chap004_7e_edited(1)

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Process Costing and Hybrid Product-

Costing Systems

4 Chapter Chapter FourFour

1-2

Comparison of Job-Order Comparison of Job-Order Costing and Process CostingCosting and Process Costing

ProcessCostingProcessCosting

Job-orderCosting

Used for production of large, identical, low cost items.

Mass produced in automated continuous production process.

Costs cannot be directly traced to each unit of product.

1-3

ProcessCostingProcessCosting

Job-orderCosting

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

Comparison of Job-Order Comparison of Job-Order Costing and Process CostingCosting and Process Costing

1-4

Job-order costing– Costs accumulated by

the job.

– Work in process has a job-cost sheet for each job.

– Many unique, high cost jobs.

– Jobs built to customer order.

Process costing– Costs accumulated by

department or process.

– Work in process has a production report for each batch of products.

– A few identical, low cost products.

– Units continuously produced for inventory in automated process.

Comparison of Job-Order Comparison of Job-Order Costing and Process CostingCosting and Process Costing

1-5

Direct Material

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

Jobs

The work-in-process account consists of individual jobs in a

job-order cost system.

Differences Between Job-Order Differences Between Job-Order and Process Costingand Process Costing

1-6

Direct Material

FinishedGoods

Cost of GoodsSold

Products

The work-in-process account consists of

individual products in a process cost system.

Differences Between Job-Order Differences Between Job-Order and Process Costingand Process Costing

Direct Labor& Overhead

(Conversion)

When direct labor is a relatively small amount compared to material and overhead, it is often

combined with overhead.

1-7

Process Cost FlowsProcess Cost Flows

Direct materialDirect laborApplied manufacturing and transferred to during currentoverhead finished goods period

Cost of goods completed Cost of goods sold

Work-in-Process Finished Goods Cost of Goods Sold

One Production Department

Inventory Inventory

1-8

Process Cost FlowsProcess Cost Flows

Direct materialDirect laborApplied manufacturing transferred to and transferred tooverhead department B finished goods

Direct materialDirect laborApplied manufacturing

overhead

during current period

Cost of goods sold

Cost of goods completed in department A and Cost of goods completed

Finished Goods Inventory Cost of Goods Sold

Two Sequential Production DepartmentsWork-in-Process Inventory Work-in-Process InventoryProduction Department A Production Department B

1-9

Equivalent Units: A Key ConceptEquivalent Units: A Key Concept

• Costs are accumulated for a period of time for products in work-in-process inventory.

• Products in work-in-process inventory at the beginning and end of the period are only partially complete.

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

• Costs are accumulated for a period of time for products in work-in-process inventory.

• Products in work-in-process inventory at the beginning and end of the period are only partially complete.

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

1-10

Equivalent Units ExampleEquivalent Units Example

Two one-half completed products are equivalent to one completed product.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

+ = l

1-11

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

Equivalent Units Question 1Equivalent Units Question 1

1-12

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

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

Equivalent Units Question 1Equivalent Units Question 1

1-13

Calculating and Using Equivalent Calculating and Using Equivalent Units of ProductionUnits of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period

1-14

If Jones incurred $27,600 inproduction costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units Question 2

1-15

If Jones incurred $27,600 inproduction costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units Question 2

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

1-16

Calculating and Using Equivalent Calculating and Using Equivalent Units of ProductionUnits of Production

To calculate the direct materials and conversion costs per equivalent unit for the period:

Materials cost per

equivalent

unit

=Materials cost for the periodMaterials equivalent units for

the period

1-17

Departmental Production ReportDepartmental Production Report

ProductionReport

Analysis of physical flow

of units.

Calculationof equivalent

units.

Computationof unit costs.

Analysis of total costs.

1-18

Equivalent Units of Production –Equivalent Units of Production –Weighted-Average MethodWeighted-Average Method

The weighted-average method . . .– Makes no distinction between work done in the

prior period and work done in the current period.– Blends together units and costs from the prior

period and the current period.

The FIFO method is a morecomplex method and israrely used in practice.

1-19

• MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching.

• MVP uses the weighted-average cost procedure.

• Material is added at the beginning of the Cutting Department, and conversion is incurred uniformly throughout the process.

• Using the following information for the month of March, let’s prepare a production report for the Cutting Department.

Production Report ExampleProduction Report Example

1-20

Work in process, March 1: 20,000 units Cost Materials: 100% complete. $ 50,000Conversion: 10% complete. 7,200

Units started into production in March: 30,000 unitsUnits completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 unitsMaterials 100% complete.Conversion 50% complete.

Costs incurred during MarchMaterials cost 90,000Conversion costs:

Direct labor $ 86,000Applied manufacturing overhead 107,500Total conversion costs 193,500

Total costs to account for $ 340,700

Production Report ExampleProduction Report Example

1-21

Analysis of Physical Flow of Units

PhysicalUnits

Work in process, March 1 20,000 Units started during March 30,000 Total units to account for 50,000

Units completed and transferred out during March 40,000 Work in process, March 31 10,000 Total units accounted for 50,000

Production Report ExampleProduction Report Example

1-22

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000

Total equivalent units 50,000 45,000

Production Report ExampleProduction Report Example

Calculation of Equivalent Units

50% of 10,000 units

Beginning inventory % is not used in weighted-average method.

