© the mcgraw-hill companies, inc., 2008 mcgraw-hill/irwin financial & managerial accounting the...

© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

Financial & Managerial Accounting

Financial & Managerial Accounting

The Basis for Business DecisionsFOURTEENTH EDITION

Williams Haka Bettner Carcello


PROCESS COSTING

Chapter

18


Learning ObjectiveLearning Objective

LO1

To distinguish productionprocedures that match

with process costing fromthose that correspondwith job order costing.


Job Order Costing

Custom orders

Unique products

Low production volume

High product flexibility

Low to medium standardization of labor and material

Process Costing

Repetitive operations

Identical products

High production volume

Low product flexibility

High standardization of labor and material

Production of Goods and Services and Costing Systems

Production of Goods and Services and Costing Systems


Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.

Process CostingProcess Costing

Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill



LO2

To account for the physicalflows and related cost

flows when usingprocess costing.


DirectMaterials

FinishedGoods

Cost per unit for

each job

DirectLabor

FactoryOverhead

Jobs

The Work in Process account consists of

individual jobs in job costing.

Tracking the Physical Flow and Related Production Costs



DirectMaterials

FinishedGoods

Direct Labor and Factory Overhead

(Conversion)

Processes

The Work in Process account consists of specific processes in

process costing.

Cost per unit

processed




Same objective: to 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




Work in Process

Assembly

Labor

Materials

Indirect

FinishedGoods

Conversion Costs

Direct

Deliveredto

Customers

Work in Process

Packaging

Understanding Cost FlowsUnderstanding Cost Flows

Factory Overhead


Costs are accumulated for a period of time by process or department.


Unit cost is computed by dividing the accumulated costs by the number of

units produced in the period.









If partially complete units remain in process, we must use equivalent units

as the divisor to obtain unit costs.

If partially complete units remain in process, we must use equivalent units

as the divisor to obtain unit costs.






LO3

To demonstrate how tocalculate equivalent units.


Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Two one-half full pitchers are equivalent to one full pitcher.

+ = 1

Process Costing andEquivalent Units



For the current period, PencilCo 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 PencilCo have for the period?

a. 10,000

b. 11,500

c. 1,500

d. 15,000


a. 10,000

b. 11,500

c. 1,500

d. 15,000





a. 10,000

b. 11,500

c. 1,500

d. 15,000


a. 10,000

b. 11,500

c. 1,500

d. 15,000

10,000 units + (5,000 units × .30) = 11,500 equivalent units





LO4

To use the costs of resourcesconsumed to calculate the

cost per equivalent unitof production.


Cost perequivalent

unit

= Product costs for the periodEquivalent units for the period

Cost per Equivalent UnitCost per Equivalent Unit


Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90




a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit



Equivalent units may be different for material and

conversion at different stages of a process.

Equivalent units may be different for material and

conversion at different stages of a process.

At completion of Stage 1 of the process,material is 40% complete, but conversion

is only 25% complete.

At completion of Stage 1 of the process,material is 40% complete, but conversion

is only 25% complete.

Stage 1

40% ofMaterial

25% ofConversion




Stage 2

25% ofConversion

60% ofMaterial

Stage 1

40% ofMaterial

25% ofConversion

+

+

=

=

100%

50%




Stage 3

50% ofConversion

The process is now complete. The process is now complete.

Stage 2

25% ofConversion

60% ofMaterial

Stage 1

40% ofMaterial

25% ofConversion




Owl Inc. uses FIFO process costing in its Fabrication

Department where a product called Strata is made.




Owl Inc Fabrication Department Data For AprilBeginning Inventory:

Units of product 30,000

Percentage of completion - direct material 100%

Percentage of completion - conversion 40%

Units started in April 90,000

Units transferred from fabrication to mixing 100,000

Ending Inventory:





Owl Inc Fabrication Department Data For AprilBeginning Inventory:




Units started in April 90,000

Units transferred from fabrication to mixing 100,000

Ending Inventory:




Material is added at thebeginning of the process soit is always 100% complete.



April Fabrication Department Physical Flow

Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000

Units accounted for as:Units transferred from Fabrication to Mixing 100,000 Ending inventory 20,000 Total number of units 120,000

Physical Flow of Units Physical Flow of Units


Fabrication DepartmentDirect Material Equivalent Units of Production - April

Units of Percent Added EquivalentProduct This Period Units

Beginning goods in process 30,000 0% 0

Goods started and completed 70,000 100% 70,000

Ending work in process 20,000 100% 20,000

Total units 120,000 90,000

Computing EquivalentUnits of Production








Total units 120,000 90,000

Since materials are added at the beginning of the process, no additional materials are necessary to complete the

beginning inventory.









Total units 120,000 90,000

} 100,000

100,000 units completed and transferred.




Fabrication Department Conversion Equivalent Units of Production - April


Beginning goods in process 30,000 60% 18,000



Total units 120,000 93,000









Total units 120,000 93,000

Since conversion is 40 percent complete in the beginning inventory,

60 percent of the work must be completed in April.









Total units 120,000 93,000

} 100,000Transferred




Summary of Fabrication DepartmentEquivalent Units of Production - April

DirectActivities during April Material ConversionUnits from beginning inventory

processed in current period 0 18,000

Units started and completedin current period 70,000 70,000

Units in ending inventory at end of current period 20,000 5,000

Equivalent units of productionfor period 90,000 93,000




Fabrication DepartmentApril Work in Process Costs

Beginning work in process 22,380$ Costs added in April: Direct material 45,000 Conversion 55,800 Total costs to account for 123,180$




Fabrication DepartmentCost Per Equivalent Unit - April

Materials ConversionTotal cost of resource for

April 45,000$ 55,800$

Equivalent units of productionin April ÷ 90,000 ÷ 93,000

Cost per equivalent unit forApril = 0.50$ = 0.60$

Direct




LO5

To use the cost perequivalent unit to

assign costs to thework completed

during the period.


Fabrication Department Work in ProcessCost Summary for April

Cost of completed unitsFrom beginning work in process

April 1 balance 22,380$ Costs to complete April 1 inventory

Direct materialConversion

Started and completed Total completed and transferred

Cost of Completed UnitsCost of Completed Units






Direct material 0$ Conversion (18,000 × $0.60) 10,800 10,800

Started and completed Total completed and transferred






Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$

$0.50 + $0.60 = $1.10




LO6

To create a process costingproduction report and

use the report fordecision making.


We will account for all costs incurred

by assigning unit costs to the: A. 100,000 units completed and

transferred.

B. 20,000 units remaining in ending work in process inventory.

We will account for all costs incurred

by assigning unit costs to the: A. 100,000 units completed and

transferred.

B. 20,000 units remaining in ending work in process inventory.

Tracking Costs Using a Process Costing Production Report








Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion

Total cost accounted for









Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion (5,000 × $0.60) 3,000 13,000

Total cost accounted for 123,180$









Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion (5,000 × $0.60) 3,000 13,000

Total cost accounted for 123,180$

All costs accounted for




Ethics, Fraud, andCorporate Governance

Ethics, Fraud, andCorporate Governance

Overstating equivalent units of resources in ending inventory will

understate cost of goods sold, and thereby overstate income.

Equivalent units of production can be overstated by inflating the application

of direct labor and overhead (conversion costs) to work in process.


End of Chapter 18End of Chapter 18

© the mcgraw-hill companies, inc., 2008 mcgraw-hill/irwin financial & managerial accounting the...

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