4-1 Chapter 4 Systems Design: Process Costing Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing F Many units of a single, homogeneous product flow evenly through a continuous production process. F One unit of product is indistinguishable from any other unit of product. F Each unit of product is assigned the same average cost.
4-2 Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill Differences Between Job- Order and Process Costing Job order costing Many jobs are worked during the period. Costs are accumulated by individual jobs. Job cost sheet is the key document. Unit cost computed by job. Process costing A single product is produced for a long period of time. Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department.
4-3 Process Costing Dollar Amount Direct Labor Direct Conversion Direct labor costs may be small in comparison to other product costs in process cost systems. Type of Product Cost Process Costing Dollar Amount Direct Conversion Direct labor costs may be small in comparison to other product costs in process cost systems. Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called conversion.
4-4 Comparing Job-Order and Process Costing Direct Direct Labor Work in Process Finished Goods Manufacturing Cost of Goods Sold Comparing Job-Order and Process Costing Direct Costs are traced and applied to individual jobs in a job-order cost system. Direct Labor Jobs Finished Goods Manufacturing Cost of Goods Sold
4-5 Comparing Job-Order and Process Costing Direct Costs are traced and applied to departments in a process cost system. Direct Labor Processing Department Finished Goods Manufacturing Cost of Goods Sold Process Cost Flows Let s look at cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials.
4-6 Process Cost Flows Raw Purchases Indirect Work in Process Department A Labor Manufacturing Actual Other Indirect Applied Work in Process Department B Process Cost Flows Wages Payable Manufacturing Actual Other Indirect Indirect Labor Labor Indirect Labor Applied Work in Process Department A Labor Work in Process Department B Labor
4-7 Process Cost Flows Manufacturing Actual Other Indirect Indirect Labor Applied Applied to Work in Process Work in Process Department A Labor Applied Work in Process Department B Labor Applied Process Cost Flows Next, transfer work from Department A to Department B.
4-8 Process Cost Flows Work in Process Department A Labor Applied Transferred to Dept. B Work in Process Department B Labor Applied Transferred from Dept. A Process Cost Flows Now let s complete the goods in Department B and sell them.
4-9 Process Cost Flows Work in Process Department B Labor Applied Transferred from Dept. A Cost of Goods Manufactured Cost of Goods Sold Cost of Goods Sold Finished Goods Cost of Goods Manufactured Cost of Goods Sold Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.
4-10 Equivalent Units of Production Two half completed products are equivalent to one completed product. + = 1 So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit = Costs for the period Equivalent units of production for the period
4-11 Equivalent Units of Production Weighted Average Method The weighted average method... Makes no distinction between work done in prior and current period. Blends together units and costs from prior period and current period. Let s see how this works! Weighted Average Example Smith Company reported the following activity in Department A for the month of June: Percent Completed Units Conversion Work in process, June 1 300 40% 20% Units started into production in June 6,000 Units completed and transferred out 5,400 of Department A during June Work in process, June 30 900 60% 30%
4-12 Weighted Average Example Equivalent units are calculated as follows: Conversion Units completed and transferred out of Department A in June 5,400 5,400 Weighted Average Example Equivalent units are calculated as follows: Conversion Units completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30: 900 units 60% 540 Equivalent units of Production in Department A during June 5,940
4-13 Weighted Average Example Equivalent units are calculated as follows: Conversion Units completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30: 900 units 60% 540 900 units 30% 270 Equivalent units of Production in Department A during June 5,940 5,670 Weighted Average Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Conversion Units completed and transferred out of Department A in June 5,400 5,400 Work in process, June 30: 900 units 60% 540 900 units 30% 270 Equivalent units of Production in Department A during June 5,940 5,670
4-14 Weighted Average Example 6,000 Units Started Beginning Work in Process 300 Units 40% Complete 5,100 Units Started and Completed Ending Work in Process 900 Units 60% Complete 5,400 Units Completed 540 Equivalent Units 5,940 Equivalent units of production 900 60% Weighted Average Example Conversion 6,000 Units Started Beginning Work in Process 300 Units 20% Complete 5,100 Units Started and Completed Ending Work in Process 900 Units 30% Complete 5,400 Units Completed 270 Equivalent Units 5,670 Equivalent units of production 900 30%
4-15 Production Report Shows the flow of units and costs through work in process Provides cost information for financial statements Production Report Becomes the job cost sheet in process costing Helps managers control their departments Production Report Production Report Section 1 Section 2 A quantity schedule showing the flow of units and the computation of equivalent units. A computation of cost per equivalent unit. Section 3
4-16 Production Report Production Report Section 1 Section 2 Section 3 A reconciliation of cost flows for the period, including: vtotal cost for units completed and transferred from the processing department. vtotal cost for partially completed units remaining in work in process. Production Report Example Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. Double Diamond uses the weighted average cost procedure. Using the following information for the month of May, let s prepare a production report for Shaping and Milling.
