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Process Costing

Chapter 4

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2015McGrawHillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGrawHillEducation.

4-2

Similarities Between Job-Order and


Process Costing
Both systems assign material, labor, and overhead

costs to products and they provide a mechanism


for computing unit product costs.
Both systems use the same manufacturing

accounts, including Manufacturing Overhead, Raw


Materials, Work in Process, and Finished Goods.
The flow of costs through the manufacturing

accounts is basically the same in both systems.

4-3

Differences Between Job-Order and


Process Costing
Process costing:
1.Is used when a single product is produced on a

continuing basis or for a long period of time. Job-order


costing is used when many different jobs having different
production requirements are worked on each period.
2.Systems accumulate costs by department. Job-order

costing systems accumulated costs by individual jobs.


3.Systems compute unit costs by department. Job-order

costing systems compute unit costs by job on the job cost


sheet.

4-4

Quick Check
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.

4-5

Quick Check
Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.

4-6

Processing Departments
Any unit in an organization where materials, labor,
or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment typically
flow in a sequence from one department to another.

4-7

Learning Objective 1
Record the flow of
materials, labor, and
overhead through a
process costing system.

4-8

The Flow of Materials, Labor, and


Overhead Costs
Direct
Materials
Direct Labor

Manufacturing
Overhead

Work in
Process

Finished
Goods

Cost of
Goods
Sold

4-9

The Flow of Costs in a Job-Order


Costing System
Costs are traced and
applied to individual
jobs in a job-order
cost system.

Direct
Materials
Direct Labor

Manufacturing
Overhead

Jobs
Jobs

Finished
Goods

Cost of
Goods
Sold

4-10

The Flow of Costs in a Processing


Costing System
Direct
Materials

Direct Labor

Manufacturing
Overhead

Costs are traced and


applied to departments
in a process cost
system.

Processing
Department

Finished
Goods

Cost of
Goods
Sold

4-11

T-Account and Journal Entry Views of


Process Cost Flows
For purposes of this example, assume there
are two processing departments
Departments A and B.
We will use T-accounts and journal entries.

4-12

Process Cost Flows: The Flow of Raw


Materials (in T-account form)
Raw Materials
Direct
Materials

Work in Process
Department A
Direct
Materials

Work in Process
Department B
Direct
Materials

4-13

Process Cost Flows: The Flow of Raw


Materials (in journal entry form)

4-14

Process Cost Flows: The Flow of Labor


Costs (in T-account form)
Salaries and
Wages Payable
Direct
Labor

Work in Process
Department A
Direct
Materials
Direct
Labor

Work in Process
Department B
Direct
Materials
Direct
Labor

4-15

Process Costing: The Flow of Labor


Costs (in journal entry form)

4-16

Process Cost Flows: The Flow of Manufacturing


Overhead Costs (in T-account form)
Work in Process
Department A
Manufacturing
Overhead
Actual
Overhead

Overhead
Applied to
Work in
Process

Direct
Materials
Direct
Labor
Applied
Overhead

Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead

4-17

Process Cost Flows: The Flow of Manufacturing


Overhead Costs (in journal entry form)

4-18

Process Cost Flows: Transfers from WIPDept. A to WIP-Dept. B (in T-account form)
Work in Process
Department A
Direct
Transferred
Materials
to Dept. B
Direct
Labor
Applied
Overhead

Department
Department
A
A

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

Department
Department
B
B

4-19

Process Cost Flows: Transfers from WIP-Dept.


A to WIP-Dept. B (in journal entry form)

4-20

Process Cost Flows: Transfers from WIPDept. B to Finished Goods (in T-account form)
Work in Process
Department B
Direct
Cost of
Materials
Goods
Direct
Manufactured
Labor
Applied
Overhead
Transferred
from Dept. A

Finished Goods
Cost of
Goods
Manufactured

4-21

Process Cost Flows: Transfers from WIP-Dept.


B to Finished Goods (in journal entry form)

4-22

Process Cost Flows: Transfers from Finished


Goods to COGS (in T-account form)
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

4-23

Process Cost Flows: Transfers from Finished


Goods to COGS (in journal entry form)

4-24

Equivalent Units of Production


Equivalent units are the
product of the number
of partially completed
units and the
percentage completion
of those units.
These partially completed units complicate the
determination of a departments output for a given
period and the unit cost that should be assigned to
that output.

