Process Costing. Chapter 17 ACCT Fall Jay K. Baker, MSFS, MBA, CPA, CFP

Transcription

1 Process Costing Chapter 17 ACCT 3270 Fall 2016 Jay K. Baker, MSFS, MBA, CPA, CFP J. Keith Baker 2015

2 Job Costing Versus Process Costing LO 17-1 Identify the situations in which process-costing systems are appropriate. Job-Costing Systems Process-Costing Systems Distinct, identifiable units of a product or service Masses of identical or similar units of a product or service Examples: Custom-made machines, houses Examples: Food, chemical processing 17-2

3 Process Costing Process costing is a system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units. Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead. Unit costs are computed by dividing total costs incurred by the number of units of output from the production process.

4 More on job-vs-process-costing In a job-costing system, individual jobs use different quantities of resources, so it would be incorrect to cost each job at the same average production cost. In contrast, when identical or similar units of products or services are mass-produced, process costing is used to calculate an average production cost for all units produced. 17-4

5 Comparing Job Order and Process Operations A

6 Process-Costing Assumptions Process-costing systems separate costs into cost categories according to when costs are introduced into the process. Direct materials are added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line. Conversion costs are added equally along the production process. 17-6

7 Process-costing: three cases Let s look at the process-costing process three ways: 1.No beginning or ending work-in-process inventories. 2.No beginning work-in-process inventory and some ending work-in-process inventory. 3.Both beginning and ending work-in-process inventories are present. 17-7

8 Process costing case 1 When using process costing without any beginning or ending work-in-process inventory, all costs that were introduced to the process during the period will be assigned to the finished units leaving work-in-process inventory at the end of the period. Go to Page of your text. 17-8

9 Quick Check Serile Pharma places 900 units in production during the month of January. All 900 units are completed during the month. It had no opening inventory. Direct material costs added during January was $81,000 and conversion costs added during January was $9,000.What is the total cost per unit of the product produced during January? A) $100 B) $90 C) $80 D) $10 Total cost per unit = [($81,000 + $9,000) / 900] = $

10 Five-Step Process-Costing Allocation LO 17-3 Describe the five steps in process costing and calculate equivalent units Summarize the flow of physical units of output. Compute output in terms of equivalent units. Summarize total costs to account for. Compute cost per equivalent unit. Assign total costs to units completed and to units in ending work-in-process. 1710

11 Equivalent Units A derived amount of output units that: Takes the quantity of each input in units completed and in unfinished units of work in process and Converts the quantity of input into the amount of completed output units that could be produced with that quantity of input Are calculated separately for each input (direct materials and conversion cost) When calculating equivalent units in step 2, focus on quantities and disregard dollar amounts until after the equivalent units are computed 1711

12 Steps 1 and 2 Illustrated 1712

13 Steps 3, 4, and 5, Illustrated 1713

14 General Ledger Cost Flows Illustrated 1714

15 Quick Check In a process-costing system, the calculation of equivalent units is used for calculating. A) the dollar amount of sales affected during the period B) the dollar amount of the cost of goods sold for the accounting period C) the dollar price earned for a particular job D) the dollar amount of revenue for the period including the revenue estimated to be received from the sale of equivalent units 1715

16 Quick Check Charlie Chairs Inc., manufactures plastic moldings for car seats. Its costing system utilizes two cost categories, direct materials and conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Department A for February 2015 are: Work in process, beginning inventory, 40% converted 200 units Units started during February 800 units Work in process, ending inventory 100 units Costs for Department A for February 2015 are: Work in process, beginning inventory: Direct materials $150,000 Conversion costs $200,000 Direct materials costs added during February $600,000 Conversion costs added during February $425,000 What is the unit cost per equivalent unit of beginning inventory in Department A? A) $750 B) $1,750 C) $2,800 D) $3,250 Direct materials per unit ($150,000 / 200 units) 750 Conversion costs per unit ($200,000 / ( ) units) Total costs per unit $ 2,500 $3,

17 Quick Check When a Bakery transfers goods from the Mixing Department to the Baking Department, the accounting entry is. A) Work in Process Mixing Department Work in Process Baking Department B) Work in Process Baking Department Accounts Payable C) Work in Process Baking Department Work in Process Mixing Department D) Work in Process Mixing Department Accounts Payable 1717

