Systems Design: Process Costing. M. En C. Eduardo Bustos Farías

Systems Design: Process Costing M. En C. Eduardo Bustos Farías 1

Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Many units of of a single, homogeneous product flow evenly through a continuous production process. One unit of of product is is indistinguishable from any other unit of of product. Each unit of of product is is assigned the same average cost. 2

Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill Fabricación de papel 3

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

An Operational Process System Mixing Selecting Sifting Measuring Blending Tableting Loading Pressing Costing Bottling Loading Counting Capping Packaging 5

Quick Check Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors. 6

Job-Order Costing Estrella Company Manufacturing Costs Direct Materials Direct Labor Applied Overhead Job 205 Job 206 Job 207 Finished Goods Finished Goods Finished Goods 8

Process Costing Estrella Company Manufacturing Costs Direct Materials Direct Labor Applied Overhead Picking Tableting Bottling Finished Goods 9

Process Costing Dollar Amount Direct Labor Direct Materials Conversion Direct labor costs may be be small in in comparison to to other product costs in in process cost systems. Type of Product Cost 10

Process Costing Dollar Amount Direct Materials Conversion Direct labor costs may be be small in in comparison to to other product costs in in process cost systems. Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called conversion. 11

Comparing Job-Order and Process Costing Direct Materials Direct Labor Work in Process Finished Goods Manufacturing Overhead Cost of Goods Sold 12

Comparing Job-Order and Process Costing Direct Materials Costs are traced and applied to individual jobs in a job-order cost system. Direct Labor Jobs Finished Goods Manufacturing Overhead Cost of Goods Sold 13

Comparing Job-Order and Process Costing Direct Materials Costs are traced and applied to departments in a process cost system. Direct Labor Processing Department Finished Goods Manufacturing Overhead Cost of Goods Sold 14

Characteristics of Process Costing Homogeneous units pass through a series of similar processes. Each unit in each process receives a similar dose of manufacturing costs. Manufacturing costs are accumulated by a process for a given period of time. 15

Characteristics of Process Costing There is a work-in-process account for each process. Manufacturing cost flows and the associated journal entries are generally similar to job-order costing. The departmental production report is the key document for tracking manufacturing activity and costs. Unit costs are computed by dividing the departmental costs of the period by the output for the period. 16

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. 17

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. 18

Cost of Production Report 1. Analysis of the flow of physical units 2. Calculation of equivalent units 3. Computation of unit cost 4. Valuation of inventories (goods transferred out and ending work in process) 5. Cost reconciliation Unit Information Units to be accounted for: Units in beginning work in process 0 Units started and completed 24,000 Units to be accounted for 24,000 Physical Flow Equivalent Units Units accounted for: Units 20,000 20,000 20,000 Units in ending work in process (25% complete) 4,000 1,000 Units accounted for 24,000 Work completed 21,000 19

Cost of Production Report Unit Information Units to account for: Units in beginning work in process 0 Units started 24,000 Total units to account for 24,000 Units accounted for: Physical Flow Equivalent Units Units completed 20,000 20,000 Units in ending work in process (25% complete) 4,000 1,000 Units accounted for 24,000 Work completed 21,000 Continued 20

Cost of Production Report Cost Information Costs to account for: Beginning work in process $ 0 Incurred during the period 168,000 Total costs to account for 168,000 Divided by equivalent units 21,000 Cost per equivalent unit $ 8 Cost accounted for: Goods transferred out ($8 x 20,000) $160,000 Ending work in process ($8 x 1,000) 8,000 Total costs accounted for $168,000 21

Quick Check For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 22

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 24

Quick Check Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 25

PELICULA 27

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 mezcla period and current period. Antes de Let s see how this works! 28

Weighted Average Example Smith Company reported the following activity in Department A for the month of June: Percent Completed Units Materials 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% 29

Weighted Average Example Equivalent units are calculated as follows: Materials Conversion Units completed and transferred out of Department A in June 5,400 5,400 30

Weighted Average Example Equivalent units are calculated as follows: Materials 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 31

Weighted Average Example Equivalent units are calculated as follows: Materials 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 32

Weighted Average Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Materials 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 33

Weighted Average Example Materials 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% 34

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% 35

PELÍCULA 36

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 37

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 38

Production Report Production Report Section 1 Section 2 Section 3 A reconciliation of cost flows for the period, including: Total cost for units completed and transferred from the processing department. Total cost for partially completed units remaining in work in process. 39

Production Report Example Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Formado y molido 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. 40

Production Report Example Work in process, May 1: 200 units Materials: 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 Materials cost $ 368,600 Conversion cost 350,900 Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete. 41

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 Materials Conversion Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 42

Production Report Example Section 2: Compute cost per equivalent unit Total Cost Materials 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 45

Production Report Example Section 3: Cost Reconciliation Total Equivalent Units Cost Materials Conversion Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31 Total cost accounted for 48

Production Report Example Section 3: Cost Reconciliation 4,800 units @ $149.00 Total Equivalent Units Cost Materials Conversion Cost accounted for as follows: Transferred out during May $ 715,200 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100 Total work in process, May 31 Total cost accounted for 49

Production Report Example Section 3: Cost Reconciliation 160 units X $76.25 Total Equivalent Units Cost Materials Conversion 100 units X $72.75 Cost accounted for as follows: Transferred out during May $ 715,200 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100 Total work in process, May 31 19,475 Total cost accounted for $ 734,675 All costs accounted for 50

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 to batches as as in in job-order costing. Conversion costs assigned to to batches as as in in process costing. 51

