Chapter 4

Systems Design: Process Costing

2/23/04

Types of Costing Systems Used to Determine Product Costs

Process Costing Job-order Costing

Many units of a single, homogeneous product flow evenly through a continuous production process.
One unit of product is indistinguishable from any other unit of product. Each unit of product is assigned the same average cost.
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Types of Costing Systems Used to Determine Product Costs

Process Costing Job-order Costing

Typical process cost applications:

Petrochemical refinery Paint manufacturer

Paper mill
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Differences Between JobOrder and Process Costing

Job order costing

Process costing

Many products are produced during the period.

Costs are accumulated by individual jobs. Job cost sheet is the key document. Unit cost computed by job.

A single product is produced for a long period of time.

Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department.

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Process Costing
Direct Materials Dollar Amount Conversion

Direct labor costs may be small in comparison to other product costs in process cost systems.

Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called conversion.
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Comparing Job-Order and Process Costing

Direct Materials Direct Labor Costs are traced and applied to individual jobs in a job-order cost system. Finished Goods

Jobs

Manufacturing Overhead
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Cost of Goods Sold

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Comparing Job-Order and Process Costing

Direct Materials Direct Labor Costs are traced and applied to departments in a process cost system. Processing Departments Finished Goods

Manufacturing Overhead
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Cost of Goods Sold

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Process Cost Systems

Exh. 4-2
Exh. 4-3 Exh. 4-4 Exh. 4-5

Sequential Processing, p.152 Parallel Processing, p. 153 T-Account Model, p. 154 Double Diamond, p. 156

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Process Cost Flows

Lets look at cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials.

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Process Cost Flows

Raw Materials
Purchases
Direct Materials Indirect Materials

Work in Process Department A

Direct Materials

Manufacturing Overhead
Other Overhead Indirect Materials
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Work in Process Department B

Direct Materials

Actual

Applied

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Process Cost Flows

Wages Payable
Direct Labor Indirect Labor

Work in Process Department A

Direct Materials Direct Labor

Manufacturing Overhead
Other Overhead Indirect Materials Indirect Labor
Actual Applied

Work in Process Department B

Direct Materials Direct Labor
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Process Cost Flows

(MOH is applied using Departmental rates)
Work in Process Department A
Direct Materials Direct Labor Applied Overhead

Manufacturing Overhead
Other Overhead Overhead Applied to Indirect Work in Materials Process Indirect POHR Labor
Actual Applied

Work in Process Department B

Direct Materials Direct Labor Applied Overhead
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Process Cost Flows

Next, transfer work from Department A to Department B.

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Process Cost Flows

Work in Process Department A Direct Transferred Materials to Dept. B Direct Labor Applied Overhead Work in Process Department B Direct Materials Direct Labor Applied Overhead Transferred from Dept. A

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Process Cost Flows

Now lets complete the goods in Department B and sell them.

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Process Cost Flows

Work in Process Department B Finished Goods

Direct Cost of Cost of Cost of Materials Goods Goods Goods Direct Manufactured Manufactured Sold Labor Applied Overhead Transferred Cost of Goods Sold from Dept. A
Cost of Goods Sold
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Equivalent Units of Production

(Accounting for partially completed units in WIP)

Equivalent units are 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.

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Equivalent Units of Production

Two half completed products are equivalent to one completed product.

+
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So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.
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Quick Check
For the current period, 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 period? a. 10,000 b. 11,500 c. 13,500 d. 15,000
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Quick Check
For the current period, 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 period? a. 10,000 10,000 units + (5,000 units 0.30) b. 11,500 = 11,500 equivalent units c. 13,500 d. 15,000
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Calculating and Using Equivalent Units of Production

To calculate the cost per equivalent unit for the period:
Cost per equivalent unit

Costs for the period Equivalent units of production for the period

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Quick Check
Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90
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Quick Check
Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones cost per equivalent unit for the period? a. $1.84 $27,600 11,500 equivalent units b. $2.40 = $2.40 per equivalent unit c. $2.76 d. $2.90
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Equivalent Units of Production Weighted Average Method

The weighted average method . . .
Makes no distinction between work done in prior and current period. Blends together units and costs from prior period and current period.

Lets see how this works!