18 Quick Check The purpose of the equivalent-unit computation is to. A) convert completed units into the amount of partially completed output units that could be made with that quantity of input B) assist the business in determining the cost assigned to ending inventory and work-in-process inventory C) predict the future production capabilities of the organization D) satisfy the GAAP requirements which requires all partially completed goods to be reported as equivalent-units 1718

19 Weighted-Average Process-Costing Method LO 17 4 Use the weighted average method and first-in, first-out (FIFO) method of process costing. Calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done) Assigns this cost to equivalent units completed and transferred out of the process, and to incomplete units in still-inprocess 1719

20 Weighted-Average Process-Costing Method Weighted-average costs is the total of all costs in the work-in-process account divided 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 period costs. 1720

21 Steps 1 and 2 Illustrated 1721

22 Steps 3, 4, and 5 Illustrated 1722

23 Result of the Process Two critical figures arise out of step 5 of the cost allocation process: The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory The ending balance of the work-in-process inventory account that will appear on the balance sheet 1723

24 Quick Check A production department's output for the most recent month consisted of 10,000 units completed and transferred to the next stage of production and 10,000 units in ending Work in Process inventory. The units in ending Work in Process inventory were 50% complete with respect to both direct materials and conversion costs. There were 1,000 units in beginning Work in Process inventory, and they were 70% complete with respect to both direct materials and conversion costs. Calculate the equivalent units of production for the month, assuming the company uses the weighted average method. A. 10,000 units. B. 10,300 units. C. 15,000 units. D. 15,300 units. E. 10,700 units. Feedback: Units completed and transferred to next stage Units in ending Work in Process inventory (10,000 * 50% complete) 10,000 units 5,000 units 15,000 units 1724

25 Quick Check Luker Corporation uses a process costing system. The company had $160,500 of beginning Finished Goods Inventory on October 1. It transferred in $837,000 of goods completed during the period. The ending Finished Goods Inventory balance on October 31 was $158,200. The entry to account for the cost of goods sold in October is: A. Debit Cost of Goods Sold $837,000; credit Finished Goods Inventory $837,000. B. Debit Cost of Goods Sold $839,300; credit Work in Process Inventory $839,300. C. Debit Finished Goods Inventory $837,000; credit Work in Process Inventory $837,000. D. Debit Finished Goods Inventory $158,200; credit Cost of Goods Sold $158,200. E. Debit Cost of Goods Sold $839,300; credit Finished Goods Inventory $839,300. Feedback: Cost of Goods Sold = Beginning FG + cost of goods manufactured Ending FG 160, , ,200 = $839,

26 Using Product Costing in a Process Industry Torrance Tape, Inc. (2T), manufactures adhesives and tapes. Production at 2T s Valley Plant takes place in three steps. 1. Compounding Department 2. Coating Department 3. Cutting and Packaging Department Warehouse 1726

27 Measure the Physical Flow of Resources (Step 1) Gallons of Compound a b Work in process, March 1 + Gallons of adhesive started Total gallons to account for 20,000a 92, ,000 =Transferred out to Coating Department + Work-in-process, March 31 Total units accounted for 96,000 16,000b 112,000 25% complete with respect to conversion costs 30% complete with respect to conversion costs 1727

28 Compute the Equivalent Units of Production (Step 2) Compounding Department, March: Equivalent Units Transferred out Work-in-process, March 31 Total work a Physical units Equivalent units Materials Conversion 96,000 16,000a 96,000 16, ,000 96,000 4, ,800 30% complete with respect to conversion costs 1728

29 Identify the Product Costs for Which to Account (Step 3) Costs: Work-in-process costs Current period costs Work (EU) Work-in-process EU* Current period EU Weighted average: FIFO: Weighted-Average Unit Costs (Work-in-process costs + Current period costs) (Work-in-process EU + Current period EU Work-in Process Unit Costs Current Period Unit Costs Work-in-process costs Work-in-process EU Current period costs Current period EU *Note: EU is equivalent unit. 1729

30 First-in, First-Out Process-Costing Method Assigns the cost of the previous accounting period s equivalent units in beginning workin-process inventory to the first units completed and transferred out of the process Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to started and completed new units, and lastly to units in ending work-in-process inventory 1730

