Systems Design: Process Costing 110904

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Systems DesignProcess Costing11/09/04
Chapter 4
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Types of Costing Systems Used to Determine
Product Costs
Job-orderCosting
ProcessCosting

• Many units of a single, homogeneous product
  flow evenly through a continuous production
  process. (like gasoline, soda, paper)
• One unit of product is indistinguishable from
  any other unit of product. (like a potato
  chip)
• Each unit of product is assigned the same
  average cost.

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Types of Costing Systems Used to Determine
Product Costs
Job-orderCosting
ProcessCosting

• Typical process cost applications
• Petrochemical refinery
• Paint manufacturer
• Paper mill

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Differences Between Job-Order and Process Costing

• Job order costing
• Many products are produced 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.

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Process Costing
DirectMaterials
Direct labor costsmay be smallin comparison
toother product costs in processcost
systems. More automated.
Conversion
Dollar Amount
Type of Product Cost
So, direct labor and manufacturing overhead are
oftencombined into one product cost called
conversion.
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Comparing Job-Orderand Process Costing
Costs are traced andapplied to individualjobs
in a job-ordercost system.
Direct Materials
FinishedGoods
Jobs
Direct Labor
ManufacturingOverhead
Cost of GoodsSold
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Comparing Job-Orderand Process Costing
Costs are traced and applied to departments in a
process cost system.
Direct Materials
FinishedGoods
Processing Departments
Direct Labor
ManufacturingOverhead
Cost of GoodsSold
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Process Cost Systems

• Exh. 4-2 Sequential Processing, p.152
• Exh. 4-3 Parallel Processing, p. 153
• Exh. 4-4 T-Account Model, p. 154
• Exh. 4-5 Double Diamond, p. 156

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Process Cost Flows
Lets look at cost flows in a process cost system
with Departments A and B.We will useT-accounts
andstart with materials.
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Process Cost Flows
Work in Process Department A
Raw Materials

• DirectMaterials

• Direct Materials

• Purchases

• Indirect Materials

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• IndirectMaterials

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Process Cost Flows
Work in Process Department A
Wages Payable

• Direct Materials

• Direct Labor

• Direct Labor

• IndirectLabor

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• Direct Labor

• IndirectMaterials

• IndirectLabor

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Process Cost Flows(MOH is applied using
Departmental rates)
Work in Process Department A

• Direct Materials

• Direct Labor

• AppliedOverhead

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• OverheadApplied to Work inProcess
• POHR

• Direct Labor

• IndirectMaterials

• AppliedOverhead

• IndirectLabor

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Process Cost Flows
Next, transfer workfrom Department Ato
Department B.
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Process Cost Flows
Work in Process Department B
Work in ProcessDepartment A

• Direct Materials

Transferred to Dept. B

• Direct Materials

• Direct Labor

• Direct Labor

• AppliedOverhead

• AppliedOverhead

• Transferred from Dept. A

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Process Cost Flows
Now lets completethe goods inDepartment Band
sell them.
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Process Cost Flows
Work in Process Department B
Finished Goods

• Direct Materials

• Cost of Goods Manufactured

• Cost of GoodsSold

• Direct Labor

• AppliedOverhead

• Transferred from Dept. A

Cost of Goods Sold

• Cost of GoodsSold

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Equivalent Units of Production(Accounting for
partially completed units in WIP)
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.
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Equivalent Units of Production
Two half completed products are equivalent to one
completed product.
So, 10,000 units 70 percent completeare
equivalent to 7,000 complete units. Assume
linearity in costs and units
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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
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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
10,000 units (5,000 units 0.30) 11,500
equivalent units
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Calculating and Using Equivalent Units of
Production

• To calculate the cost perequivalent unit for the
  period

Cost perequivalent unit
Costs for the periodEquivalent units of
productionfor the period

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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. 2.4
0 c. 2.76 d. 2.90
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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. 2.4
0 c. 2.76 d. 2.90
27,600 11,500 equivalent units 2.40 per
equivalent unit
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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.

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Weighted Average Method

• Equivalent units of production Units completed
  and transferred to the next department (10,000)
  equivalent units in ending WIP (1,500)

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Weighted Average Example

• Smith Company reported the following activity in
  Department A for the month of June

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Weighted Average Example

• Equivalent units are calculated as follows

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Weighted Average Example

• Equivalent units are calculated as follows

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Weighted Average Example

• Equivalent units are calculated as follows

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Weighted Average Example
Equivalent units of production always equals
Units completed and transferred
Equivalent units remaining in work in process
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Production Report
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Production Report
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Production Report

• 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.

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Production Report ExamplePage 160

• 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, lets prepare a production report for
  Shaping and Milling.

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Production Report Example

• Work in process, May 1 200 units
• Materials 55 complete. 9,600
• Conversion 30 complete. 5,575
• Production started during May 5,000 units
• Production completed during May 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.

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Production Report Example
Section 1 Quantity Schedule with Equivalent
Units
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Production Report Example
Section 1 Quantity Schedule with Equivalent
Units
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Production Report Example
Section 1 Quantity Schedule with Equivalent
Units
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Production Report Example
Section 2 Compute cost per equivalent unit
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Production Report Example
Section 2 Compute cost per equivalent unit
378,200 4,960 units 76.25
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Production Report Example
Section 2 Compute cost per equivalent unit
356,475 4,900 units 72.75
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Production Report Example
Section 3 Cost Reconciliation
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Production Report Example
Section 3 Cost Reconciliation
4,800 units _at_ 149.00
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Production Report Example
Section 3 Cost Reconciliation
160 units _at_ 76.25
100 units _at_ 72.75
All costs accounted for (See VG 41)
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Do You Want to SeeJournal Entries?
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End of Chapter 4