Don R. Hansen

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COST MANAGEMENT

• Don R. Hansen
• Maryanne M. Mowen

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Chapter Five
Product and Service Costing A Process Systems
Approach
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Learning Objectives

• Describe the basic characteristics of process
  costing, including cost flows, journal entries,
  and the cost of production report.
• Describe process costing for settings without
  work in process inventories.
• Define equivalent units, and explain their role
  in process costing.

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Learning Objectives (continued)

• Prepare a departmental production report using
  the FIFO method.
• Prepare a departmental production report using
  the weighted average method.
• Prepare a departmental production report with
  transferred-in goods and changes in output
  measures.
• Describe the basic features of operation costing.

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Comparison of Job-Order andProcess Costing

• Job-Order Costing Process Costing
• 1. Wide variety of distinct 1. Homogeneous
  products products
• 2. Cost accumulated by job 2. Costs accumulated
  by process or department
• 3. Unit cost computed by 3. Unit cost computed
  by dividing total job costs dividing process
  costs of by units produced on that the period
  by the units job produced in the period

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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 for a process
  for a given period of time.

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Characteristics of Process Costing (continued)

• 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.

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Process Costing Cost Flow
Direct Materials Direct Labor Applied Overhead
Picking
Encapsulating
Bottling
Finished Goods
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Service Organization Without Work in Process
Inventories

• To illustrate how services without work in
  process inventories are costed using a process
  approach, consider the teeth cleaning process
  offered by most dentists.
• The production costs and the number of cleanings
  (patients served) for the month of March are
  given below
• Direct materials 200
• Hygienist salary 2,500
• Overhead 1,800
• Total production cost 4,500
• Number of cleanings 300
• Unit cost 4,500/300 15 per cleaning

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Steps for Costing Out Productionin Process
Costing

• 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

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A Cost Analysis
1,000 units - 5,000 materials added 10,000
conversion costs added
1,500 units - 8,000 materials added 13,000
conversion costs added
Costs added to EWIP
Cost added to BWIP
Work in Process
Cost of Units Started
Cost of Units Completed
10,000 units 23,000 matl added 120,175
conversion cost added
9,500 units
Input Costs Output
Costs 158,175
158,175
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The Concept of Equivalent Units
1,000 units - 20 materials added 60 conversion
costs added
1,500 units - 1/3 materials added 50
conversion costs added
Units in BWIP
Units in EWIP
Work in Process
Units Completed
Units Started
10,000 units
9,500 units
Units of Input
Units of Output Units in BWIP Units Started
Units in EWIP Units Completed
1,000 10,000 1,500 9,500
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The Concept of Equivalent Units (continued)

Equivalent Units Calculation
Materials Conversion Costs Units Completed
9,500 9,500 Ending WIP
500 750 Total Units Processed 10,000
10,250 Beg. WIP Inventory (200) (600) Units
Processed This Period
9,800 9,650 Equivalent
units for weighted average (total units worked
on) Equivalent units for FIFO (units worked
on this period)
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ExampleNo Beginning Inventory

• Materials are added at the beginning of the
  process.
• Units started 24,000
• Units completed and transferred out 20,000
• Units in process, May 31, 25 complete 4,000
• Costs
• 
  
  Cost Added
• Materials 126,000
• Conversion Costs 42,000

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ExampleNo Beginning Inventory (continued)

• Step 1 - Physical Flow
• Units to account for
• Units, BWIP 0
• Units started 24,000
• Total 24,000
• Units accounted for
• Units completed 20,000
• Units, EWIP 4,000
• Total 24,000

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ExampleNo Beginning Inventory (continued)

• Step 2 - Equivalent units
• Materials Conversion
• Units completed 20,000 20,000
• EWIP 4,000 1,000
• Total Equivalent Units 24,000 21,000

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ExampleNo Beginning Inventory (continued)

• Step 3 - Unit Cost
• Unit Cost 126,000/24,000 42,000/21,000
• 5.25 2.00
• 7.25

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ExampleNo Beginning Inventory (continued)