1-23

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000

Total equivalent units 50,000 45,000

Production Report ExampleProduction Report Example

Calculation of Equivalent Units

100% of 10,000 units, allmaterial added at beginning

1-24

DirectMaterial Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$

Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$

Computation of unit costs

Production Report ExampleProduction Report Example

$140,000 ÷ 50,000 equivalent units

$200,700 ÷ 45,000 equivalent units

$2.80 + $4.46

1-25

Production Report ExampleProduction Report Example

Analysis of total costs

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Convserion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$

1-26

Production Report ExampleProduction Report Example

Analysis of total costs

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Convserion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$

1-27

Production Report ExampleProduction Report Example

Analysis of total costs

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Convserion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$ All costs

accounted for

1-28

Percentage of Completion Equivalent Units

Physical with Respect to DirectUnits Conversion Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000

Total equivalent units 50,000 45,000

DirectMaterial Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$

Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Conversion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$

MVP SPORTS EQUIPMENT COMPANYProduction Report: Cutting Department

1-29

Manufacturing overhead is

appliedto Work-in-

Process Inventory using a

predetermined overhead rate

Actual costs of manufacturing overhead are entered in Work-in-

Process Inventory

Actual Costing vs. Normal Costing

1-30

Departmental Production ReportDepartmental Production Report Analysis of physical flow

of units. Calculationof equivalent

units. Computation

of unit costs.

Analysis of total costs.

1-31

Operation CostingOperation Costing

Operation costing employs some aspectsof both job-order and process costing.

Job-order Operation CostingOperation Costing Process Costing (Products produced in batches)(Products produced in batches) Costing

1-32

Operation CostingOperation Costing

Operation costing employs some aspectsof both job-order and process costing.

Job-order Operation CostingOperation Costing Process Costing (Products produced in batches)(Products produced in batches) Costing

Conversion costsassigned to batches

as in process costing.

Material Costs chargedto batches as in

job-order costing.

1-33

Sequential Production DepartmentsSequential Production Departments

Direct material Cost of goods Transferred-completed and in costs

Conversion: transferred outDirect labor Direct materialManufacturing

overhead Conversion:Direct laborManufacturing

overhead

Work-in-Process Inventory:Cutting Department

Work-in-Process Inventory:Stitching Department

1-34

Work in process, March 1: 10,000 units Cost Transferred in: 100% complete. $ 61,000Materials: none -0-Conversion: 20% complete. 7,600

Units transferred in during March: 40,000 unitsUnits completed and transferred out in March: 30,000 units

Work in process, March 31: 20,000 unitsTransferred in: 100% complete.Materials: noneConversion: 90% complete.

Costs incurred during MarchTransferred in 290,400Materials cost 7,500Conversion costs:

Direct labor $115,000Applied manufacturing overhead 115,000Total conversion costs 230,000

Total costs to account for $ 596,500

Exh. 4-4

Sequential Production DepartmentsSequential Production Departments

1-35

Analysis of Physical Flow of Units

Sequential Production DepartmentsSequential Production Departments

PhysicalUnits

Work in process, March 1 10,000 Units transferred in during March 40,000 Total units to account for 50,000

Units completed and transferred out during March 30,000 Work in process, March 31 20,000 Total units accounted for 50,000

1-36

Calculation of Equivalent Units

Sequential Production DepartmentsSequential Production Departments

ConversionPhysical Percentage Transferred Direct

Units Completion In Material Conversion

Work in process, March 1 10,000 20%Units transferred in during March 40,000 Total units to account for 50,000

Units completed and transferred out during March 30,000 30,000 30,000 30,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000 Total units accounted for 50,000 Total equivalent units 50,000 30,000 48,000

90% of 20,000 units

1-37

Transferred DirectIn Material Conversion Total

Work in Process, March 1 61,000$ -0- 7,600$ 68,600$ Costs incurred during March 290,400 7,500$ 230,000 527,900 Total costs to account for 351,400$ 7,500$ 237,600$ 596,500$

Equivalent units 50,000 30,000 48,000 Cost per equivalent unit 7.028$ 0.25$ 4.95$ 12.228$

$351,400 $7,500 $237,600 7.028$ 50,000 30,000 48,000 + $.25

+ $4.95

Production Report ExampleProduction Report Example

Computation of unit costs

1-38

Cost of goods completed and transferred out of Stitching Dept. during March30,000 units x $12.228 per equivalent unit 366,840$

Costs remaining in work-in-process in Stitching Dept. on March 31Direct Material:20,000 equivalent units x $7.028 per equivalent unit 140,560$

Convserion:18,000 equivalent units x $4.95 per equivalent unit 89,100

Total cost of March 31 work-in-process 229,660

Total costs accounted for 596,500$

Production Report ExampleProduction Report Example

Analysis of total costs

All costs accounted for

1-39

I’m ready to processsome leisure time.

End of Chapter 4End of Chapter 4