Describe process costing for settings without work-in-process inventories

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Process Costing

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  1. Process Costing Chapter 6

  2. chapter 6 Objectives Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report Describe process costing for settings without work-in-process inventories Describe process costing for settings with ending work-in-process inventories Prepare a departmental production report using the FIFO method

  3. chapter 6 Objectives Prepare a departmental production report using the weighted average method Prepare a departmental production report with transferred-in goods and changes in output measures Describe the basic features of operation costing Explain how spoilage is treated in a process-costing system

  4. Basic Operational and Cost Concepts A process system is characterized by a large number of homogeneous products passing through a series of processes • Each process is responsible for one or more operations that bring a product one step closer to completion • A process is a series of activities that are linked to perform a specific objective LO-1

  5. Basic Operational and Cost Concepts Each process may require materials labor and overhead inputs Upon completion of a particular process, the partially completed goods are transferred to another process LO-1

  6. EXHIBIT 6.1—An Operational Process System: Antihistamine Manufacturing LO-1

  7. Basic Operational and Cost Concepts Cost Flows Cost flows for a process-costing system are basically similar to those of a job-order costing system There are two key differences • First, a job-order costing system accumulates production costs by job, and a process-costing system accumulates production costs by process • Second, for manufacturing firms, the job-order costing system uses a single work-in-process (WIP) account, while the process-costing system has a WIP account for every process LO-1

  8. EXHIBIT 6.2—Comparison of Cost Accumulation Methods LO-1

  9. EXHIBIT 6.2—Comparison of Cost Accumulation Methods (continued) LO-1

  10. EXHIBIT 6.3—Process Cost Flows Illustrated Using T-Accounts: No Ending WIP LO-1

  11. Basic Operational and Cost Concepts Unit Information section • Units to account for • Units accounted for Cost Information section • Costs to account for • Costs accounted for The Production Report A document that summarizes the manufacturing activity that takes place in a process department for a given period of time Divided into a unit information section and a cost information section LO-1

  12. EXHIBIT 6.4—Basic Features of a Process-Costing System LO-1

  13. Basic Operational and Cost Concepts Unit Costs First, measure the manufacturing costs for a process department for a given period of time Second, measure the output of the process department for the same period of time Finally, the unit cost for a process is computed by dividing the costs of the period by the output of the period LO-1

  14. Process Costing with No Work-In-Process Inventories Services that are homogeneous and repetitively produced can use the process-costing approach Examples: check processing in a bank, changing oil, checking baggage, pressing shirts, etc. LO-2

  15. Process Costing with No Work-In-Process Inventories JIT Manufacturing Firms Emphasizes continuous improvement and the elimination of waste Strive to minimize inventories and reduce work-in-process inventories to insignificant levels LO-2

  16. Process Costing with Ending Work-In-Process Inventories Physical Flow and Equivalent Units Equivalent units of output are the complete units that could have been produced given the total amount of productive effort expended for the period under consideration Every transferred-out unit is an equivalent unit LO-3

  17. Process Costing with Ending Work-In-Process Inventories Physical Flow and Equivalent Units First two steps in building a production report for process costing • Preparation of a physical flow schedule, which provides an analysis of the physical flow units • Calculation of the period’s equivalent units LO-3

  18. Process Costing with Ending Work-In-Process Inventories Calculating Unit Costs, Assigning Costs to Inventories, and Reconciliation The final three steps needed for a production report • Unit cost calculation • Valuation of inventories • Cost reconciliation LO-3

  19. FIFO Costing Method Equivalent units and manufacturing costs in beginning work in process are excluded from the current period unit cost calculation Recognizes that the work and costs carried over from the prior period legitimately belong to that period LO-4

  20. Exhibit 6.5—Production Report: Blending Department LO-4

  21. Exhibit 6.5—Production Report: Blending Department (continued) LO-4

  22. Exhibit 6.5—Production Report: Blending Department (continued) LO-4

  23. Weighted Average Costing Method The weighted average costing method picks up beginning inventory costs and the accompanying equivalent output and treats them as if they belong to the current period Prior period output and manufacturing costs found in beginning work in process are merged with the current period output and manufacturing costs LO-5

  24. exhibit 6.6—Production Report: Blending Department LO-5

  25. exhibit 6.6—Production Report: Blending Department (continued) LO-5

  26. Weighted Average Costing Method FIFO Compared with Weighted Average Differ on two key dimensions • How output is computed • What costs are used for calculating the period’s unit cost The two methods use different total costs and different measures of output LO-5

  27. Treatment of Transferred-In Goods The cost of this material is the cost of the goods transferred out computed in the prior department The units started in the subsequent department correspond to the units transferred out from the prior department The units of the transferring department may be measured differently than the units of the receiving department LO-6

  28. exhibit 6.7—Production and Cost Data: Encapsulating Department LO-6

  29. Treatment of Transferred-In Goods LO-6 Step 1: Physical Flow Schedule

  30. exhibit 6.8—Equivalent Units of Production: Weighted Average Method LO-6 Step 2: Calculation of Equivalent Units

  31. Treatment of Transferred-In Goods LO-6 Step 3: Computation of Unit Costs

  32. Treatment of Transferred-In Goods LO-6 Step 4: Valuation of Inventories

  33. exhibit 6.9—Production Report: Encapsulating Department LO-7

  34. exhibit 6.9—Production Report: Encapsulating Department (continued) LO-7

  35. Operation Costing Basics of Operation Costing A blend of job-order and process-costing procedures applied to batches of homogeneous products • Uses job-order procedures to assign direct materials costs to batches • Uses process procedures to assign conversion costs Work orders are used to collect production costs for each batch • Work orders also are used to initiate production LO-7

  36. exhibit 6.10—basic features of OPERATION COSTING LO-7

  37. exhibit 6.10—basic features of OPERATION COSTING (continued) LO-7

  38. End of Chapter 6

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