ch 18 - process costing.ppt

8/11/2019 ch 18 - process costing.ppt

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

PROCESS COSTING

Chapter

18


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Learning Objective

LO1

To distinguish production

procedures that match

with process costing fromthose that correspond

with job order costing.


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Job Order Costing

Custom orders

Unique products

Low production volume

High product flexibility

Low to mediumstandardization of laborand material

Process Costing

Repetitive operations

Identical products

High production volume

Low product flexibility

High standardization of

labor and material

Production of Goods and Servicesand Costing Systems


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Used for production of small,identical, low-cost items.

Mass produced in automatedcontinuous production process.

Costs cannot be directly traced toeach unit of product.

Process Costing

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill


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Learning Objective

LO2

To account for the physical

flows and related costflows when using

process costing.


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7/46 The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin

DirectMaterials

FinishedGoods

Direct Laborand FactoryOverhead

(Conversion)

Processes

The Work in Processaccount consists of

specific processesinprocess costing.

Cost perunit

processed

Tracking the Physical Flow andRelated Production Costs



Sameobjective: to determinethe cost of products

Sameinventory accounts: raw materials,work in process, and finished goods

Sameoverhead assignment method:predetermined rate times actual activity

Tracking the Physical Flow andRelated Production Costs



Work in

ProcessAssembly

Labor

Materials

Indirect

FinishedGoods

ConversionCosts

Direct

Deliveredto

Customers

Work inProcess

Packaging

Understanding Cost Flows

Factory

Overhead



Costs are accumulated for a period of timeby process or department.

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

units produced in the period.

Understanding Cost Flows


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Learning Objective

LO3

To demonstrate how to

calculate equivalent units.



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

Twoone-half full pitchers areequivalent to one full pitcher.

+ = 1

Process Costing andEquivalent Units



For the current period, PencilCo started15,000 units and completed 10,000 units,leaving 5,000 units in process 30 percent

complete. How many equivalent units ofproduction did PencilCo have for the period?

a. 10,000

b. 11,500c. 1,500

d. 15,000



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For the current period, PencilCo started15,000 units and completed 10,000 units,leaving 5,000 units in process 30 percent

complete. How many equivalent units ofproduction did PencilCo have for the period?

a. 10,000

b. 11,500c. 1,500

d. 15,000

10,000 units + (5,000 units .30)

= 11,500 equivalent units



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Learning Objective

LO4

To use the costs of resources

consumed to calculate thecost per equivalent unit

of production.


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Cost perequivalent

unit

=Product costs for the period

Equivalent units for the period

Cost per Equivalent Unit


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

a. $1.84

b. $2.40

c. $2.76d. $2.90



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

a. $1.84

b. $2.40

c. $2.76d. $2.90

$27,600 11,500 equivalent units

= $2.40 per equivalent unit



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Equivalent units may bedifferent for material and

conversion at different stagesof a process.

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

is only 25% complete.

Stage 1

40% ofMaterial

25% ofConversion



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Stage 2

25% ofConversion

60% ofMaterial

Stage 1

40% ofMaterial

25% ofConversion

+

+

=

=

100%

50%



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Stage 3

50% ofConversion

The process is now complete.

Stage 2

25% ofConversion

60% ofMaterial

Stage 1

40% ofMaterial

25% ofConversion



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Owl Inc. usesFIFOprocesscosting in itsFabrication

Department wherea product calledStrata is made.

Process Costing


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Process Costing

Owl Inc Fabrication Department Data For April

Beginning 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:

Units of product 20,000

Percentage of completion - direct material 100%

Percentage of completion - conversion 25%


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April Fabrication Department Physical Flow

Units to account for:

Beginning inventory 30,000Units 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


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Fabrication DepartmentDirect MaterialEquivalent Units of Production - April

Units of Percent Added Equivalent

Product This Period Units

Beginning goods in process 30,000 0% 0Goods 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


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Fabrication DepartmentDirect MaterialEquivalent Units of Production - April





Total units 120,000 90,000

Since materials are added at thebeginning of the process, no additionalmaterials are necessary to complete the

beginning inventory.


C i E i l


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Fabrication Department

Direct MaterialEquivalent Units of Production - April





Total units 120,000 90,000

} 100,000

100,000 units completedand transferred.


C ti E i l t


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Conversion Equivalent Units of Production - April



Beginning goods in process 30,000 60% 18,000Goods started and completed 70,000 100% 70,000


Total units 120,000 93,000


C ti E i l t


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Total units 120,000 93,000

Since conversion is 40 percentcomplete in the beginning inventory,

60 percent of the work must becompleted in April.


C ti E i l t


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Total units 120,000 93,000

} 100,000Transferred



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P C ti d


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April Work in Process Costs

Beginning work in process 22,380$

Costs added in April:

Direct material 45,000

Conversion 55,800Total costs to account for 123,180$



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Cost Per Equivalent Unit - April

Materials Conversion

Total cost of resource for

April 45,000$ 55,800$

Equivalent units of production

in April 90,000 93,000

Cost per equivalent unit for

April = 0.50$ = 0.60$

Direct



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Learning Objective

LO5

To use the cost per

equivalent unit to

assign costs to thework completed

during the period.


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Fabrication Department Work in Process

Cost Summary for April

Cost of completed units

From beginning work in processApril 1 balance 22,380$

Costs to complete April 1 inventory

Direct material

Conversion

Started and completed

Total completed and transferred

Cost of Completed Units


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Direct material 0$

Conversion (18,000 $0.60) 10,800 10,800

Started and completed

Total completed and transferred


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Direct material 0$

Conversion (18,000 $0.60) 10,800 10,800

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

$0.50 + $0.60 = $1.10



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Learning Objective

LO6

To create a process costing

production report anduse the report for

decision making.

Tracking Costs Using a Process


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We will account for all costs incurredby assigning unit costs to the:

A. 100,000 units completed andtransferred.

B. 20,000 units remaining in ending

work in process inventory.

Tracking Costs Using a ProcessCosting Production Report



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From beginning work in process

April 1 balance 22,380$

Costs to complete April 1 inventoryDirect material 0$

Conversion (18,000 $0.60) 10,800 10,800

Started and completed (70,000 $1.10) 77,000

Total completed and transferred (100,000 units) 110,180$

Cost of ending work in process

Direct material (20,000 $0.50) 10,000$

Conversion

Total cost accounted for




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Conversion (18,000 $0.60) 10,800 10,800




Direct material (20,000 $0.50) 10,000$

Conversion (5,000 $0.60) 3,000 13,000

Total cost accounted for 123,180$




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Conversion (18,000 $0.60) 10,800 10,800




Direct 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 and


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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 applicationof direct labor and overhead

(conversion costs) to work in process.


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End of Chapter 18

ch 18 - process costing.ppt

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