4-25

Equivalent Units The Basic Idea


Two half completed products are
equivalent to one complete product.

So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.

4-26

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

4-27

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

4-28

Calculating Equivalent Units


Equivalent units can be calculated
two ways:
The First-In, First-Out Method FIFO is
covered in the appendix to this chapter.

The Weighted-Average Method This method


will be covered in the main portion of the chapter.

4-29

Learning Objective 2
Compute the equivalent
units of production
using the weightedaverage method.

4-30

Equivalent Units of Production


Weighted-Average Method

The weighted-average method . . .


1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.

4-31

Treatment of Direct Labor

Dollar Amount

Direct
Materials
Manufacturing
Overhead
Direct
Labor
Type of Product Cost

Direct labor costs


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

4-32

Treatment of Direct Labor

Dollar Amount

Direct
Materials
Conversion
Direct
Labor

Direct
Labor
Type of Product Cost

Manufacturing
Overhead

Direct labor and


manufacturing
overhead may be
combined into
one classification
of product
cost called
conversion costs.

4-33

Weighted-Average An Example
Smith Company reported the following activity in
the Assembly Department for the month of June:
Percent Completed
Units
Work in process, June 1

300

Units started into production in June

6,000

Units completed and transferred out


of Department A during June

5,400

Work in process, June 30

900

Materials Conversion
40%

20%

60%

30%

4-34

Weighted-Average An Example
The first step in calculating the equivalent units is to identify
the units completed and transferred out of Assembly
Department in June (5,400 units)

4-35

Weighted-Average An Example
The second step is to identify the equivalent units of production in
ending work in process with respect to materials for the month
(540 units) and adding this to the 5,400 units from step one.

4-36

Weighted-Average An Example
The third step is to identify the equivalent units of production in
ending work in process with respect to conversion for the month
(270 units) and adding this to the 5,400 units from step one.

4-37

Weighted-Average An Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process

4-38

Weighted-Average An Example
Materials
Beginning
Work in Process
300 Units
40% Complete

6,000 Units Started

5,100 Units Started


and Completed

5,400 Units Completed


540 Equivalent Units
5,940 Equivalent units
of production

Ending
Work in Process
900 Units
60% Complete

900 60%

4-39

Weighted-Average An Example
Conversion
Beginning
Work in Process
300 Units
20% Complete

6,000 Units Started

5,100 Units Started


and Completed

5,400 Units Completed


270 Equivalent Units
5,670 Equivalent units
of production

Ending
Work in Process
900 Units
30% Complete

900 30%

4-40

Learning Objective 3
Compute the cost per
equivalent unit using the
weighted-average
method.

4-41

Compute and Apply Costs


Beginning Work in Process Inventory:
400 units
Materials: 40% complete $
6,119
Conversion: 20% complete $
3,920
Production started during June
6,000 units
Production completed during June
5,400 units
Costs added to production in June
Materials cost
$ 118,621
Conversion cost
$ 81,130
Ending Work in Process Inventory:
Materials:
60% complete
Conversion: 30% complete

900 units

4-42

Compute and Apply Costs


The formula for computing the cost per equivalent
unit is:
Cost per
equivalent =
unit

Cost of beginning
Work in Process + Cost added during
Inventory
the period
Equivalent units of production

4-43

Compute and Apply Costs


Here is a schedule with the cost and equivalent
unit information.

4-44

Compute and Apply Costs


Here is a schedule with the cost and equivalent
unit information.
$124,740 5,940 units = $21.00

$85,050 5,670 units = $15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

4-45

Learning Objective 4
Assign costs to units
using the weightedaverage method.

4-46

Applying Costs

4-47

Applying Costs

4-48

Applying Costs

4-49

Computing the Cost of Units


Transferred Out

4-50

Computing the Cost of Units


Transferred Out

4-51

Computing the Cost of Units


Transferred Out

4-52

Learning Objective 5
Prepare a cost
reconciliation report.

4-53

Reconciling Costs

4-54

Reconciling Costs

4-55

Operation Costing
Operation cost is a hybrid of job-order and
process costing because it possesses
attributes of both approaches.
Operation
Operation costing
costing is
is
commonly
commonly used
used when
when
batches
batches of
of many
many
different
different products
products pass
pass
through
through the
the same
same
processing
processing department.
department.

