COST MANAGEMENT Accounting & Control HansenMowenGuan COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 1 Chapter 6 Product and Service Costing: A Process Systems Approach 2 Study Objectives 1.Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report. 2.Describe process costing for settings without beginning or ending work-in- process inventories. 3.Define equivalent units, and explain their role in process costing. 4.Prepare a departmental production report using the FIFO method. 5.Prepare a departmental production report using the weighted average method. 6.Prepare a departmental production report with transferred-in goods and changes in output measures. 7.Describe the basic features of operation costing. 8.Explain how spoilage is treated in a process-costing system. 3 Process-Costing Systems: Basic Operational and Cost Concepts 4 5 6 7 1.Homogeneous units pass through a series of similar processes. 2.Each unit in each process receives a similar dose of manufacturing costs. 3.Manufacturing costs are accumulated by a process for a given period of time. 4.There is a work-in-process account for each process. Basic features of a process-costing system continued 8 Process-Costing Systems: Basic Operational and Cost Concepts 5.Manufacturing cost flows and the associated journal entries are generally similar to job- order costing. 6.The departmental production report is the key document for tracking manufacturing activity and costs. 7.Unit costs are computed by dividing the departmental costs of the period by the output of the period. Basic features of a process-costing system (cont) 9 Process Costing With No Beginning or Ending Work-in-Process Inventories Services that are homogeneous and repetitively produced can use the process- costing approach. Examples: check processing in a bank, changing oil, dental cleaning, surgical procedures JIT manufacturing firms minimize inventories and strive to reduce work-in-process inventories to insignificant levels. 10 Process Costing With Ending Work-in-Process Inventories 11 Process Costing With Ending Work-in-Process Inventories 12 Process Costing With Ending Work-in-Process Inventories Analysis of the flow of physical units Calculation of equivalent units Computation of unit cost Valuation of inventories (goods transferred out and ending work in process) Cost reconciliation Cost of Production Report 13 Process Costing With Ending Work-in-Process Inventories Nonuniform application of productive inputs 14 FIFO Costing Method Under the FIFO costing method, the equivalent units and manufacturing costs in beginning work in process are excluded from the current-period unit cost calculation. Thus, FIFO recognizes that the work and costs carried over from the prior period legitimately belong to that period. 15 FIFO Costing Method 16 FIFO Costing Method Step 1: Physical Flow Analysis 17 FIFO Costing Method Step 2: Calculation of Equivalent Units 18 Step 3: Computation of Unit Cost FIFO Costing Method Unit direct materials cost= $12,600 70,000 = $0.18 Unit conversion cost= $3,050 61,000 = $0.05 Unit cost= Unit direct materials + Unit conversion cost = $ $0.05 = $0.23 per ounce 19 Step 4: Valuation of Inventories FIFO Costing Method 20 Step 5: Cost Reconciliation FIFO Costing Method 21 FIFO Costing Method 22 FIFO Costing Method 23 Weighted Average Costing Method Step 1: Physical Flow Analysis 24 Step 2: Calculation of Equivalent Units Weighted Average Costing Method 25 Step 3: Computation of Unit Cost Weighted Average Costing Method Unit direct materials cost= ($1,000 + $12,600) 80,000 = $0.17 Unit conversion cost= ($350 + $3,050) 68,000 = $0.05 Unit cost= Unit direct materials + Unit conversion cost = $ $0.05 = $0.22 per completed unit 26 Weighted Average Costing Method Step 4: Valuation of Inventories Cost of goods transferred out= $0.22 60,000 = $13,200 Direct materials: $0.17 20,000$3,400 Conversion costs: $0.05 8, Total cost$3,800 27 Weighted Average Costing Method Step 5: Cost Reconciliation 28 Weighted Average Costing Method 29 Weighted Average Costing Method 30 FIFO compared with Weighted Average Weighted Average Costing Method 31 Treatment of Transferred-in Goods 32 Step 1: Physical Flow Analysis Treatment of Transferred-in Goods 33 Treatment of Transferred-in Goods Step 2: Calculation of Equivalent Units 34 Treatment of Transferred-in Goods Unit transferred-in cost= ($800 + $13,200) 280,000 = $0.05 Unit direct material cost= ($300 + $2,500) 280,000 = $0.01 Unit conversion costs= ($180 + $5,000) 259,000 = $0.02 Unit cost= $ $ $0.02 = $0.08 Step 3: Computation of Unit Cost 35 Treatment of Transferred-in Goods Step 4: Valuation of Inventories Cost of goods transferred out= $0.08 250,000 = $20,000 Transferred-in materials: $5.05 30,000$1,500 Direct materials: $0.01 30, Conversion costs: $0.02 9, Total cost$1,980 36 Treatment of Transferred-in Goods 37 Treatment of Transferred-in Goods 38 Operation Costing Operation costing A blend of job-order and process-costing procedures Job-order procedures to assign direct material costs to batches Process-costing procedures to assign conversion costs Applied to homogeneous products 39 Operation Costing 40 Operation Costing 41 Operation costing example Operation Costing 42 The following costs are collected from work orders: Operation costing example Operation Costing 43 1.Work in ProcessPicking4,000 Materials4,000 2.Work in ProcessPicking1,000 Conversion Costs Applied1, Work in ProcessEncapsulating5,000 Work in ProcessPicking 5,000 4.Work in ProcessEncapsulating3,000 Conversion Costs Applied3,000 Operation Costing Operation costing example continued 44 5.Work in ProcessBottling8,000 Work in ProcessEncapsulating8,000 6.Work in ProcessBottling1,500 Conversion Costs Applied1,500 7.Finished Goods9,500 Work in ProcessBottling9,500 The journal entries for Work Order #101 are not shown but would follow a similar pattern. Operation Costing Operation costing example 45 Appendix: Spoiled Units BWIP April 1 100,000 pounds, 40% complete (conversion) Direct materials$20,000 Direct labor10,000 Overhead30,000 EWIP April 30 50,000 pounds, 60% complete (conversion) 46 Appendix: Spoiled Units Completed and transferred out: 360,000 pounds Direct materials$211,000 Direct labor100,000 Overhead270,000 April spoilage 10,000 pounds 47 Appendix: Spoiled Units 48 Appendix: Spoiled Units 49 Appendix: Spoiled Units DM unit cost ($20,000 + $211,000) 420,000$0.55 CC unit cost ($40,000 + $370,000) 398, Total cost per equivalent unit$1.58 Cost of goods transferred out: Good units $1.58 360,000$568,800 Spoiled units ($0.55 10,000) + ($1.03 8,000) 13,740 Total cost per equivalent unit$582,540 Cost of ending work in process: ($0.55 50,000) + ($1.03 30,000)$58,400 50 Appendix: Spoiled Units 51 Appendix: Spoiled Units Abnormal spoilage 52 Appendix: Spoiled Units Abnormal spoilage COST MANAGEMENT Accounting & Control HansenMowenGuan 53 End Chapter 6