Chapter 21 continued

1
Chapter 21 (continued)

• LO 4,5,6,7

2
The Process Costing System

• Objective 4
• Explain product flow and cost flow in a process
  costing system

3
The Process Costing System

• Used by companies that
• Produce large amounts of similar products or
  liquid products
• Have long, continuous production runs of
  identical products
• Tracking costs to individual products in a
  continuous flow environment would be too
  difficult and too expensive
• Also, would not result in significantly different
  product costs

4
The Process Costing System (contd)

• Because products are alike, they should cost the
  same to produce
• A process costing system accumulates costs and
  assigns them to products as they are produced
  during a particular period

5
Patterns of Product Flows and Cost Flows

• When using process costing, the steps in
  processing can be combined in hundreds of
  different ways
• Two basic production flows
• The completed product from one department becomes
  the direct materials for the next department
• Two separate products are each developed in their
  own department and then joined with a third
  direct material in another department

6
Production Flows for Process Costing
7
Patterns of Product Flows and Cost Flows

• Steps describing the production flow during the
  manufacture of computer chips
• Producing the silicon wafer
• Fabricating the chips
• Final testing, assembly, and packaging of chips

8
Product Flows in a Process Costing System for
Computer Chip Making
9
Patterns of Product Flows and Cost Flows

• Costs are accumulated as the product passes
  through each manufacturing process, department,
  or work cell and passed on to the next
  manufacturing process, department, or work cell
• At the end of every accounting period, the system
  generates a process cost report

10
Process Cost Report

• Assigns the costs that have accumulated during
  the period to the units that
• Have transferred out of the process, department,
  or work cell
• Are still work in process
• Used to assign costs using the FIFO costing method

11
FIFO Costing Method

• Cost flow follows the logical physical flow of
  production
• Costs assigned to first materials processed are
  the first costs transferred out when the
  materials flow to the next process, department,
  or work cell

12
Cost Flows Through the Work in Process Inventory
Accounts

• Work in Process Inventory accounts are the focal
  point of process costing
• As products flow through the Work in Process
  Inventory accounts for each process, department,
  or work cell, the costs associated with them flow
  to the Work in Process Inventory account of that
  process, department, or work cell.

13
Cost Flows Through the Work in Process Inventory
Accounts (contd)
Mixing Department
Cookie dough is prepared
Costs of cookie dough accumulate

• Cookie dough is prepared in the Mixing
  Department, where the costs of direct materials,
  direct labor, and manufacturing overhead incurred
  accumulate

14
Cost Flows Through the Work in Process Inventory
Accounts (contd)
Mixing Department
Baking Department
Cookie dough is prepared
Cookies are baked
Costs of cookie dough accumulate
Costs of cookie dough Baking costs accumulate

• Cookie dough is transferred to the Baking
  Department
• The costs accumulated in the Mixing Department
  Work in Process account are transferred to the
  Baking Department Work in Process account
• Costs incurred to bake the cookies are
  accumulated in the Baking Department Work in
  process account

15
Cost Flows Through the Work in Process Inventory
Accounts (contd)
Mixing Department
Baking Department
Packaging Department
Cookie dough is prepared
Cookies are baked
Cookies are packaged
Costs of cookie dough accumulate
Costs of cookie dough Baking costs accumulate
Costs of cookie dough baking Packaging
costs accumulate

• The baked cookies are transferred to the
  Packaging Department
• The costs accumulated in the Baking Department
  Work in Process account are transferred to the
  Packaging Department Work in Process account
• Costs incurred to package the cookies are
  accumulated in the Packaging Department Work in
  process account

16
Cost Flows Through the Work in Process Inventory
Accounts (contd)
Mixing Department
Baking Department
Packaging Department
Cookie dough is prepared
Cookies are baked
Cookies are packaged
Cookies are moved to finished goods storeroom
Costs of cookie dough accumulate
Costs of cookie dough Baking costs accumulate
Costs of cookie dough baking Packaging
costs accumulate
Total costs of cookies are transferred to
Finished Goods Inventory

