Process Costing

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Process Costing

• Objectives
• Compare job order and process costing
• Talk about costs to account for
• Understand the concept of equivalent units

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Types of Product-Costing Systems
ProcessCosting
Job-OrderCosting

• Used for production of small, identical, low cost
  items.
• Mass produced, automated continuous production
  process.
• Costs cannot be directly traced to each unit of
  product.

• Used for production of large, unique, high-cost
  items.
• Built to order rather than mass produced.
• Many costs can be directly traced to each job.

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Accumulating Costs - Job-Order Costing System
Direct Materials
Job No. 1
Cost of Goods Sold
Direct Labor
Finished Goods
Job No. 2
Job No. 3
Manufacturing Overhead
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Accumulating Costs - Process Costing System
Process A
Direct Materials Direct Labor Manufacturing
Overhead
Process B
Cost of Goods Sold
Assembly
Finished Goods
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Similarities Job Order and Process Costing

• The same purpose exists - assign manufacturing
  costs to products, provide a mechanism for
  computing unit costs
• Both systems use the same basic manufacturing
  accounts
• The flow of costs through each system is similar

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Differences Job Order and Process Costing

• The flow of units in a process costing system is
  more or less continuous - as a result, units are
  indistinguishable from one another
• Costs are accumulated by department, rather than
  by job as a result, the firm can have more than
  one work-in-process inventory account

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Process Costing
DirectMaterial
Direct-labor costsare usually smallin
comparison toother product costs in processcost
systems.(high level of automation)
ManufacturingOverhead
Dollar Amount
DirectLabor
Type of Product Cost
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Process Costing
DirectMaterial
Conversion
Direct-labor costsare usually smallin
comparison toother product costs in processcost
systems.(high level of automation)
Dollar Amount
Type of Product Cost
So, direct labor and manufacturing overhead are
oftencombined into one product cost called
conversion.
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Peas! Peas! Example
Frozen Vegetable Company quick-cooks peas before
freezing them. The Company uses two departments
-- cooking and freezing. Suppose the Company
processed 10,000 pounds of peas in the month of
January and incurred the following
costs DM 3,000 Conversion
Costs DL 5,000 OH 9,000
14,000 Total 17,000
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Peas! Peas! Example (cont)
What would be the (per) unit cost of goods
completed? DM 3,000 Conversion
Costs DL 5,000 OH 9,000
14,000 Total 17,000
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Peas! Peas! Example (cont)
What if not all 10,000 pounds of peas were
completed in the month of January? Assume that
2,000 were still in process at the end of the
month -- only 8,000 were started and fully
completed. How should the costs be accounted
for?
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MY NOTES
The deal is that if we have no incomplete units
at the end of the period, then we dont have a
problem. If we have incomplete units, then we
need to think about how to allocate costs. Not
like ending WIP in a job order costing system -
WHY? There we have tracked costs to a job.
Here we are worried about getting an average cost
so we can track the cost of products
produced/work done in the department
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Process Costing - 5 Key Steps
Step 1 -- Summarize the flow of physical units --
where are the costs? Step 2 -- Calculate output
in terms of Equivalent Units Step 3 -- Summarize
total costs to account for which are the costs
charged (debited) to WIP Step 4 -- Calculate
equivalent unit costs Step 5 -- Apply/assign
costs to units completed and to units in the
ending WIP
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Step 1 and Step 2 In Pictures
Two one-half completed products are equivalent to
one completed product.
So, 10,000 units 80 percent completeare
equivalent to ? complete units.
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Step 1 and Step 2 -- Equivalent Units
Costs are accumulated for a period of time for
products in work-in-process inventory. Products
in work-in-process inventory at the beginning and
end of the period are only partially complete.
Equivalent units is a concept expressing these
partially completed products as a smaller number
of fully completed products.
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Equivalent Units Question 1
During the current period, Regina 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 Regina
have for the period? a. 10,000 b.
11,500 c. 13,500 d. 15,000
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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 for the
period

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Equivalent Units Question 2
Regina incurred 27,600 in production costs for
the 11,500 equivalent units. What was Reginas
cost per equivalent unit for the
period? a. 1.84 b. 2.40 c. 2.76 d. 2.90
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Equivalent Units of Production Weighted-Average
Method
Makes no distinction between work done in
the prior period and work done in the current
period. Blends together units and costs from the
prior period and the current period.
The weighted-average method . .
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A Process Costing Example
MVP Sports Equipment Company makes baseball
gloves in two departments, Cutting and Stitching.
MVP uses the weighted-average process costing
method. Material is added at the beginning of
the Cutting Department, and conversion costs are
incurred uniformly throughout the process.
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Production Report
Cost
Work in process, March 1 20,000 units
Materials 100 complete.
50,000 Conversion 10 complete.
7,200 Units started into
production in March 30,000 units Units
completed and transferred out in March 40,000
units Work in process, March 31 10,000
units Materials 100 complete. Conversion
50 complete. Costs incurred during
March Materials cost 90,000 Conversion
cost 193,500
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(1) Analysis of Physical Flow of Units
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(2) Calculation of Equivalent Units
100 of 10,000 units, allmaterial added at
beginning
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(2) Calculation of Equivalent Units (cont)
50 of 10,000 units
Beginning inventory is not used in
weighted-average method.
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(3) Computation of total costs to account for
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(4) Computation of unit costs
140,000 50,000 equivalent units
2.80 4.46
200,700 45,000 equivalent units
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(5) Analysis of total costs
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(5) Analysis of total costs
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Equivalent Units Practice
The following data are from Energy Resources
Amarillo Plant WIP, November 1 2,000,000
gallons DM 100 complete CC 25
complete Units started during November
950,000 gallons WIP, November 30 240,000
gallons DM 100 complete CC 80
complete Calculate the equivalent unit amounts
necessary to determine per unit costs.
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Process Costing
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Process Costing
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Process Costing Practice
Centura completed and transferred 900,000 units
to finished goods during 1999. WIP as of
December 31, 1999, had 300,000 units that were
50 complete w/r/t CC and 100 w/r/t DM.
Finished goods inventory consisted of 200,000
units. Materials are added at the beginning of
production and overhead is applied at a rate of
60 of direct labor costs. There was no finished
goods inventory on January 1, 1999. Their
inventory cost records provide the following
information
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Process Costing
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Process Costing in Subsequent Production
Departments
An added complication in process costing system
is that production often takes place in more than
one department. In the previous example, only
costs and units in the MVPs Cutting Department
were taken into consideration. Now lets work
with the Cutting and Stitching Department.
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Subsequent Departments
Work In Process Inventory Stitching Department
Work In Process Inventory Cutting Department
Transferred- in costs Direct material Conversion
Direct labor Manufacturing overhead
Direct material Conversion Direct
labor Manufacturing overhead
Cost of goods completed and transferred out
Cost of goods completed and transferred out
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MVP Sports - Additional Facts
In Stitching, DM are added at the end of
production process. 40,000 units from Cutting
are transferred in to Stitching during
March 10,000 units are in Stitchings Beginning
WIP (March 1) 30,000 units are transferred to
Finished Goods in March With respect to
Stitchings Ending WIP (March 31) Transferred
In 100 complete Direct Material
None Conversion 90 complete
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Transferred-In Costs
The costs assigned to the units completed in
each department and transferred to the next
departments work in process inventory account.
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Equivalent Units for Stitching
Step 1
Step 2
Equivalent Units
Physical Units
comp w/r/t
Transferred
conversion
In
DM
CC
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For Thursday

• Finish Chapter 14 - reading and homework
  problems!
• Quiz covering Chapter 6 and Chapter 13 and 14!