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

Chapter 6

Process Costingand Hybrid

Product-Costing Systems

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LearningObjective

1

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Job-Costing and Process Costing:Opposite Ends of a Continuum

Job-Costing Systems

Distinct, identifiableunits of a product

or service

Examples:

Custom-mademachines,Houses

Process-CostingSystems

Masses of identicalor similar units of aproduct or service

Examples:Food,Chemical processing

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1-4

Comparison of Job-Order Costingand Process Costing

ProcessCosting

ProcessCosting

Job-orderCosting

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

Mass produced in automatedcontinuous production process.

Costs cannot be directly traced toeach unit of product.

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1-5

ProcessCosting

ProcessCosting

Job-orderCosting

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill


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Similarities in Job Order and Process Costing

determine a product cost by measuring theamount of direct materials and direct laborused and allocating overhead costs.

allocate overhead using a predeterminedoverhead rate (or activity-based costing).

maintain perpetual inventory records with

subsidiary ledgers formaterials, work inprocess, and finished goods.

Both systems:

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1-7

Job-order costing

Costs accumulated bythe job.

Work in process has ajob-cost sheet for eachjob.

Many unique, high costjobs.

Jobs built to customerorder.

Process costing

Costs accumulated bydepartment orprocess.

Work in process has aproduction report foreach batch ofproducts.

A few identical, low costproducts.

Units continuouslyproduced for inventoryin automated process.


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Job Order Cost System

Job Order and Process Cost Systems Compared

Job CostSheets

Dept. A andDept. B

Direct materials

Direct labor

Factory overhead

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Job CostSheets

Dept. A andDept. B

Direct materials

Direct labor

Factory overhead

Finishedgoods

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Job CostSheets

Dept. A andDept. B

Process Cost System

Direct materials

Direct labor

Factory overhead

Finishedgoods

Dept. A Dept. BDirect

materials

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Job CostSheets

Dept. A andDept. B

Process Cost System

Direct materials

Direct labor

Factory overhead

Finishedgoods

Dept. A Dept. B

Factoryoverhead

Directlabor

Direct

materials

Factoryoverhead

Directlabor

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Direct Material

FinishedGoods

Cost ofGoodsSold

Direct Labor

ManufacturingOverhead

Jobs

The work-in-processaccount consists ofindividualjobs in a

job-ordercost system.

Differences Between Job-Orderand Process Costing

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Direct Material

FinishedGoods

Cost ofGoodsSold

Products

The work-in-processaccount consists of

individual products in aprocess cost system.

Differences Between Job-Orderand Process Costing

Direct Labor& Overhead

(Conversion)

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

combined with overhead.

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LearningObjective

2

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Process-Costing

Process-costing is a system where the unit cost of aproduct or service is obtained by assigning totalcosts to many identical or similar units

Each unit receives the same or similar amounts of

direct materials costs, direct labor costs, andmanufacturing overhead

Unit costs are computed by dividing total costs

incurred by the number of units of output from theproduction process

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Process-Costing Assumptions

Direct Materials are added at the beginningof the production process, or at the start ofwork in a subsequent department down the

assembly line Conversion Costs are added equally along

the production process

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Five-Step Process-Costing Allocation

1. Summarize the flow of physical units ofoutput

2. Compute output in terms of equivalent

units3. Compute cost per equivalent unit

4. Summarize total costs to account for

5. Assign total costs to units completed andto units in ending Work-in-Process

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Flow of Costs in a Process Cost System

