Hilton • Maher • Selto

Process-Costing Systems

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

8-3

Process Costing System Design

Process
Process Costing
Costing isis aa costing
costing system
system that
that
assigns
assigns costs
costs equally
equally toto homogeneous
homogeneous units
units
within
within aa particular
particular time
time period.
period.

This
This is
is an
an appropriate
appropriate system
system to
to use
use
when:
when:
••Units
Units do
do not
not differ
differ from
from each
each other.
other.
••Unit
Unit cycle
cycle time
time is
is relatively
relatively short.
short.
••The
The production
production process
process is
is continuous.
continuous.
8-4

Process Costing at Monterrey

Bay Abalone
Cultivation
Cultivationprocess
process
Human activities
activities
Humanandand
physical
physical
resources
resources Grow-out
Grow-outprocess
process
activities
activities

Market-size
Market-sizeabalone
abalone

Finished
FinishedGoods
GoodsInventory
Inventory
8-5

Process Costing: The Basics

Costs
Costs will
will be
be accumulated
accumulated by by process.
process. They
They will
will
not
not be
be traced
traced to
to individual
individual units
units of
of product.
product.

Direct
DirectMaterials
Materials Conversion
ConversionCosts
Costs

Raw
Raw material
material directly
directly Labor
Laborand
andoverhead
overhead
traceable
traceableto
tothe
the directly
directlytraceable
traceableto
tothe
the
process.
process. process.
process.
8-6

Process Costing: The Basics

Direct
Direct
Materials
Materials(DM)
(DM)

+
Conversion
Conversion
Costs
Costs(CC)
(CC)
8-7

Process Costing: The Basics


 Determine
Determinetotal
totalDirect
Direct Material
Materialcosts
costs

 Compute
ComputeDM DMCost
Cost per
perUnit
Unit

 Determine
Determinetotal
totalConversion
ConversionCosts
Costs

 Compute
ComputeCC CCCost
Cost per
perUnit
Unit

 Add
AddSteps
Steps22and
and44totoget
get Total
TotalCost
Cost
per
perUnit
Unit

 COGS
COGS==StepStep55××Units
UnitsSold
Sold

 Ending
EndingInventory
Inventory==Step
Step55×× Units
UnitsNot
Not
Sold
Sold
8-8

Example 1: All Units Fully

Completed (No WIP)
Toothpick,
Toothpick, Inc.
Inc. is
is aa new
new company
company that that makes
makes
toothpicks
toothpicks from
from damaged
damaged antiqueantique furniture.
furniture. The
The
product
product sells
sells at
at aa premium
premium and and isis in
in high
high demand.
demand.
During
During June,
June, they
they purchased
purchased 8,000 8,000 pounds
pounds of of
wood
wood scraps
scraps costing
costing $67,000.
$67,000. TheyThey spent
spent $6,500
$6,500
on
on labor.
labor. Toothpick,
Toothpick, Inc. Inc. incurred
incurred other
other process
process
overhead
overhead (insurance,
(insurance, rent,rent, benefits,
benefits, etc.)
etc.) of
of $6,000.
$6,000.
They
They produced
produced and and sold
sold 250,000
250,000 toothpicks
toothpicks during
during
June.
June. There
There were
were no no units
units inin beginning
beginning or or ending
ending
WIP
WIP inventory.
inventory.
Compute
Compute thethe cost
cost perper toothpick
toothpick produced.
produced.
8-9

Example 1: All Units Fully

Completed (No WIP)
Direct
Direct
Materials
Materials(DM)
(DM)

+
Conversion
Conversion
Costs
Costs(CC)
(CC)

?
8-10

Some Units Not Fully

Complete (Ending WIP)
In
Inmany
manycases,
cases, With
Withaacontinuous
continuous
there
therewillwill be
be process,
process, ititwould
wouldbe
be
some
someunitsunitsat atthe
the unrealistic
unrealisticto toexpect
expect
end
endofofthethemonth
month every
everyunit
unitto
tobe becomplete
complete
still
still in
inthe
the at
atthe
theend
endofofeach
eachmonth
month
process.
process.

We
Wemust
mustcompute
compute EQUIVALENT
EQUIVALENTUNITSUNITS of
of
Production
Productionfor
forthe
theitems
itemsstill
still in
inEnding
EndingWIP.
WIP.
8-11

Some Units Not Fully

Complete (Ending WIP)
We
Wehave
haveto
tocompute
computeEQUIVALENT
EQUIVALENTUNITS
UNITSinin
Ending
EndingWIP
WIPfor
forboth
bothDirect
DirectMaterials
Materialsand
andfor
for
Conversion
ConversionCosts.
Costs.

For
For example,
example, two
two half
half full
full glasses
glasses are
are
equivalent
equivalent to
to 11 full
full glass.
glass.
8-12

Some Units Not Fully

Complete (Ending WIP)
Total
Total EQUIVALENT
EQUIVALENTUNITS
UNITS==EU
EUininEnding
EndingWIP
WIP++
Units
UnitsCompleted
Completedand
andTransferred
TransferredtotoFinished
Finished
Goods.
Goods.
8-13

Some Units Not Fully

Complete (Ending WIP)

 Summarize
Summarizethe theflow
flowofof physical
physicalunits.
units.

 Compute
Computethe thenumber
numberof of equivalent
equivalent
units.
units.

 Summarize
Summarizethe thetotal
totalcosts
coststotoaccount
account
for
for(for
(forboth
bothDMDMand
andCC)
CC)

 Compute
Computecosts
costsper
perequivalent
equivalent unit.
unit.

