Topic+3ii(Process+Costing).Ppt | Oil Refinery | Petroleum

Systems Design: Process Costing

Topic Three (ii)

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Types of Product Costing Systems
Process Costing
 A company produces many units of a single  A company produces many units of a single product. product.  One unit of product is indistinguishable from  One unit of product is indistinguishable from other units of product. other units of product.  The identical nature of each unit of product enables  The identical nature of each unit of product enables assigning the same average cost per unit. assigning the same average cost per unit.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

What is a Processing Department?
Any location 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.

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Sequential vs. Parallel Processing
Sequential processing means that units Sequential processing means that units flow in a sequence from one flow in a sequence from one department to another. department to another. Parallel processing is used when Parallel processing is used when after a point, some units go through after a point, some units go through different processing departments different processing departments than others. For example, a than others. For example, a petroleum refinery separates crude petroleum refinery separates crude oil into products like gasoline, jet oil into products like gasoline, jet fuel, and heating oil. fuel, and heating oil.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

Equivalent Units of Production
Equivalent units are the product of the number of partially completed units and the percentage completion of those units.

We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

Equivalent Units – The Basic Idea
Two half completed products are equivalent to one completed product.

+
McGraw-Hill/Irwin

=

1

So, 10,000 units 70% complete So, 10,000 units 70% complete are equivalent to 7,000 complete units. are equivalent to 7,000 complete units.
Copyright © 2006, The McGraw-Hill Companies, Inc.

Equivalent Units of Production
Weighted-Average Method The weighted-average method . . . •Makes no distinction between work done in prior or current periods. •Blends together units and costs from prior and current periods.
Cost per equivalent unit
McGraw-Hill/Irwin

=

Costs for the period Equivalent units of production for the period

Copyright © 2006, The McGraw-Hill Companies, Inc.

Process Costing and Direct Labor
Direct Materials

Dollar Amount

Direct Labor

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

Type of Product Cost

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Process Costing and Direct Labor
Direct Materials

Dollar Amount

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

Type of Product Cost

Direct labor and manufacturing overhead may be Direct labor and manufacturing overhead may be combined into one product cost called conversion.. combined into one product cost called conversion
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

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 completed and transferred out of Department A during June Work in process, June 30
McGraw-Hill/Irwin

Materials 40%

Conversion 20%

300 6,000 5,400

900

60%

30%

Copyright © 2006, The McGraw-Hill Companies, Inc.

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

C

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Weighted-Average 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 add this to the 5,400 units from step one.
Materials Units completed and transferred out of Department A in June Work in process, June 30: 900 units × 60% Equivalent units of Production in
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

5,400 540

Weighted-Average 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 add this to the 5,400 units from step one.
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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

5,400 540

Weighted-Average Example
Equivalent units of production always equals: Equivalent units of production always equals: Units completed and transferred Units completed and transferred + Equivalent units remaining in work in process + 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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

5,400 540

Weighted-Average Example

Materials Materials
Beginning Work in Process 300 Units 40% Complete

6,000 Units Started

5,100 Units Started and Completed

Ending Work in Process 900 Units 60% Complete

5,400 Units Completed 540 Equivalent Units 5,940 Equivalent units of production
McGraw-Hill/Irwin

900 × 60%

Copyright © 2006, The McGraw-Hill Companies, Inc.

Weighted-Average Example

Conversion Conversion
Beginning Work in Process 300 Units 20% Complete

6,000 Units Started

5,100 Units Started and Completed

Ending Work in Process 900 Units 30% Complete

5,400 Units Completed 270 Equivalent Units 5,670 Equivalent units of production
McGraw-Hill/Irwin

900 × 30%

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report – Weighted-Average
Production Report

Section 1 Section 2 Section 3
McGraw-Hill/Irwin

showing the flow of units showing the flow of units and the computation of and the computation of equivalent units. equivalent units. cost per equivalent unit. cost per equivalent unit.

A quantity schedule A quantity schedule

A computation of A computation of

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report
Production Report

Section 1 Section 2 Section 3
McGraw-Hill/Irwin

 Cost Reconciliation  Cost Reconciliation

section shows the section shows the reconciliation of all cost reconciliation of all cost flows into and out of the flows into and out of the department during the department during the period. period.
Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example

Assume that Double Diamond Skis uses the Assume that Double Diamond Skis uses the weighted-average method of process costing to weighted-average method of process costing to determine unit costs in it Shaping and Milling determine unit costs in it Shaping and Milling Department. Department.

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Work in process, May 1: 200 units Work in process, May 1: 200 units Materials: 55% complete Materials: 55% complete Conversion: 30% complete Conversion: 30% complete $ $ 9,600 9,600 5,575 5,575 5,000 units 5,000 units 4,800 units 4,800 units $ 368,600 $ 368,600 350,900 350,900

Production started during May Production started during May Production completed during May Production completed during May Costs added to production in May Costs added to production in May Materials cost Materials cost Conversion cost Conversion cost

Work in process, May 31 400 units Work in process, May 31 400 units Materials: 40% complete Materials: 40% complete Conversion: 25% complete Conversion: 25% complete

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step1: Prepare 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

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step1: Prepare 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
McGraw-Hill/Irwin

4,800

4,960
Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step1: Prepare 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
McGraw-Hill/Irwin

4,800

4,960

100 4,900

Copyright © 2006, The McGraw-Hill Companies, Inc.

Step 2: Calculating the Costs Per Equivalent Unit
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

=

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step 2: Compute the 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

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step 2: Compute the 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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step 2: Compute the 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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step 3: Prepare a 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

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step 3: Prepare a Cost Reconciliation
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 Total Cost $ 715,200 Equivalent Units Materials Conversion 4,800 160 100 4,800

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Production Report Example
Step 3: Prepare a Cost Reconciliation
160 units @ $76.25
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 Total Cost $ 715,200 12,200 7,275 19,475 $ 734,675 Equivalent Units Materials 100 units @ Conversion $72.75 4,800 160 100 4,800

All costs accounted for

McGraw-Hill/Irwin

Copyright © 2006, The McGraw-Hill Companies, Inc.

Operation Costing
Operation costing is a hybrid of job-order Operation costing is a hybrid of job-order and process costing because it and process costing because it possesses attributes of both approaches. possesses attributes of both approaches.
Job-order Costing Operation Costing (Products produced in batches) Process Costing

Material Costs charged Material Costs charged to batches as in to batches as in job-order costing. job-order costing.
McGraw-Hill/Irwin

Conversion costs Conversion costs assigned to batches assigned to batches as in process costing. as in process costing.
Copyright © 2006, The McGraw-Hill Companies, Inc.

Sign up to vote on this title
UsefulNot useful