FOH Melting WIP Melting Finished Goods

FOH Casting WIP Casting

Cost of Goods Sold

DM

DL

Actualcosts

incurred

Actualcosts

incurred DL

Direct materials used in productionDM

Direct labor used in productionDL

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Cost of Goods Sold

DM

DL

FOHA

Actualcosts

incurred

Actualcosts

incurred

FOHA

FOHA

FOHA

DL

Factory overhead applied to work in processFOHA

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Cost of Goods Sold

DM

DL

FOHA

Actualcosts

incurred

Actualcosts

incurred

FOHA

FOHA

TRANFOHA

DL

TRAN

Cost of goods transferred to WIP CastingTRAN

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Cost of Goods Sold

DM

DL

FOHA

COGMActualcosts

incurred

Actualcosts

incurred

FOHA

FOHA

TRAN COGMFOHA

DL

TRAN

Cost of goods manufactured and transferred to finished goodsCOGM

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Cost of Goods Sold

SOLD

DM

DL

FOHA

COGM SOLDActualcosts

incurred

Actualcosts

incurred

FOHA

FOHA

TRAN COGMFOHA

DL

TRAN

Finished goods soldSOLD

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Process Cost Flows

Direct material

Direct labor

Applied 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

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Process Cost Flows

Direct material

Direct labor

Applied manufacturing transferred to and transferred to

overhead department B finished goods

Direct material

Direct labor

Applied 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 Departments

Work-in-Process Inventory Work-in-Process InventoryProduction Department A Production Department B

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Learning

Objective3

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Inventories of Partially Processed Materials

A. Often, partially processed materialsremain in various stages of productionin a department at the end of a period.

In this case, the costs in process mustbe allocated between the units thathave been completed and transferredto the next process or to finished

goods and those units that are onlypartially completed and remain withinthe department.

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B. To allocate direct materials andtransferred costs between the outputcompleted and transferred to the next

process and the inventory of partiallycompleted goods within thedepartment, it is necessary todetermine the manner in which

materials are placed in production.

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1. All materials may be introduced when

the work begins on a product.

2. For other products, materials may beadded to production uniformly

throughout the production process.3. In still other situations, materials may

enter the production process at

relatively few points, which may ormay not be evenly spaced throughoutthe process.

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C. To allocate processing costs betweenthe output completed and transferredto the next process and the inventoryof goods within the process, it is

necessary to determine the number ofequivalent units of production duringthe period.

D. The equivalent units of production arethe number of units that could havebeen manufactured from start to finishduring the period .

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E. The conversion cost per equivalentunit is computed by dividing the sumof the direct labor and factory

overhead costs for the period by thenumber of equivalent units ofproduction for the period.

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Equivalent Units

A derived amount of output units that:1. Takes the quantity of each input in units

completed and in unfinished units of work inprocess and

2. converts the quantity of input into the amountof completed output units that could beproduced with that quantity of input

Are calculated separately for each input(direct materials and conversion cost)

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1-32

Equivalent Units: A Key Concept

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

Products in work-in-process inventory at thebeginning and end of the period are onlypartially complete.

Equivalent units is a concept expressing

these partially completed products as asmaller number of fully completed products.

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Equivalent Units Example

Two one-half completed products areequivalent to one completed product.

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

+ = l

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1-34

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

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

a. 10,000

b. 11,500c. 13,500

d. 15,000

Equivalent Units Question 1

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1-35

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

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

a. 10,000

b. 11,500c. 13,500

d. 15,000

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

= 11,500 equivalent units


C l l ti d U i E i l t

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1-36

Calculating and Using EquivalentUnits of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period

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1-37

If Jones incurred $27,600 inproduction costs for the 11,500equivalent units. What was Joness

cost per equivalent unit for the period?a. $1.84

b. $2.40

c. $2.76d. $2.90


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1-38

If Jones incurred $27,600 inproduction costs for the 11,500equivalent units. What was Joness

cost per equivalent 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

C l l ti d U i E i l t

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1-39

Calculating and Using EquivalentUnits of Production

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

Materialscost per

equivalentunit

=Materials cost for the period

Materials equivalent units for

the period

Conversioncost per

equivalentunit

=Conversion cost for the period

Conversion equivalent units for

the period

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Steps 1 & 2 Illustrated

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Steps 3, 4 & 5, Illustrated

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General Ledger Cost FlowsIllustrated

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1-43

Departmental Production Report

ProductionReport

Analysis ofphysical flow

of units.

Calculationof equivalent

units.

Computationof unit costs.

Analysis oftotal costs.

W i ht d A

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Weighted-AverageProcess-Costing Method

Calculates cost per equivalent unit of allwork done to date (regardless of theaccounting period in which it was done)

Assigns this cost to equivalent unitscompleted & transferred out of the process,and to incomplete units in still in-process

W i ht d A

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Weighted-AverageProcess-Costing Method

Weighted-average costs is the total of allcosts in the Work-in-Process Accountdivided by the total equivalent units of work

done to date The beginning balance of the Work-in-

Process account (work done in a prior

period) is blended in with current periodcosts

Equivalent Units of Production

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1-46

Equivalent Units of ProductionWeighted-Average Method

The weighted-average method . . .