31 First-in, First-Out Process-Costing Method A distinctive feature of FIFO process-costing method is that work done on beginning inventory is kept separate from work done in the current period. There is no blending of costs as we saw with the weighted-average method. 1731

32 Steps 1 and 2, Illustrated example, case 3, with beg & ending wip (FIFO) 1732

33 Steps 3, 4, and 5, Illustrated 1733

34 Result of the Process (As Before) Two critical figures arise out of step 5 of the cost-allocation process: The amount of the journal entry transferring the allocated cost of units completed and sent from work-in-process inventory to finished goods inventory The ending balance of the work-in-process inventory account that will appear on the balance sheet 1734

35 Quick Check A company uses the FIFO method for inventory costing. At the beginning of a period, the production department had 20,000 units in beginning Work in Process inventory which were 40% complete; the department completed and transferred 165,000 units. At the end of the period, 22,000 units were in the ending Work in Process inventory and are 75% complete. Compute the number of equivalent units produced by the department. A. 181,500. B. 165,000. C. 173,500. D. 145,000. E. 187,000. Equivalent Units Units to complete BGIP Started and completed Units in EGIP Equivalent units 20,000 * 60% 145,000 * 100% 22,000 *75% 12, ,000 16, ,

36 Comparing weighted-average and FIFO methods FIFO assumes that all the higher-cost units (from our example) from the previous period in beginning wip are the first to be completed and transferred out and that ending wip consists of only the lower-cost current-period units. The weighted-average method smooths out the cost per equivalent unit by assuming that more lower-cost units are transferred out and some higher-cost remain in ending wip. 1736

37 Comparing weighted-average and FIFO methods, concluded Managers use information from processcosting systems to make pricing and productmix decisions and understand how well a firm s processes are performing. FIFO provides managers with information about changes in the costs per unit from one period to the next. In a period of rising prices, the weightedaverage method will decrease taxes because cost of goods sold will be higher and operating income lower. 1737

38 Determining Which is Better: FIFO or Weighted-Average? Does not separate prior period and current period activities and costs. Separates prior period and current period activities and traces the prior period and current period costs to the respective units. 1738

39 Dealing With Transfer Costs LO 17 5 Apply process-costing methods to situation with transferred-in costs. Dealing with the norm that most processcosting systems have two or more departments or processes in the production cycle. How to assigns these costs as units move from department to department and their related costs are also transferred by journal entries. 1739

40 How Do We Account For Movement of Transferred Costs? Let s diagram it out: Now let s look at the Data for the Testing Department as follows: 1740

41 Transferred-In Costs Are costs incurred in previous departments that are carried forward as the products cost when it moves to a subsequent process in the production cycle. Also called previous department costs. Journal entries are made to mirror the progress in production from department to department. Transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process. 1741

42 Steps 1 and 2, Illustrated example for beginning and ending wip and transferred-in costs, weighted average 1742

43 Steps 3, 4, and 5, Illustrated 1743

44 Steps 1 and 2, Illustrated example for beg & ending wip and transferred-in costs, FIFO 1744

45 Steps 3, 4, and 5, Illustrated 1745

46 Points to remember about transferred-in costs Be sure to include the transferred-in costs from previous departments in your calculations. When calculating the costs to be transferred using the FIFO method, do not overlook costs that were in beginning wip which may now be part of the units transferred. Unit costs may fluctuate between periods so transferred units may contain batches accumulated at different costs (using FIFO). 1746

47 Points to remember about transferredin costs, concluded Those unit costs discussed in item #3 on the prior slide will be transferred to the next department at ONE AVERAGE UNIT cost. Units may be measured in different denominations in different departments (feet in one department and yards in another or kilos vs. liters). In this case, measurements must be converted to the correct measure. 1747

48 Measure the Physical Flow of Resources (Step 1) Gallons of Compound Work in process, March 1 + Gallons of adhesive started Total gallons to account for 20,000a 92, ,000 =Transferred out to Coating Department + Work-in-process, March 31 Total units accounted for 96,000 16,000b 112,000 25% complete with respect to conversion costs b 30% complete with respect to conversion costs a 1748

49 Compute the Equivalent Units of Production (Step 2) Compounding Department, March: Equivalent Units Transferred out Work-in-process, March 31 Total work Physical units Equivalent units Materials Conversion 96,000 16,000 96,000 16,000a 112,000 96,000 4,800b 100,800 16,000 units 100% (all materials added in beginning) b 16,000 units 30% a 1749