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Weighted Average Method

Equivalent units of production = Units completed and transferred to the next department + equivalent units in ending WIP

Weighted Average Example

Smith Company reported the following activity in Department A for the month of June:
Percent Completed Units Work in process, June 1 Units started into production in June Units Available Units completed and transferred out of Department A during June Work in process, June 30
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Materials Conversion 40% 20%

300 6,000 6,300 5400 900

60%

30%

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Weighted Average Example

Equivalent units are calculated as follows:
Materials Units completed and transferred out of Department A in June 5,400 Conversion 5,400

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Weighted Average Example

Equivalent units are calculated as follows:
Materials Units completed and transferred out of Department A in June Work in process, June 30: 900 units 60% Equivalent units of Production in Department A during June
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Conversion 5,400

5,400 540

5,940
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Weighted Average Example

Equivalent units are calculated as follows:
Materials Units completed and transferred out of Department A in June Work in process, June 30: 900 units 60% 900 units 30% Equivalent units of Production in Department A during June
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Conversion 5,400

5,400 540

270 5,940 5,670

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Weighted Average Example

Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Materials Units completed and transferred out of Department A in June Work in process, June 30: 900 units 60% 900 units 30% Equivalent units of Production in Department A during June
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Conversion 5,400

5,400 540

270 5,940 5,670

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Production Report
Shows the flow of units and costs through work in process Provides cost information for financial statements

Production Report
Becomes the job cost sheet in process costing
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Helps managers control their departments

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Production Report
Production Report
A quantity schedule
showing the flow of units and the computation of equivalent units.

Section 1 Section 2

A computation of
cost per equivalent unit.

Section 3
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Production Report
Production Report
A reconciliation of cost
flows for the period, including:
Total cost for units

Section 1 Section 2

completed and transferred from the processing department.

Total cost for partially

Section 3
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completed units remaining in work in process.

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Production Report Example

Page 160

Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. Double Diamond uses the weighted average cost procedure. Using the following information for the month of May, lets prepare a production report for Shaping and Milling.
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Production Report Example

Work in process, May 1: 200 units Materials: 55% complete. Conversion: 30% complete. Production started during May: Production completed during May: Costs added to production in May Materials cost Conversion cost Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete.
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9,600 5,575 5,000 units 4,800 units

$ 368,600 350,900

Production Report Example

Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Units accounted for as follows: Completed and transferred Work in process, May 31 4,800 400 4,800 4,800

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Production Report Example

Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Units accounted for as follows: Completed and transferred Work in process, May 31 Materials 40% complete 4,800 400 4,800 160 5,200
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4,800

4,960
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Production Report Example

Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Units accounted for as follows: Completed and transferred Work in process, May 31 Materials 40% complete Conversion 25% complete 4,800 400 4,800 160 5,200
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4,800

4,960

100 4,900

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Production Report Example

Section 2: Compute cost per equivalent unit
Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units Cost per equivalent unit $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 Conversion $ 5,575 350,900 $ 356,475 4,900

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Production Report Example

Section 2: Compute cost per equivalent unit
Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units Cost per equivalent unit $ $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 76.25 Conversion $ 5,575 350,900 $ 356,475 4,900

$378,200 4,960 units = $76.25

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Production Report Example

Section 2: Compute cost per equivalent unit
Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost Equivalent units $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 $ Conversion $ 5,575 350,900 $ 356,475 4,900 72.75

Cost per equivalent unit $ 76.25 Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 4,900 units = $72.75

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Production Report Example

Section 3: Cost Reconciliation
Total Cost Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion Total work in process, May 31 Total cost accounted for Equivalent Units Materials Conversion 4,800 160 100 4,800

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Production Report Example

Section 3: Cost Reconciliation
Total Cost $ 715,200 Equivalent Units Materials Conversion 4,800 160 100 4,800

4,800 units @ $149.00

Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion Total work in process, May 31 Total cost accounted for

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Production Report Example

Section 3: Cost Reconciliation Total Equivalent Units Cost Materials Conversion
160 units @ $76.25 Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion 100 units @ $72.75

$ 715,200 12,200 7,275 19,475 $ 734,675

4,800 160

4,800

100
All costs accounted for (See VG 42)
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Total work in process, May 31 Total cost accounted for

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Do You Want to See Journal Entries?

Im going to end this chapter and process some leisure time, unless you want to see some journal entries. Noooo!

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End of Chapter 4

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