Makes no distinction between work done in theprior period and work done in the current period.

Blends together units and costs from the priorperiod and the current period.

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

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1. For example, if 1,000 units are 50%

complete at the end of a period, theequivalent units of production would be 500units (1,000*50%).

2. The computation of equivalent units ofproduction for a period is equal to the sumof the equivalent units of production forcompletion of the beginning work in process

inventory plus the units started andcompleted during the period plus theequivalent units of production in work inprocess inventory at the end of the period.

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Inventory within Polishing department on March 1

Completed in polishing department and transferred to

finished goods during March

Inventory within polishing department on March 31

600 units1/3

completed

9,800 units,completed

800 units,2/5

completed

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Equivalent Unit Of ProductionWeighted Average

The equivalent units of production are determined as follows:

To process units in inventory on March 1 (600 unit) degree of

completion is not considered

To process units started and completed in March (9,800units600 units)

To process units in inventory on March 31(800 units * 2/5 )

Equivalent units of production in March,

600

9,200

320

10,120

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Account WORK IN PROCESSPOLISHING DEPARTMENT Account

Balance

Date Item Debit Credit Debit Credit

May1 Bal.600 units%

completed

10,200

May 1-

31

Sanding dept. 10,000

units at $ 16

160,000 170,200

May31 Direct labor 26,640 196,840

May31 Factory overhead 18,000 214,840

May31 Goods finished, 9.800

units

200,609.486

May31 Bal. 800 units, 2/5

completed

14,230.514

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600 units:

9, 200 units

9, 800 units: 9,800 @20.47035573 $ 200,609.486

Goods Finished During March

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800

units:

800

units:

Materials cost in March, at

$ 16 per unit

Conversion cost in March:

800 * 2/5, or 320 at

$4.47035573

Polishing department

inventory on March 31

Total Cost accounted for

$ 12,800.000

1, 430.514

$14,230.514

$214,840.00

Polishing Department Inventory on March 31

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Steps 3, 4 & 5 Illustrated

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Result of the Process

Two critical figures arise out of Step Five ofthe cost allocation process:

1. The amount of the Journal Entry transferring

the allocated cost of units completed and sentfrom Work-in-Process Inventory to FinishedGoods Inventory

2. The ending balance of the Work-in-Process

Inventory account that will appear on theBalance Sheet

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1-56

MVP Sports Equipment Company makes baseball glovesin two departments, Cutting and Stitching.

MVP uses the weighted-average cost procedure.

Material is added at the beginning of the CuttingDepartment, and conversion is incurred uniformlythroughout the process.

Using the following information for the month of March,

lets prepare a production report for the CuttingDepartment.

Production Report Example

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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 March

Materials cost 90,000

Conversion costs:

Direct labor $ 86,000Applied manufacturing overhead 107,500

Total conversion costs 193,500

Total costs to account for $ 340,700


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1-58

Analysis of Physical Flow of Units

Physical

Units

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 10,000Total units accounted for 50,000


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1-59

Conversion Equivalent Units

Physical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%



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


Calculation of Equivalent Units

50% of 10,000 units

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

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





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

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Learning

Objective4

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1-62

Direct

Material 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




$2.80 + $4.46

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Learning

Objective5

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1-64


Analysis of total costsCost of goods completed and transferred during March

40,000 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 50,300Total costs accounted for 340,700$

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Convserion:


Total cost of March 31 work-in-process 50,300Total costs accounted for 340,700$

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Convserion:


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

Total costs accounted for 340,700$

All costsaccounted for

First-in First-Out

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First-in, First-OutProcess-Costing Method

Assigns the cost of the previous accounting periodsequivalent units in beginning work-in-processinventory to the first units completed and transferredout of the process

Assigns the cost of equivalent units worked onduring the current period first to complete beginninginventory, next to stat and complete new units, andlastly to units in ending work-in-process inventory

First-in First-Out

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First in, First OutProcess-Costing Method

The beginning balance of the Work-in-Process account (work done in a priorperiod) is kept separate from current period

costs

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1-69

MVP Sports Equipment Company makes baseball glovesin two departments, Cutting and Stitching.

MVP uses the First-In First-Out cost procedure.