4-56

End of Chapter 4

FIFO Method
Appendix 4A

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2015McGrawHillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGrawHillEducation.

4-58

FIFO vs. Weighted-Average Method


The FIFO method (generally considered more
accurate than the weighted-average method) differs
from the weighted-average method in two ways:
1.
1. The
The computation
computation of
of equivalent
equivalent units.
units.
2.
2. The
The way
way in
in which
which the
the costs
costs of
of beginning
beginning
inventory
inventory are
are treated.
treated.

4-59

Learning Objective 6
Compute the equivalent
units of production
using the FIFO method.

4-60

Equivalent Units FIFO Method


Lets revisit the Smith Company example. Here is
information concerning the Assembly Department
for the month of June.
Percent Completed
Units
Work in process, June 1

300

Units started into production in June

6,000

Units completed and transferred out


of Department A during June

5,400

Work in process, June 30

900

Materials Conversion
40%

20%

60%

30%

4-61

Equivalent Units FIFO Method


Step 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.

4-62

Equivalent Units FIFO Method


Step 2: Determine units started and completed during
the period.

4-63

Equivalent Units FIFO Method


Step 3: Add the equivalent units in ending Work in
Process Inventory.

4-64

FIFO Example
Materials
Beginning
Work in Process
300 Units
40% Complete

300 60%

6,000 Units Started

5,100 Units Started


and Completed

180 Equivalent Units


5,100 Units Completed
540 Equivalent Units
5,820 Equivalent units
of production

Ending
Work in Process
900 Units
60% Complete

900 60%

4-65

FIFO Example
Conversion
Beginning
Work in Process
300 Units
20% Complete

300 80%

6,000 Units Started

5,100 Units Started


and Completed

240 Equivalent Units


5,100 Units Completed
270 Equivalent Units
5,610 Equivalent units
of production

Ending
Work in Process
900 Units
30% Complete

900 30%

4-66

Equivalent Units:
Weighted-Average vs. FIFO
As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the
weighted-average method to obtain the equivalent units of
production under the FIFO method.

4-67

Learning Objective 7
Compute the cost per
equivalent unit using the
FIFO method.

4-68

Cost per Equivalent Unit - FIFO


Lets revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
Beginning work in process:
Materials: 40% complete
$
Conversion: 20% complete
$
Production started during June
Production completed during June

400 units
6,119
3,920
6,000 units
5,400 units

Costs added to production in June


Materials cost
$ 118,621
Conversion cost
$ 81,130
Ending work in process
900 units
Materials:
60% complete
Conversion: 30% complete

4-69

Cost per Equivalent Unit - FIFO


The formula for computing the cost per equivalent
unit under FIFO method is:

4-70

Cost per Equivalent Unit - FIFO

$118,621 5,820

$81,130 5,610

Total cost
cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$34.8433

4-71

Learning Objective 8
Assign costs to units
using the FIFO method.

4-72

Applying Costs - FIFO


Step 1: Record the equivalent units of production in ending Work
in Process Inventory.

900
900 units
units 60%
60%

900
900 units
units 30%
30%

4-73

Applying Costs - FIFO


Step 2: Record the cost per equivalent unit.

4-74

Applying Costs - FIFO


Step 3: Compute the cost of ending Work in Process Inventory.

540
540 $20.3816
$20.3816

270
270 14.4617
14.4617

4-75

Cost of Units Transferred Out


Step 1: Record the cost in beginning Work in Process Inventory.

4-76

Cost of Units Transferred Out


Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.

4-77

Cost of Units Transferred Out


Step 3: Compute the cost of units started and completed this
period.

4-78

Cost of Units Transferred Out


Step 4: Compute the total cost of units transferred out.

4-79

Learning Objective 9
Prepare a cost
Prepare a cost
reconciliation report
reconciliation report
using the FIFO method.

using the FIFO method.

4-80

Reconciling Costs

4-81

Reconciling Costs

* $1 rounding error.

4-82

A Comparison of Costing Methods


In a lean production environment, FIFO and
weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is
superior to weighted-average because it
does not mix costs of the current period with
costs of the prior period.

4-83

End of Appendix 4A