• Step 4 - Valuation of Inventories
• Goods Transferred Out
• 7.25 x 20,000 145,000
• Ending Work in Process
• (5.25 x 4,000) (2.00 x 1,000 23,000

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ExampleNo Beginning Inventory (continued)

• Step 5 - Cost Reconciliation
• Cost Assigned
• Goods transferred 145,000
• EWIP 23,000
• 168,000
• Cost to Account For
• BWIP 126,000
• Cost added 42,000
• 168,000

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FIFO Costing Example

• 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
• Materials 1,000
• Conversion costs 350
• Total work in process 1,350
• Current costs
• Materials 12,600
• Conversion costs 3,050
• Total current costs 15,650

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FIFO Costing Method

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

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FIFO Costing (continued)
Step 1- Physical Flow Analysis Inputs
Outputs BWIP 10,000 EW
IP 20,000 Started 70,000 Completed
60,000 Total 80,000 Total 80,000

Step one is the same for weighted average and
FIFO
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FIFO Costing (continued)
Step 2 - Calculation of Equivalent Units
Materials Conversion EWIP
20,000 8,000 Completed
60,000 60,000 Units Worked
On in Total 80,000 68,000 BWIP
10,000 7,000 Units Worked On
this Period 70,000 61,000
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FIFO Costing (continued)
Step 3 - Computation of Unit Cost Calculation
Materials Conversion Total Beginning WIP
1,000 350 1,350 Added this period
12,600 3,050 15,650 Total 13,600
3,400 17,000 Added this period 12,600
3,050 15,650 Equivalent units ? 70,000 ?
61,000 Unit cost 0.18 0.05
0.23
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FIFO Costing (continued)
Step 4 - Value of Goods Completed and EWIP
(Short-cut method) Total Input Costs
17,000 Less EWIP Materials (20,000 x
0.18) 3,600 Conversion Cost (8,000 x 0.05)
400 4,000 Cost of Goods Completed
13,000
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FIFO Costing (continued)
Step 5 - Cost Reconciliation
Manufacturing costs are reconciled as
follows Costs to account for Beginning
work in process 1,350 Incurred during the
period 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
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Journal Entries

• Work in Process--Mixing 12,600 Materials 12,600
  To record requisitions of materials for October.
• Work in Process--Mixing 3,050 Conversion Cost
  Control 3,050 To record the application of
  overhead and incurrence of direct labor.
• Work in Process--Tableting 13,000 Work in
  Process--Mixing 13,000 To record the transfer of
  cost of goods completed from Mixing to Tableting.

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Weighted Average Costing
Step 1- Physical Flow Analysis Inputs
Outputs BWIP 10,000 EW
IP 20,000 Started 70,000 Completed
60,000 Total 80,000 Total 80,000

Step one is the same for weighted average and
FIFO
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Weighted Average Costing (continued)
Step 2 - Calculation of Equivalent Units
Materials Conversion EWIP
20,000 8,000 Completed
60,000 60,000 Equivalent
units 80,000 68,000
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Weighted Average Costing (continued)
Step 3 - Computation of Unit Cost Calculation
Materials CC Total Beginning WIP 1,000
350 1,350 Added this period 12,600
3,050 15,650 Total 13,600
3,400 17,000 Equivalent units ? 80,000 ?
68,000 Unit cost 0.17 0.05
0.22
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Weighted Average Costing (continued)
Step 4 - Valuation of Inventories Cost of
Goods Transferred Out (0.22 x 60,000 )
13,200 Ending Work in Process Materials
( 0.17 x 20,000) 3,400 Conversion (0.05 x
8,000) 400 3,800 Total

17,000
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Basics of Operation Costing

• Operation costing is a blend of job and process
  costing procedures applied to batches of
  homogeneous products. This costing system uses
  job-order procedures to assign materials costs to
  batches and process procedures to assign
  conversion costs.
• Work orders are used to collect production costs
  for each batch.

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End of Chapter 5