• The packaged cookies are transferred to the
  finished goods storeroom
• The costs accumulated in the Packaging Department
  Work in Process account are transferred to the
  Finished Goods Inventory account
• When the cookies are sold, their costs will be
  transferred to the Cost of Goods Sold account

17
Cost Flows Through the Work in Process Inventory
Accounts (contd)

• Process cost report
• Prepared at the end of every accounting period
• Assigns the costs that have accumulated in each
  Work in Process account to the units
• Transferred out
• Still in process
• Used to compute the unit cost of all products
  worked on during the period
• Includes all costs from all processes,
  departments, or work cells

18
Cost Flows Through the Work in Process Inventory
Accounts (contd)

• Unit cost
• The total cost of direct materials, direct labor,
  and manufacturing overhead divided by the total
  number of units worked on during the period

Because units of product will be in various
stages of completion at the end of a period, the
total number of units worked on is determined by
computing equivalent units of production
19
Discussion

• Which accounts are the focal point of a process
  costing system?
• As products flow through the Work in Process
  Inventory accounts for each process, department,
  or work cell, the costs associated with them flow
  to the Work in Process Inventory account of that
  process, department, or work cell.

20
Computing Equivalent Production

• Objective 5
• Define equivalent production and compute
  equivalent units

21
Equivalent Production

• is a measure that applies a percentage-of-comple
  tion factor to partially completed units to
  calculate the equivalent number of whole units
  produced in an accounting period
• Also called equivalent units

22
Equivalent Production (contd)

• Equivalent units are computed for each type of
  input
• Direct materials
• Direct labor
• Manufacturing overhead
• The number of equivalent units produced is the
  sum of
• Total units started and completed during the
  period
• Amount representing the work done on partially
  completed products
• In both the beginning and ending work in process
  inventories

Equivalent production must be computed separately
for each type of input because of differences in
the ways the costs are incurred
23
Equivalent Production (contd)

• Direct materials
• Usually added to production at the beginning of
  the process
• Costs of direct labor and manufacturing overhead
• Often incurred uniformly throughout the
  production process
• Are combined when calculating equivalent units
• Called conversion costs (DLOH)

24

• W I P
• _________________________________________
• b.b.
• DM used this period
• DL incurred this period
• OH applied this period
• _________________________________________
• e.b.

25
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed
26
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed
Equivalent units in regard to conversion costs
.5 (1 x 50)
One soft drink was started during Week 1 and was
50 percent completed (and still in production)
when Week 2 started
Direct materials were all added during Week 1, so
there were no equivalent units in regard to
direct materials costs during Week 2
The soft drink was 50 percent completed during
Week 1, so the other 50 percent of conversion
costs were incurred during Week 2
27
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed
Three soft drinks were started and completed
during Week 2
Because materials are added at the beginning of
production, all direct materials for these drinks
were added during Week 2
Equivalent units in regard to direct materials
costs 3 (3 x 100)
28
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed
Three soft drinks were started and completed
during Week 2
The soft drinks were started and completed during
Week 2, so 100 percent of conversion costs were
incurred during Week 2
Equivalent units in regard to conversion costs
3 (3 x 100)
29
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed
One soft drink was started during Week 2 and was
75 completed (and still in production) when
Week 2 ended
Direct materials were all added during Week 2, so
direct materials costs were 100 in regard to
direct materials costs during Week 2
Equivalent units in regard to direct materials
costs 1 (1 x 100)
30
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed
One soft drink was started during Week 2 and was
75 completed (and still in production) when
Week 2 ended
Because 75 of this soft drink was completed
during Week 2, 75 of conversion costs were
incurred during Week 2
Equivalent units in regard to conversion costs
.75 (1 x 75)
31
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed
Total equivalent units 4
4.25
32
Discussion

• If 100 items in beginning inventory were 100
  percent complete in regard to direct materials
  costs and 35 percent complete in regard to
  conversion costs, what is the number of
  equivalent units in regard to conversion costs if
  they were completed during the current period?
• 100 x 65 65. Since 35 percent of conversion
  costs were incurred during the previous period,
  65 percent must have been incurred during the
  current period.