 Assign
Assigncosts
coststo
toCOGS
COGSand andto
toending
ending
WIP.
WIP.
8-14

Example 2: Some Units Not

Fully Complete (Ending WIP)
For
For July,
July, Toothpick
Toothpick purchased
purchased 9,0009,000 pounds
pounds of of
wood
wood scraps
scraps for
for $72,000.
$72,000. They
They spent
spent $7,500
$7,500 on
on labor
labor
and
and had
had other
other process
process overhead
overhead of of $7,404.
$7,404.
Toothpick
Toothpick started
started 300,000
300,000 units
units in
in July,
July, completing
completing
and
and selling
selling 260,000
260,000 units.
units. Ending
Ending WIPWIP had
had 40,000
40,000
toothpicks.
toothpicks. Beginning
Beginning WIP WIP waswas zero.
zero.
The
The ending
ending WIP
WIP waswas 100%
100% complete
complete with
with respect
respect toto
material,
material, but
but only
only 40%
40% ofof the
the conversion
conversion workwork has
has
been
been done.
done.
Compute
Compute thethe cost
cost per
per toothpick
toothpick produced.
produced. Also,
Also,
compute
compute thethe Ending
Ending WIP
WIP Inventory
Inventory andand COGS.
COGS.
8-15

Example 2: Some Units Not

Fully Complete (Ending WIP)

. .

100%
100%complete
completefor
formaterials
materials
100%
100%complete
completefor
forconversion
conversion
100%
100%complete
completefor
formaterials
materials
40%
40%complete
completefor
forconversion
conversion
8-16

Example 2: Some Units Not

Fully Complete (Ending WIP)

. .
8-17

Example 2: Some Units Not

Fully Complete (Ending WIP)
8-18

Example 2: Some Units Not

Fully Complete (Ending WIP)
8-19

Example 2: Some Units Not

Fully Complete (Ending WIP)
8-20

Example 2: Some Units Not

Fully Complete (Ending WIP)

Ending
EndingWIP
WIP== $9,600
$9,600++ $864
$864== $10,464
$10,464
8-21

Beginning & Ending WIP

When
When there
there is
is Beginning
Beginning WIP,
WIP, the
the
determination
determination ofof equivalent
equivalent units
units
becomes
becomes somewhat
somewhat moremore complicated.
complicated.

Primary
Primaryquestion
questiontotobebeanswered:
answered:
Which
Whichunitsunitswere
werecompleted
completedfirst
first
during
duringthe
theperiod?
period?
(How
(Howyouyouanswer
answerthis
thisquestion
questionwill
will
affect
affect the
theTotal
TotalEU
EUfor
forthe
theperiod.)
period.)
8-22

Beginning & Ending WIP

Weighted
Weighted Average
Average vs.
vs. FIFO
FIFO

Weighted-Average
Weighted-Average
All
FIFO
FIFO
Allunits
unitsand
andcosts
costsare
are
considered Costs
Costsareareaccounted
accounted
consideredtogether
togetherto
to
determine for
forby
bylayer.
layer.Cost
Costper
per
determineaverage
average
cost
costper
perEU,
EU, EU
EUfor
forthis
thisperiod
periodis
is
regardless
regardlessof ofwhether
whether computed
computedseparately
separately
the
thecosts
costswere
were from
fromthe
theCost
Costper
perEUEU
incurred
incurredlast
lastperiod
periodor
or for
forlast
lastperiod.
period.
currently.
currently.
8-23

Beginning & Ending WIP

Weighted
Weighted Average
Average vs.
vs. FIFO
FIFO

Weighted-Average
Weighted-Average
All
Allunits
unitsand
andcosts
costsare
are
Weighted-
Weighted-
considered
consideredtogether
togetherto
to Average
Average is
is
determine
determineaverage
average
cost
costper
perEU,
EU, the
the most
most
regardless
regardlessof ofwhether
the
thecosts
whether
costswere
were
commonly
commonly
incurred
incurredlast
lastperiod
periodor
currently.
or used
used method.
method.
currently.
8-24

Example: Weighted-Average

For
For August,
August, Toothpick
Toothpick purchased
purchased 9,500
9,500 pounds
pounds ofof
wood
wood scraps
scraps for
for $75,000.
$75,000. They
They spent
spent $8,000
$8,000 on
on labor
labor
and
and had
had other
other process
process overhead
overhead of of $7,000.
$7,000.
Toothpick
Toothpick started
started 320,000
320,000 units
units in
in July,
July, completing
completing
335,000
335,000 units.
units. Ending
Ending WIP
WIP had
had 25,000
25,000 toothpicks.
toothpicks.
Beginning
Beginning WIP
WIP was
was 40,000
40,000 units.
units.
The
The ending
ending WIP
WIP was
was 100%
100% complete
complete for
for material,
material, and
and
70%
70% complete
complete for
for conversion.
conversion. Beginning
Beginning WIP WIP was
was
100%
100% for
for material
material and
and 40%
40% complete
complete for
for conversion.
conversion.
Compute
Compute the
the cost
cost per
per toothpick
toothpick produced.
produced. Also,
Also,
compute
compute the
the Ending
Ending WIP
WIP Inventory
Inventory and
and COGS.
COGS.
8-25

Example: Weighted-Average

. .

100%
100%complete
completefor
formaterials
materials
40%
40%complete
completefor
forconversion
conversion

100%
100%complete
completefor
formaterials
materials
70%
70%complete
completefor
forconversion
conversion
8-26

Example: Weighted-Average
8-27

Example: Weighted-Average
8-28

Example: Weighted-Average

Step
Step 2:
2: Total
Total Equivalent
Equivalent Units
Units
8-29

Example: Weighted-Average
8-30

Example: Weighted-Average

Ending
EndingWIP
WIP== $5,875
$5,875++ $789
$789== $6,664
$6,664