PELÍCULA 52

Review exercise 53

1. Calcular las unidades equivalentes para el período actual utilizando el método de promedios ponderados. 54

2. Calculate equivalent units and understand how to use them. 56

Five Steps in Process Costing Step 1: Summarize the flow of physical units of output. Step 2: Compute output in terms of equivalent units. Step 3: Compute equivalent unit costs. Step 4: Summarize total costs to account for. Step 5: Assign total costs to units completed and to units in ending work in process inventory. 57

Physical Units (Step 1) Physical units Flow of Production Work in process, beginning 0 Started during current period 35,000 To account for 35,000 Completed and transferred out during current period 30,000 Work in process, ending (100%/20%) 5,000 Accounted for 35,000 58

Compute Equivalent Units (Step 2) Equivalent units Direct Conversion Flow of Production Materials Costs Completed and transferred out 30,000 30,000 Work in process, ending 5,000 (100%) 1,000 (20%) Current period work 35,000 31,000 59

Compute Equivalent Unit Costs (Step 3) Total production costs are $146,050. Direct Conversion Materials Costs $84,050 $62,000 Equivalent units 35,000 31,000 Cost per equivalent unit $2.4014 $2.00 60

Summarize and Assign Total Costs (Steps 4 and 5) Step 4: Total costs to account for: $146,050 Step 5: Assign total costs: Completed and transferred out 30,000 $4.4014 $132,043 Work in process, ending (5,000 units) Direct materials 5,000 $2.4014 12,007 Conversion costs 1,000 $2.00 2,000 Total $146,050 61

PELÍCULA 62

5. Lexguard Home Paiting 63

FIFO Costing Method Under the FIFO costing method, the equivalent units and manufacturing costs in beginning work in process are excluded from the currentperiod unit cost calculation. Thus, FIFO recognizes that the work and costs carried over from the prior period legitimately belong to that period. 69

FIFO Costing Method Estrella Company Mixing Department Production and Cost Data for October Production: Units in process, October 1, 70% complete 10,000 Units completed and transferred out 60,000 Units in process, October 31, 40% complete 20,000 Costs: Work in process, October 1: Direct materials $1,000 Conversion costs 350 Total work in process $1,350 Continued 70

Estrella Company Mixing Department Production and Cost Data for October Costs: Current costs: Direct materials $12,600 Conversion costs 3,050 Total current costs $15,650 71

FIFO Costing Method Step 1: Physical Flow Analysis Units to account for: Units, beginning work in process 10,000 Units started during October 70,000 Total units to account for 80,000 Units accounted for: Units completed and transferred out: Started and completed 50,000 From beginning work in process 10,000 60,000 Units in ending work in process (40% complete) 20,000 Total units accounted for 80,000 72

FIFO Costing Method Step 2: Calculation of Equivalent Units Direct Materials Conversion Costs Units started and completed 50,000 50,000 Add: Units in beginning work in process x percentage to complete: 10,000 x 0% materials --- 10,000 x 30% conversion 3,000 Add: Units in ending work in process x percentage complete: 20,000 x 100% materials 20,000 20,000 x 40% conversion 8,000 Equivalent units of output 70,000 61,000 73

FIFO Costing Method Step 3: Computation of Unit Cost Unit direct materials costs = $12,600/70,000 = $0.18 Unit conversion costs = $3,500/61,000 = $0.05 Unit cost = Unit materials cost + Unit conversion costs = $0.18 + $0.05 = $0.23 per ounce 74

FIFO Costing Method Step 4: Valuation of Inventories Cost of ending work in process: Direct materials ($0.18 x 20,000) $ 3,600 Conversion costs ($0.05 x 8,000) 400 Total $ 4,000 Units started and completed ($0.23 x 50,000) $11,500 Units, beginning work in process: Prior period costs $1,350 Cost to finish ($0.05 x 3,000) 150 1,500 Total $13,000 75

FIFO Costing Method Step 5: Cost Reconciliation Costs to account for: Beginning work in process $1,350 Incurred during the period: Direct materials $12,600 Conversion costs 3,050 15,650 Total costs to account for $17,000 Costs accounted for Goods transferred out: Units, beginning work in process $ 1,500 Units started and completed 11,500 Goods in ending work in process 4,000 Total costs accounted for $17,000 76

Estrella Company Mixing Department Production Report for October (FIFO Method) Units to account for: Units accounted for: Unit Information Units, beginning work Units completed 60,000 in process 10,000 Units started 70,000 Units, EWIP 20,000 Total units to account for 80,000 Total units accounted for 80,000 Equivalent Units Direct Conversion Materials Costs Units started and completed 50,000 50,000 Units, beginning work in process --- 3,000 Units, ending work in process 20,000 8,000 Equivalent units of output 70,000 61,000 Continued 77

Cost Information Costs to account for: Direct Conversion Materials Costs Total Beginning work in process $ 1,000 $ 350 $ 1,350 Incurred during the period 12,600 3,050 15,650 Total costs to account for $13,600 $ 3,400 $17,000 Costs per equivalent unit: Current costs $12,600 $ 3,050 Divided by equivalent units 70,000 61,000 Cost per equivalent unit $ 0.18 $ 0.05 $ 0.23 Continued 78

Costs accounted for: Units transferred out: Units, beginning work in process: From prior period $ 1.350 From current period ($0.05 x 3,000) 150 Units started and completed ($0.23 x 50,000) 11,500 $13,000 Ending work in process: Direct materials (20,000 x $0.18) $ 3,600 Conversion costs (8,000 x $0.05) 400 4,000 Total costs accounted for $17,000 79