Material is added at the beginning of the CuttingDepartment, and conversion is incurred uniformlythroughout the process.

Using the following information for the month of March,

lets prepare a production report for the CuttingDepartment.


P d i R E l

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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.



Conversion costs:

Direct labor $ 86,000Applied manufacturing overhead 107,500




P d ti R t E l

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Physical

Units

Work in process, March 1 20,000Units started during March 30,000





P d ti R t E l

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Units at the beginning 20,000 90% 18,000

Units completed during march an 20,000 100% 20,000 20,000Work in process, March 31 10,000 50% 10,000 5,000





50% of 10,000 units

Beginning inventory % is used in First-In First-Out m ethod.

P d ti R t E l

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Units at the beginning 20,000 90% 18,000

Units started and completed durin 20,000 100% 20,000 20,000Work in process, March 31 10,000 50% 10,000 5,000





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

P d ti R t E l

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Direct


Work in Process, March 1 57,200$Costs incurred during March 90,000 193,500 283,500

Total costs to account for 90,000$ 193,500$ 340,700$







$3.00 + $4.50

P d ti R t E l

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1-75



Work in Process March 1 $57,200

Cost added during March (18,000 *$4.50) $81,000

Total Cost 20,000 units @ $6.91 -------------- $138,200Cost of goods completed and transferred during March

20,000 units @ $7.50 $150,000

Total $288,200

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent u its @ $3.00 $30,000

Convserion:

5,000 equivalent unis @ $4.50 22,500

P d ti R t E l

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1-76


Analysis of total costsWork in process March 1 $57,200

Cost added during this month (18,000 @ $4.50) $81,000

20,000 units @ $6.91 $138,200




Convserion:




P d ti R t E l

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1-77


Analysis of total costs

Cost of goods completed and transferred during March

Work in process March 1 $57,200

Cost added during march (18,000 @ $4.50) $81,000

________ $138,20020,000 units x $7.50 per equivalent unit 150,400$


Direct Material:


Convserion:5,000 equivalent units x $4.50per equivalent unit 22,500




I t i f P ti ll P d M t i l

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1. For example, if 1,000 units are 50%

complete at the end of a period, theequivalent units of production would be 500units (1,000*50%).

2. The computation of equivalent units ofproduction for a period is equal to the sumof the equivalent units of production forcompletion of the beginning work in process

inventory plus the units started andcompleted during the period plus theequivalent units of production in work inprocess inventory at the end of the period.

In entories of Partiall Processed Materials

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Inventory within Polishing department on March 1

Completed in polishing department and transferred to

finished goods during March

Inventory within polishing department on March 31

600 units1/3

completed

9,800 units,

completed

800 units,2/5

completed

Equivalent Production First In First Out

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Equivalent ProductionFirst-In First-Out


To process units in inventory on March 1 (600 units * 2/3)

To process units started and completed in March (9,800units

600 units)To process units in inventory on March 31(800 units * 2/5 )


400

9,200

320

9,920

Equivalent Production First In First Out

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Equivalent ProductionFirst-In First-Out


To process units in inventory on March 1 (600 units * 2/3)

To process units started and completed in March (9,800units

600 units)To process units in inventory on March 31(800 units * 2/5 )


400

9,200

320

9,920


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600 units:

9, 200 units

9, 800 units:

Inventory on March 1, 1/3 completed


600* 2/3, or 400 units at $4.50

Total (600 @$20.00)

(unit cost: $ 12,000 + 600 - $ 20)

Materials cost in March, at $ 16 per unit


9, 200 at $ 4.50 per unit

Total

(unit cost: $ 188, 600 / 92, 00 = $ 20.50)

Goods finished during March:

$ 10, 200

1, 800

$ 147, 200

41, 400

$ 12, 000

188, 600

$ 200,600

Goods Finished During March


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800 units:

800 units:

Materials cost in March, at $ 16 per

unit


800 * 2/5, or 320 at $ 4.50

Polishing department inventory on

March 31

$

12,800

1, 440 $ 14, 240

Polishing Department Inventory on March 31

Steps 1 & 2, Illustrated

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p ,(Under FIFO)

St 3 4 & 5 Ill t t d

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Result of the Process (as before)

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Result of the Process (as before)

Two critical figures arise out of Step Five ofthe cost allocation process:

1. The amount of the Journal Entry transferringthe allocated cost of units completed and sentfrom Work-in-Process Inventory to FinishedGoods Inventory

2. The ending balance of the Work-in-Process

Inventory account that will appear on theBalance Sheet

Transferred in Costs

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Transferred-in Costs

Are costs incurred in previous departments that arecarried forward as the products cost when it movesto a subsequent process in the production cycle

Also called Previous Department Costs

Journal entries are made to mirror the progress inproduction from department to department

Transferred-in costs are treated as if they are aseparate type of direct material added at the

beginning of the process

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S eps & , us a ed(Under FIFO)

Steps 3 4 & 5 Illustrated

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Learning

Objective6

Percentage of

Completion Equivalent Units

Phys ical with Respect to Direc t

MVP SPORTS EQUIPMENT COMPANYProduction Report: Cutting Department

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1-93

Phys ical with Respect to Direc t

Units Conversion Material Conversion




Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000



Direct


Work in Process, March 1 50,000$ 7,200$ 57,200$

Costs incurred during March 90,000 193,500 283,500Total costs to account for 140,000$ 200,700$ 340,700$



Cost of goods completed and transferred during March



Direct Material:


Conversion:




A t l C ti N l C ti

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Manufacturingoverhead is

applied

to Work-in-Process Inventory

using apredetermined

overhead rate

Actual costs of

manufacturing overheadare entered in Work-in-Process Inventory

Actual Costing vs. Normal Costing


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1-95


Analysis ofphysical flowof units.

Calculationof equivalent

units. Computationof unit costs.

Analysis oftotal costs.

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Learning

Objective7

Operation Costing

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1-97

Operation Costing

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

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Operation Costing

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1-98

Operation Costing

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

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

Conversion costsassigned to batches

as in process costing.

Material Costs chargedto batches as in

job-order costing.

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Learning

Objective8(appendix)

Sequential Production Departments

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Direct material Cost of goods Transferred-

completed and in costs

Conversion: transferred out

Direct labor Direct material

Manufacturingoverhead Conversion:

Direct labor

Manufacturing

overhead

Work-in-Process Inventory:Cutting Department

Work-in-Process Inventory:Stitching Department

Exh.4-4


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Transferred in: 100% complete. $ 61,000

Materials: none -0-Conversion: 20% complete. 7,600

Units transferred in during March: 40,000 units

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

Work in process, March 31: 20,000 units

Transferred in: 100% complete.Materials: none

Conversion: 90% complete.


Transferred in 290,400


Conversion costs:

Direct labor $115,000

Applied manufacturing overhead 115,000



q p


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Physical

Units

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




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Conversion

Physical Percentage Transferred Direct

Units Completion In Material Conversion


Units transferred in during March 40,000


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 equivalent units 50,000 30,000 48,000

90% of 20,000 units


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Transferred DirectIn Material Conversion Total

Work in Process, March 1 61,000$ -0- 7,600$ 68,600$Costs incurred during March 290,400 7,500$ 230,000 527,900Total 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




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Cost of goods completed and transferred out of Stitching Dept. during March


Costs remaining in work-in-process in Stitching Dept. on March 31

Direct Material:20,000 equivalent units x $7.028 per equivalent unit 140,560$

Convserion:





Analysis of total costs


Standard Costing andP C ti

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Process Costing

Teams of design and process engineers,operations personnel, and managementaccountants work together to determineseparate standard costs per equivalentunit on the basis of different technicalprocessing specifications for each product

Standard costs replace actual costs inequivalent unit calculations


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General Ledger Cost Flows

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General Ledger Cost FlowsIllustrated

Transferred-in Costs

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Transferred in Costs

Are costs incurred in previous departments that arecarried forward as the products cost when it movesto a subsequent process in the production cycle

Also called Previous Department Costs

Journal entries are made to mirror the progress inproduction from department to department

Transferred-in costs are treated as if they are aseparate type of direct material added at thebeginning of the process

St 1 & 2 Ill t t d

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Hybrid Costing Systems

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yb d Cost g Syste s

A Hybrid-Costing System blendscharacteristics from both job-costing andprocess-costing systems

Many actual production systems are in facthybrids

Examples include manufacturers oftelevisions, dishwashers and washingmachines, as well as Adidas

End of Chapter 4

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