50 Identify the Product Costs for Which to Account (Step 3) Total costs Work in process, March 1 Current costs, March Total Materials costs Conversion costs $ 24,286 $ 16,160 $ 8, ,274 84, ,634 $322,560 $100,800 $221,

51 Compute the Cost per Equivalent Unit (Step 4) Total costs Total costs (Step 3) Materials costs Conversion costs $322,560 $100,800 $221,760 Total equivalent units (Step 2) Cost per equivalent unit 112, ,800 $ 0.90 $

52 Assign Product Costs to Batches of Work (Step 5) Total Transferred out: Equivalent units Cost per equivalent unit Cost assigned Work-in-process, March 31 Equivalent units Cost per equivalent unit Cost assigned Total cost assigned Materials costs Conversion costs 96,000 96,000 $ 0.90 $ 2.20 $297,600 $ 86,400 $211,200 16,000 4,800 $ 0.90 $ ,960 14,400 10,560 $322,560 $100,800 $221,

53 Quick Check The Swivel Chair Company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 145,000 chairs. During the month, the firm completed 175,000 chairs and transferred them to the Finishing Department. The firm ended the month with 18,000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Swivel. How many chairs were in inventory at the beginning of the month? Conversion costs are incurred uniformly over the production cycle. A) 8,000 chairs B) 18,000 chairs C) 38,000 chairs D) 48,000 chairs Beginning inventory = 18,000 chairs (ending inventory) + 175,000 chairs (finished and transferred during the month) 145,000 chairs (started production during the month) = 48,000 chairs 1753

54 Quick Check The Swivel Chair Company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 145,000 chairs. During the month, the firm completed 175,000 chairs and transferred them to the Finishing Department. The firm ended the month with 18,000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Swivel. What were the equivalent units for materials for February? A) 193,000 chairs B) 173,000 chairs C) 163,000 chairs D) 153,000 chairs Equivalent units for materials = 18,000 units (ending units) + 175,000 units (completed and transferred) = 193,000 units. 1754

55 Quick Check The Swivel Chair Company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 145,000 chairs. During the month, the firm completed 175,000 chairs and transferred them to the Finishing Department. The firm ended the month with 18,000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Swivel. What were the equivalent units for conversion costs for February if the beginning inventory was 70% complete as to conversion costs and the ending inventory was 40% complete as to conversion costs? A) 182,200 B) 152,200 C) 172,200 D) 162,200 Equivalent units for conversion costs for February = 175,000 units + 7,200 equivalent units = 182,200 units 1755

56 Quick Check A major advantage of using the FIFO process-costing method is that. A) FIFO makes the unit cost calculations simpler B) in contrast with the weighted-average method, FIFO is considered GAAP C) FIFO provides managers with information about changes in the costs per unit from one period to the next D) in the period of rising prices, it leads to lower operating income and lower tax payments, saving the company cash and increasing the company's value 1756

57 Quick Check Transferred-in costs are treated as if they are. A) conversion costs added at the beginning of the process B) costs of beginning inventory added at the beginning of the process C) direct labor costs added at the beginning of the process D) a separate direct material added at the beginning of the process 1757

58 Hybrid Costing Systems LO 17-6 Understand the need for hybrid-costing systems such as operation costing. Product-costing systems do not always fall neatly into either job-costing or process-costing categories. A Hybrid-costing system blends characteristics from both job-costing and process-costing systems. Many actual production systems are in fact hybrids. Examples include manufacturers of televisions, dishwashers, and washing machines, as well as Adidas who tend to use hybrid-costing systems

59 Hybrid-costing systems, concluded The hybrid-costing systems use process costing to account for the conversion costs and job costing for the material and customizable components. One specific type of hybrid-costing system is known as the Operation-Costing System 1759

60 Operation-costing system An operation is a standardized method or technique that is performed repetitively resulting in different finished goods. An operation-costing system is a hybridcosting system applied to batches of similar, but not identical, products. Within each operation, all product units are treated exactly alike, using identical amounts of the operation s resources. Managers find operation costing useful in cost management because operation costing focuses on control of physical processes or operations of a given production system. 1760

61 Quick Check Weighted-average method, equivalent units. Consider the following data for the assembly division of Fenton Watches, Inc.: The assembly division uses the weightedaverage method of process costing. Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule. 1761