33
Preparing a Process Cost Report Using the FIFO
Costing Method

• Objective 6
• Prepare a process cost report using the FIFO
  costing method

34
Preparing a Process Cost Report Using the FIFO
Costing Method

• Process cost report
• Used by managers to track and analyze costs for a
  process, department, or work cell in a process
  costing system
• Report using the FIFO costing method
• Cost flow follows the logical physical flow of
  production

35
Preparing a Process Cost Report Using the FIFO
Costing Method

• Five steps in preparing a process cost report
• Account for the physical flow of products
• Compute equivalent production
• Accumulate and analyze all costs charged to the
  Work in Process Inventory accounts of each
  production process, department, or work cell
• Compute the cost per equivalent unit for direct
  materials and conversion costs
• Assign costs to products transferred out of the
  area and to those remaining behind in ending work
  in process inventory

36
Accounting for Units

• Managers must
• (Step 1) Account for the physical flow of
  products through their areas before they can
• (Step 2) compute equivalent production for the
  accounting period

37
Accounting for Units
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 1 - Account for physical units
These 63,700 units are the actual physical units
that the manager is responsible for during the
period
38
Accounting for Equivalent Units
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These unite were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
Units accounted for in Step 2 must equal the
units accounted for in Step 1
39
Beginning Inventory
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These unite were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
0
0
Because all materials are added at the beginning
of the production process, the units in beginning
inventory were already 100 complete in regard to
direct materials
40
Beginning Inventory
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These unite were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
0
0
2,480
0
They were 60 complete in regard to conversion
costs therefore, the remaining 40 of conversion
costs were incurred during the current month
(6,200 x 40 2,480)
41
Units Started and Completed During the Period
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These unite were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
0
0
2,480
0
52,500
100
52,500
100
All direct materials costs and conversion costs
for the 52,500 units started and completed were
incurred during this period
42
Ending Inventory
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These unite were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
0
0
2,480
0
52,500
100
52,500
100
5,000
100
All materials were added to the units in ending
inventory when the units went into production
during the month
43
Ending Inventory
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These unite were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
0
0
2,480
0
52,500
100
52,500
100
5,000
100
2,250
45
These units were 45 complete in regard to
conversion costs by the end of the period (5,000
x 45)
44
Totals
For the accounting period ending February 20x6,
Soda Products Company had beginning work in
process inventory consisting of 6,200 units, 60
complete. These unite were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
0
0
2,480
0
52,500
100
52,500
100
5,000
100
2,250
45
57,500
57,230
Total equivalent units for direct materials costs
and conversion costs will be used in Step 4
45
Accounting for Costs
During the accounting period ending February
20x6, Soda Products Company had costs from
beginning inventory of 20,150 for direct
materials and 21,390 for conversion costs.
Current period costs include 189,750 for direct
materials costs and 320,488 for conversion costs
Step 3 - Account for costs
Only the Total Costs column is totaled
Current costs for direct materials costs and
conversion costs will be used in Step 4
46
Accounting for Costs
For the accounting period ending February 20x6,
Soda Products Companys equivalent units of
production totaled 57,500 for direct materials
costs and 57,230 for conversion costs. Current
period costs totaled 189,750 for direct
materials and 320,488 for conversion costs
Step 4 Compute cost per equivalent unit
Costs attached to beginning inventory are not
included in these computations because the FIFO
costing method uses separate costing analyses for
each accounting period
47
Assigning Costs
Step 5 Assign costs to cost of goods
manufactured and ending inventory

