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Systems Design: Process Costing

Chapter 4. Systems Design: Process Costing. How are unit costs used?. Process Costing. To help set prices. To evaluate products. To determine balance sheet inventory. To evaluate production efficiency. Job costing Costs accumulated by the job .

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Systems Design: Process Costing

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  1. Chapter4 Systems Design:Process Costing

  2. How are unitcosts used? Process Costing To helpset prices To evaluateproducts To determinebalance sheetinventory To evaluateproductionefficiency

  3. 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 or process. Work in process has a production report for each batch of products. A few identical,low cost products. Unitscontinuouslyproduced for inventory in automated process. Comparing Job Costingand Process Costing

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

  5. 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

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

  7. Manufacturing costs for a periodUnits produced for the period Cost perunit = Assigning Costs to Products – All Units Fully Completed No beginning or endingWork in Process Inventory Common when a company issuccessful at just-in-time production

  8. Assigning Costs to Products – Some Units Not Fully Completed Same objective: determine the cost of products No beginning Work in Process Inventory Ending Work in Process Inventory consistsof units started during the period, butincomplete at the end of the period. Same Inventory accounts: rawmaterials, work in process, and finished goods Same overhead assignment method:predetermined rate times actual activity We must now deal with the conceptof equivalent units.

  9. Cost perequivalent unit Manufacturing costs for a periodEquivalent units for the period = Assigning Costs to Products – Some Units Not Fully Completed 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: rawmaterials, work in process, and finished goods Same overhead assignment method:predetermined rate times actual activity

  10. Process Cost Flows Work in Process Department A Raw Materials • DirectMaterials • DirectMaterials • Purchases • Indirect Materials Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • Indirect Materials

  11. Process Cost Flows Work in Process Department A Wages Payable • Direct Materials • Direct Labor • Direct Labor • IndirectLabor Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • Direct Labor • IndirectMaterials • IndirectLabor

  12. Process Cost Flows Work in Process Department A Wages Payable • Direct Materials • Direct Labor • Direct Labor • IndirectLabor • AppliedOverhead Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • OverheadApplied to Work inProcess • Direct Labor • IndirectMaterials • AppliedOverhead • IndirectLabor

  13. Process Cost Flows Work in Process Department B Work in ProcessDepartment A • Direct Materials Transferred to Dept. B • Direct Materials • Direct Labor • Direct Labor • AppliedOverhead • AppliedOverhead • Transferred from Dept. A

  14. Process Cost Flows 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

  15. ProductionReport Production Report Shows the flowof units and coststhrough work inprocess Provides costinformation forfinancial statements Becomes thejob cost sheetin processcosting Helps managerscontrol theirdepartments

  16. Production Report Section 1 Section 2 Section 3 Production Report • A quantity schedule showing the flow of units and the computation of equivalent units. • A computation ofcost per equivalent unit.

  17. Production Report Section 1 Section 2 Section 3 Production Report • A reconciliation of cost flows for the period, including: • Total cost for units completed and transferred from the processing department. • Total cost for partially completed units remaining in work in process.

  18. Equivalent Units of Production Equivalent unitsare partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

  19. Equivalent Units of Production Two half completed products areequivalentto one completed product. + = So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

  20. 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.

  21. Assigning Costs UsingWeighted-Average Costing Beginning Inventory250 units 1,250 units 1,100 unitscompleted 1,000 unitsstarted EndingInventory150 units Now let’s examine the five-step process.

  22. Weighted Average Example Materials 1,000 Units Started EndingWork in Process150 Units100% Complete BeginningWork in Process250 Units100% Complete 850 Units Startedand Completed 1,100 Units Completed 150 × 100% 150 Equivalent Units 1,250 Equivalent units of production

  23. Weighted Average Example Conversion 1,000 Units Started BeginningWork in Process250 Units80% Complete Work to Complete Process20% 250 Units EndingWork in Process150 Units33 1/3% Complete 850 Units Startedand Completed 1,100 Units Completed 150 × .333% 50 Equivalent Units 1,150 Equivalent units of production

  24. 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 see an example.

  25. Costs Transferred infrom Prior Departments Complete the five-step process for Ace CD Inc. to assign costs to units completed and to units left in process for June.

  26. Costs Transferred infrom Prior Departments

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

  28. Costs Transferred infrom Prior Departments 60% of 15,000 units 40% of 15,000 units Transferred-in units are 100% complete

  29. Costs Transferred infrom Prior Departments

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