process costing
DESCRIPTION
Process CostingTRANSCRIPT
Slide 1
CHAPTER 3
Process Costing
1
Difference Between Job-Order and Process Costing Systems
Job-Order Costing
Each unique product or batch is considered a job for which cost information is needed
Necessary to trace manufacturing costs to specific jobs
When completed, cost of job is removed from Work in Process and included in Finished Goods
Slide 3-2
2
Difference Between Job-Order and Process Costing Systems
Process Costing
Large quantities produced of homogenous products
Average cost = total costs divided by total number of items produced
When completed, number of units completed times average cost determines cost to be moved from WIP to Finished Goods
Slide 3-3
3
Which of the following characteristics are associated with a process costing system?
Heterogeneous products
Homogeneous products
Answer: b
Slide 3-4
Review 1
4
Which of the following characteristics are associated with a process costing system?
Continuous production
Discontinuous production
Answer: a
Slide 3-5
Review 2
5
Which of the following characteristics are associated with a process costing system?
Costs are traced to jobs
Costs are traced to processing departments
Answer: b
Slide 3-6
Review 3
6
Type of Costing Used
Slide 3-7
7
An example of a business requiring a process costing system would be a(n):
Custom cabinet shop
Antique furniture restorer
Soap manufacturer
Automobile repair shop
Answer: c
A soap manufacturer produces many identical units
Slide 3-8
Review 4
8
Job-Order Costing System
Slide 3-9
9
Process Costing System
Slide 3-10
10
Cost Flows through Departments
Manufacturing operations typically pass through two or more departments
Costs are accumulated in each department
Easy to identify when materials are added
Harder to identify when labor and overhead are added
-Often grouped together as conversion costs
-Assumed to be added evenly
Slide 3-11
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
11
The costs in a process costing system are traced to:
Specific jobs
Specific customers
Specific company administrators
Specific production departments
Answer: d
Specific production departments
Slide 3-12
Review 5
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
12
Cost Flows through Accounts
Direct Material
Suppose that $142,000 of direct materials are used
Journal entry:
Slide 3-13
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
13
Cost Flows through Accounts
Direct Labor
Suppose that $62,200 of direct labor costs are incurred
Journal entry:
Slide 3-14
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
14
Cost Flows through Accounts
Manufacturing Overhead
Suppose manufacturing overhead is applied at a rate of $3 per direct labor dollar
Journal entry:
Slide 3-15
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
15
Cost Flows through Accounts
Transferred-in Cost
When a department completes its work, the items are transferred to the next department
Related costs are transferred as well
Suppose the Mixing Department completed units with a cost of $360,000
Slide 3-16
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
16
Flow of Costs Between Processing Departments
Slide 3-17
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
17
Calculating Unit Cost
Equivalent Units
Partially completed units are converted to a comparable number of completed units, called equivalent units
e.g. 100 units that are 50% complete are equivalent to 50 complete units (100 x 50%)
Equivalent units may be different for material and conversion costs if materials and conversion costs enter production at different times.