62 Under the weighted-average method, equivalent units are calculated as the equivalent units of work done to date. The equivalent units of work effort performed for the Assembly Division for direct materials and conversion costs are: STEP 1: Summarize Output in Physical Units STEP 2: Compute Output in Equivalent Units

63 Quick Check Weighted-average method, assigning costs For the data in used previously, summarize total costs to account for, calculate cost per equivalent unit for direct materials and conversion costs, and assign total costs to units completed (and transferred out) and to units in ending work in process. STEP 3: Summarize Total Costs to Account For STEP 4: Compute Cost per Equivalent Unit STEP 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process 1763

64 Quick Check FIFO method, equivalent units. Suppose the assembly division at Fenton Watches, Inc., uses the FIFO method of process costing instead of the weighted-average method. Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule. STEP 1: Summarize Output in Physical Units Calculation not in the weighted average method STEP 2: Compute Equivalent Units done in current period 1764

65 Quick Check Managers find operation costing useful in cost management because it. A) often results in profit maximization B) results in cost minimization C) focuses on control of physical processes of a given production system D) uses job costing to account for the conversion costs and process costing for the material and customizable components 1765

66 Quick Check Which of the following companies is likely to use a hybridcosting system? A) Best Fit Corp., which manufactures pharmaceuticals B) Rida Corp., which processes and sells, after import, a single variant of Turkish marble to real estate companies C) Fast run, which sells a limited range of televisions, which go through similar manufacturing process D) Karoline Corp., which manufactures and sells a single model of cap 1766

67 Quick Check Pitt Enterprises manufactures jeans. All materials are introduced at the beginning of the manufacturing process in the Cutting Department. Conversion costs are incurred uniformly throughout the manufacturing process. As the cutting of material is completed, the pieces are immediately transferred to the Sewing Department. Information for the Cutting Department for the month of May follows. Work in Process, May 1 (50,000 units, 100% complete for direct materials, 40% complete with respect to direct labor and overhead; includes $70,500 of direct material cost; $34,050 of conversion costs). Units started in May 225,000 Units completed in May 200,000 Work in Process, May 31 (75,000 units, 100% complete for direct materials; 20% complete for conversion costs). Costs incurred in May Direct materials $342,000 Conversion costs $352,950 If Pitt Enterprises uses the FIFO method of process costing, compute the equivalent units for materials and conversion costs respectively for May. A. 225,000; 225,000. B. 200,000; 195,000 C. 275,000; 200,000 D. 225,000; 195,000 E. 200,000; 200,

68 Quick Check Pitt Enterprises manufactures jeans. All materials are introduced at the beginning of the manufacturing process in the Cutting Department. Conversion costs are incurred uniformly throughout the manufacturing process. As the cutting of material is completed, the pieces are immediately transferred to the Sewing Department. Information for the Cutting Department for the month of May follows. Work in Process, May 1 (50,000 units, 100% complete for direct materials, 40% complete with respect to direct labor and overhead; includes $70,500 of direct material cost; $34,050 of conversion costs). Units started in May 225,000 Units completed in May 200,000 Work in Process, May 31 (75,000 units, 100% complete for direct materials; 20% complete for conversion costs). Costs incurred in May Direct materials $342,000 Conversion costs $352,950 If Pitt Enterprises uses the FIFO method of process costing, compute the equivalent units for materials and conversion costs respectively for May. All 50,000 units in beginning Work in Process were already 100% complete with respect to direct materials. The information indicates 225,000 units were begun during May. Since direct materials are added at the beginning of the process, those units were 100% complete with respect to direct materials by the end of May. Therefore, the equivalent units of production for direct materials for May was 225,000. The 50,000 units in beginning Work in Process were only 40% complete with respect to conversion costs. Therefore, the remaining 60% or 30,000 units were completed in May as far as conversion costs are concerned. The information also indicates that 200,000 units were completed during May. That means that another 150,000 units were started and completed during May and were 100% complete with respect to conversion costs (200,000 50,000). Finally, there were 75,000 units in ending Work in Process inventory and those units were 20% complete with respect to conversion costs. 75,000 units * 20% = 15,000 units. Therefore, the total equivalent units of production for conversion costs during May were 30, , ,000 = 195,

69 End of Chapter