4-17 Production Report Example Work in process, May 1: 200 units : 55% complete. $ 9,600 Conversion: 30% complete. 5,575 Production started during May: Production completed during May: 5,000 units 4,800 units Costs added to production in May cost $ 368,600 Conversion cost 350,900 Work in process, May 31: 400 units 40% complete. Conversion 25% complete. Production Report Example Section 1: Quantity Schedule with Equivalent Units Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200 Equivalent units Conversion Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400
4-18 Production Report Example Section 1: Quantity Schedule with Equivalent Units Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200 Equivalent units Conversion Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 40% complete 160 5,200 4,960 Production Report Example Section 1: Quantity Schedule with Equivalent Units Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200 Equivalent units Conversion Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 40% complete 160 Conversion 25% complete 100 5,200 4,960 4,900
4-19 Production Report Example Section 2: Compute cost per equivalent unit Total Cost Conversion Cost to be accounted for: Work in process, May 1 $ 15,175 $ 9,600 $ 5,575 Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost $ 734,675 $ 378,200 $ 356,475 Equivalent units 4,960 4,900 Cost per equivalent unit Production Report Example Section 2: Compute cost per equivalent unit Total Cost Conversion Cost to be accounted for: Work in process, May 1 $ 15,175 $ 9,600 $ 5,575 Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost $ 734,675 $ 378,200 $ 356,475 Equivalent units 4,960 4,900 Cost per equivalent unit $ 76.25 $378,200 4,960 units = $76.25
4-20 Production Report Example Section 2: Compute cost per equivalent unit Total Cost Conversion Cost to be accounted for: Work in process, May 1 $ 15,175 $ 9,600 $ 5,575 Costs added in the Shipping and Milling Department 719,500 368,600 350,900 Total cost $ 734,675 $ 378,200 $ 356,475 Equivalent units 4,960 4,900 Cost per equivalent unit $ 76.25 $ 72.75 Total cost per equivalent unit = $76.25 + $72.75 = $149.00 $356,475 4,900 units = $72.75 Production Report Example Section 3: Cost Reconciliation Total Equivalent Units Cost Conversion Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: 160 Conversion 100 Total work in process, May 31 Total cost accounted for
4-21 Production Report Example Section 3: Cost Reconciliation 4,800 units @ $149.00 Total Equivalent Units Cost Conversion Cost accounted for as follows: Transferred out during May $ 715,200 4,800 4,800 Work in process, May 31: 160 Conversion 100 Total work in process, May 31 Total cost accounted for Production Report Example Section 3: Cost Reconciliation 160 units @ $76.25 Total Equivalent Units Cost Conversion 100 units @ $72.75 Cost accounted for as follows: Transferred out during May $ 715,200 4,800 4,800 Work in process, May 31: 12,200 160 Conversion 7,275 100 Total work in process, May 31 19,475 All costs Total cost accounted for $ 734,675 accounted for
4-22 Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Process Costing Material Costs Charged to batches as in job-order costing. Conversion costs assigned to batches as in process costing. Do You Want to See Journal Entries? I m going to end this chapter and process some leisure time, unless you want to see some journal entries.
4-23 Process Costing Typical Accounting Entries Let s look at the accounting journal entries for a process cost system. We ll omit the numbers so that we can focus on concepts. Process Costing Typical Accounting Entries Date Description Raw Accounts Payable To record the purchase of material. GENERAL JOURNAL Page 4 Post. Ref. Debit Credit
4-24 Process Costing Typical Accounting Entries Date Description Raw Accounts Payable To record the purchase of material. GENERAL JOURNAL Page 4 Post. Ref. Debit Credit Work in Process - Department A Work in Process - Department B Raw To record the use of direct material. Process Costing Typical Accounting Entries Date Description Work in Process - Department A Work in Process - Department B Salaries and Wages Payable To record direct labor costs. GENERAL JOURNAL Page 4 Post. Ref. Debit Credit
4-25 Process Costing Typical Accounting Entries Date Description Work in Process - Department A Work in Process - Department B Manufacturing To apply overhead to departments. GENERAL JOURNAL Page 4 Post. Ref. Debit Credit Process Costing Typical Accounting Entries Date Description Work in Process - Department B Work in Process - Department A To record the transfer of goods from Department A to Department B. GENERAL JOURNAL Page 4 Post. Ref. Debit Credit
4-26 Process Costing Typical Accounting Entries Date Description Finished Goods Work in Process - Department B To record the completion of goods and their transfer from Department B to finished goods inventory. GENERAL JOURNAL Page 4 Post. Ref. Debit Credit Process Costing Typical Accounting Entries Date Description Accounts Receivable Sales To record sales on account. GENERAL JOURNAL Page 4 Post. Ref. Debit Credit Cost of Goods Sold Finished Goods To record cost of goods sold.
4-27 End of Chapter 4