Slide 3-18
Learning objective 2: Discuss the concept of an equivalent unit
18
Equivalent Units Material and Conversion Costs
Slide 3-19
Learning objective 2: Discuss the concept of an equivalent unit
19
Beginning Work in Process 500 units
% complete = 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete = 85% materials, 50% conversion
Calculate equivalent units for materials
Slide 3-20
Exercise 1
Learning objective 2: Discuss the concept of an equivalent unit
20
Beginning Work in Process 500 units
% complete: 65% materials, 45% conversion
Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete: 85% materials, 50% conversion
Calculate equivalent units conversion
Slide 3-21
Exercise 2
Learning objective 2: Discuss the concept of an equivalent unit
21
Calculating Unit Cost
Cost Per Equivalent Unit
The average unit cost is referred to as cost per equivalent unit
Slide 3-22
Learning objective 3: Calculate the cost per equivalent unit
22
Calculating Cost per Equivalent Unit
Mixing Department
Beginning Work in Process: 10,000 gallons that are 80% complete
-Direct material costs = $18,000
-Direct labor =$7,80
-Overhead = $23,400
70,000 gallons started, 60,000 gallons completed
-Direct material costs = $142,000
-Direct labor cost = $62,200
- Overhead cost = $186,600
Slide 3-23
Learning objective 3: Calculate the cost per equivalent unit
23
Cost per EU Mixing Department
Slide 3-24
Learning objective 3: Calculate the cost per equivalent unit
24
Equivalent units(EU):
Materials =2,650EU, conversion=2,755EU
Costs in beginning Work in Process
Materials = $3,180, conversion = $3,306
Costs incurred:
Materials = $18,020, conversion = $13,224
Calculate materials cost/equivalent unit
Slide 3-25
Exercise 3
Learning objective 3: Calculate the cost per equivalent unit
25
Equivalent units (EU):
Materials = 2,650EU, conversion = 2,755EU
Costs in beginning Work in Process
Materials = $3,180, conversion = $3,306
Costs incurred:
Materials = $18,020, conversion = $13,224
Calculate conversion cost/equivalent unit
Slide 3-26
Exercise 4
Learning objective 3: Calculate the cost per equivalent unit
26
Costs Transferred Out
60,000 gallons completed by the Mixing Department
Unit cost is $6 per gallon
$360,000 (60,000 X $6) of cost transferred to the Packaging Department
Slide 3-27
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department
27
Ending Work in Process
Slide 3-28
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department
28
Summary of Cost Activity Mixing Department
Slide 3-29
Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department
29
Production Cost Report
Slide 3-30
Reconciliation of Units
Learning objective 5: Describe a production cost report
30
Production Cost Report
Slide 3-31
Reconciliation of Costs
Learning objective 5: Describe a production cost report
31
Basic Steps in Process Costing
Step 1: Account for the number of physical units
Step 2: Calculate the cost per equivalent unit for materials, labor, and overhead
Step 3: Assign cost to items completed and items in ending Work in Process
Step 4: Account for the amount of product cost
Slide 3-32
Learning objective 5: Describe a production cost report
32
Dealing with Transferred-In Cost
Packaging Department summary:
Beginning Work in Process 15,000 gallons 50% through packaging operationCosts in WIP: materials $10,500, labor $4,500, $9,000 overhead, $92,250 transferred in
Units transferred in 60,000 gallons with $360,000 transferred in costCosts added: Materials $49,500, labor $27,900, $55,800 overhead
Ending Work in Process 5,000 gallons 40% through packaging operation
Slide 3-33
Learning objective 5: Describe a production cost report
33
Production Cost Report Packaging Department
Slide 3-34
Learning objective 5: Describe a production cost report
34
Production Cost Report Packaging Department
Slide 3-35
Learning objective 5: Describe a production cost report
35
Production Cost Report Packaging Department
Slide 3-36
Learning objective 5: Describe a production cost report
36
Process Costing and Incremental Analysis
Slide 3-37
A company has no beginning or ending Work in Process
Assume materials and labor variable, manufacturing overhead fixed
Cost summary:
Learning objective 5: Describe a production cost report
37
Process Costing and Incremental Analysis
Slide 3-38
Decreasing price to $2.90 will increase demand to 275,000 units
$2.90 is less than equivalent cost per unit
Incremental analysis: profit will increase
Learning objective 5: Describe a production cost report
38
You Get What You Measure
Slide 3-39
39
(date)Work in Process, Mixing142,000
Raw Materials142,000
To record use of raw material
(date)Work in Process, Mixing62,200
Wages Payable62,200
To record direct labor cost
(date)Work in Process, Mixing186,600
Manufacturing Overhead186,600
To record manufacturing overhead applied to
Work in Process
(date)Work in Process, Packaging360,000
Work in Process, Mixing360,000
To record transfer of units
Units finished2,500 X 100%2,500
Ending Work in Process300 X 85%255
Equivalent Units - Materials2,755
Units finished2,500 X 100%2,500
Ending Work in Process300 X 50%150
2,650 Equivalent Units - Conversion Costs
Costs in beginning WIP3,180
Materials costs incurred18,020
Total materials cost21,200
$21,200 / 2,650 EU8 per EU
Costs in beginning WIP3,306
Conversion costs incurred13,224
Total conversion cost16,530
$16,530 / 2,755 EU6 per EU