• Use information from Steps 2 through 4 to assign
  costs
• Step 2
• Equivalent units for direct materials costs
• Equivalent units for conversion costs
• Step 3
• Total costs of beginning inventory
• The total costs assigned to units completed and
  transferred out and to ending inventory in Step 5
  must equal the total costs in Step 3
• Step 4
• Cost per equivalent unit for direct materials
  costs
• Cost per equivalent unit for conversion costs

48
Cost of Goods Manufactured and Transferred Out
Step 5 Assign costs to cost of goods
manufactured and ending inventory
This amount is calculated in Step 3 in the Total
Costs column for beginning inventory
49
Cost of Goods Manufactured and Transferred Out
Step 5 Assign costs to cost of goods
manufactured and ending inventory
Current costs to complete
The 2,480 equivalent units were calculated in
Step 2 in the Equivalent Units/Conversion Costs
column for beginning inventory
The 5.60 cost per equivalent unit for conversion
costs was calculated in Step 4
50
Units Started and Completed This Period
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
The 52,500 equivalent units were calculated in
Step 2 in the Equivalent Units/Direct Materials
Costs column for units started and completed
during the period
The 3.30 and 5.60 costs per equivalent unit for
direct materials costs and conversion costs,
respectively, were calculated in Step 4
51
Cost of Goods Manufactured and Transferred Out
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
467,250


(52,500 x 5.60)
(52,500 x 3.30)
Cost of goods manufactured
52
Ending Inventory
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
467,250


(52,500 x 5.60)
(52,500 x 3.30)
522,678
Cost of goods manufactured
Ending inventory
The 5,000 and 2,250 equivalent units were
calculated in Step 2 in the Equivalent
Units/Direct Materials Costs and Conversion Costs
columns, respectively, for ending inventory
The 3.30 and 5.60 costs per equivalent unit for
direct materials costs and conversion costs,
respectively, were calculated in Step 4
53
Total Costs
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
467,250


(52,500 x 5.60)
(52,500 x 3.30)
522,678
Cost of goods manufactured
29,100


(5,000 x 3.30)
(2,250 x 5.60)
Ending inventory
Total costs
Remember that the total costs in Steps 3 and 5
must always be the same
If differences occur due to rounding in Step 4,
adjust the total costs transferred out for any
rounding difference so that the total costs in
Steps 3 and 5 are equal
54
Recap of Work in Process Account
55
Process Costing for Two or More Production
Departments

• More than one production department
• Must have a Work in Process Inventory account for
  each department
• Costs are accumulated in each department and
  transferred to the next department as the product
  flows from one department to the next

56
Discussion

• How is the cost per equivalent unit computed?
• For either direct materials costs or conversion
  costs, divide the current period costs by the
  number of equivalent units

57
Using Information About Product Cost to Evaluate
Performance

• Objective 7
• Evaluate performance using information about
  product cost

58
Using Information About Product Cost to Evaluate
Performance

• How managers use information from a product
  costing system
• Determine a products price
• Compute balances in the Materials Inventory, Work
  in Process, and Finished Goods Inventory accounts
  on the balance sheet
• Compute the balance in the Cost of Goods Sold
  account on the income statement
• Evaluate operating performance

59
Using Information About Product Cost to Evaluate
Performance (contd)

• Analyses for evaluating operating performance may
  include
• Cost trends of a product or product line
• Help identify areas of rising costs or those for
  which cost-effectiveness has improved
• Units produced per time period
• Helps evaluate operating efficiency
• Materials usage and labor costs per unit produced
• Help determine optimal resource usage

60
Using Information About Product Cost to Evaluate
Performance (contd)

• Analyses for evaluating operating performance may
  include
• Special needs of customers
• Identify which customers are increasing or
  reducing their orders and take action
• Cost-effectiveness of changing a more advanced
  production process
• Estimate unit costs for new equipment and compare
  with those for existing equipment

61
Discussion

• Why would managers want to analyze cost trends of
  a product?
• Cost trends developed over a period of time help
  managers identify areas of rising costs or areas
  in which cost-effectiveness has improved. The
  factors causing the changes can then be
  identified for purposes of improving
  cost-effectiveness