Systems Design: Process Costing

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Systems DesignProcess Costing
2
LEARNING OBJECTIVES
After studying this chapter, you should be able
to

• 1. Record the flow of materials, labour and
  overhead through a process costing system.
• 2. Compute the equivalent units of production
  using the weighted-average method.
• 3. Prepare a quantity schedule using the
  weighted-average method.
• 4. Compute the costs per equivalent unit using
  the weighted-average method.
• 5. Prepare a cost reconciliation using the
  weighted-average method.

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LEARNING OBJECTIVES
After studying this chapter, you should be able
to
6. (Appendix 4A) Explain and compute the
equivalent units of production using the FIFO
method. 7. (Appendix 4A) Prepare a quantity
schedule using the FIFO method. 8. (Appendix 4A)
Compute the costs per equivalent unit using the
FIFO method. 9. (Appendix 4A) Prepare a cost
reconciliation using the FIFO method.
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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.
• One unit of product is indistinguishable from
  any other unit of product.
• Each unit of product is assigned the same
  average cost.

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

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Process Costing
DirectMaterials
Direct labour costsmay be smallin comparison
toother product costs in processcost systems.
ManufacturingOverhead
Dollar Amount
DirectLabour
Type of Product Cost
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Process Costing
DirectMaterials
Direct labour costsmay be smallin comparison
toother product costs in processcost systems.
Conversion
Dollar Amount
Type of Product Cost
So, direct labour and manufacturing overhead are
oftencombined into one product cost called
conversion cost.
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Comparing Job-Order and Process Costing
Direct Materials
FinishedGoods
Work inProcess
Direct Labour
ManufacturingOverhead
Cost of GoodsSold
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Comparing Job-Order and Process Costing
Costs are traced andapplied to individualjobs
in a job-ordercosting system.
Direct Materials
FinishedGoods
Jobs
Direct Labour
ManufacturingOverhead
Cost of GoodsSold
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Comparing Job-Order and Process Costing
Costs are traced and applied to departments in a
process costing system.
Direct Materials
FinishedGoods
Processing Department
Direct Labour
ManufacturingOverhead
Cost of GoodsSold
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Process Cost Flows
Lets look at cost flows in a process costing
system with Departments A and B. We will use
T-accounts and start with materials.
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Process Cost Flows
Work in Process Department A
Raw Materials

• DirectMaterials

• DirectMaterials

• Purchases

• Indirect Materials

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• Indirect Materials

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Process Cost Flows
Work in Process Department A
Wages Payable

• Direct Materials

• Direct Labour

• Direct Labour

• IndirectLabour

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• Direct Labour

• IndirectMaterials

• IndirectLabour

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Process Cost Flows
Work in Process Department A
Wages Payable

• Direct Materials

• Direct Labour

• Direct Labour

• IndirectLabour

• AppliedOverhead

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• OverheadApplied to Work inProcess

• Direct Labour

• IndirectMaterials

• AppliedOverhead

• IndirectLabour

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Process Cost Flows
Next, transfer work from Department A to
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 Labour

• Direct Labour

• AppliedOverhead

• AppliedOverhead

• Transferred from Dept. A

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Process Cost Flows
Now lets complete the goods in Department B and
sell them.
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Process Cost Flows
Work in Process Department B
Finished Goods

• Direct Materials

• Cost of GoodsManufactured

• Cost of Goods Manufactured

• Cost of GoodsSold

• Direct Labour

• AppliedOverhead

• Transferred from Dept. A

Cost of Goods Sold

• Cost of GoodsSold

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Process CostingAccounting Entries
Lets look at the journal entries for a process
costing system. Well omit the numbers so that
we can focus on concepts.
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Process CostingAccounting Entries
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Process CostingAccounting Entries
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Process CostingAccounting Entries
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Process CostingAccounting Entries
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Process CostingAccounting Entries
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Process CostingAccounting Entries
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Process CostingAccounting Entries
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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.

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Equivalent Units of Production
Two half completed products are equivalent to one
completed product.


So, 10,000 units, 70 completeare equivalent to
7,000 complete units.
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Equivalent Units
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process, 30 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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Equivalent Units
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 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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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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Equivalent Units
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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Equivalent Units
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.

Lets see how this works!
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Weighted-Average Method Example

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

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Weighted-Average Method Example

• Equivalent units are calculated as follows

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Weighted-Average Method Example

• Equivalent units are calculated as follows

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Weighted-Average Method Example

• Equivalent units are calculated as follows

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

• Equivalent units are calculated as follows

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Weighted-Average Method Example
Materials
6,000 Units Started
EndingWork in Process900 Units60 Complete
BeginningWork in Process300 Units40 Complete
5,100 Units Startedand Completed
5,400 Units Completed
5,400 Units Completed
900 60
540 Equivalent Units
5,940 Equivalent units of production
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Weighted-Average Method Example
Conversion
6,000 Units Started
EndingWork in Process900 Units30 Complete
BeginningWork in Process300 Units20 Complete
5,100 Units Startedand Completed
5,400 Units Completed
900 30
270 Equivalent Units
5,670 Equivalent units of production
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Production Report
Shows the flowof units and coststhrough work
inprocess
Provides costinformation forfinancial
statements
Becomes thejob cost sheetin processcosting
Helps managerscontrol theirdepartments
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Production Report

• A quantity schedule showing the flow of units and
  the computation of equivalent units.

• A computation ofcost per equivalent unit.

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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 Example

• Double Diamond Skis uses process costing to
  determine unit costs in its Shaping and Milling
  Department.
• Double Diamond uses the Weighted-Average costing
  method.
• 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
Cost

• Work in process, May 1 200 units
• Materials 50 complete. 3,000
• Conversion 30 complete. 1,000
• Units started into production in May 5,000
• Units completed and transferred out in May 4,800
• Costs added to production in May
• Materials cost 74,000
• Conversion cost 70,000
• 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
77,000 4,960 units 15.524 (rounded)
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Production Report Example
Section 2 Compute cost per equivalent unit
71,000 4,900 units 14.490 (rounded)
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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_ 30.014
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Production Report Example
Section 3 Cost Reconciliation
160 units _at_ 15.524
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Production Report Example
Section 3 Cost Reconciliation
100 units _at_ 14.490
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Appendix4A
FIFO Method
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FIFO Method

• The FIFO method of process costing is a method in
  which equivalent units and units costs relate
  only to work done during the current period.
• Under the FIFO method, both beginning and ending
  work in process inventories are converted to an
  equivalent unit basis.
• Lets use the previous Double Diamond Skis
  example to illustrate this method.

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FIFO Method Example

• Double Diamond Skis uses process costing to
  determine unit costs in its Shaping and Milling
  Department.
• Double Diamond uses the FIFO costing method.
• Using the following information for the month of
  May, lets prepare a production report for
  Shaping and Milling.

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FIFO Method Example
Cost
Work in process, May 1 200 units
Materials 50 complete.
3,000 Conversion 30 complete.
1,000 Units started into production in
May 5,000 Units completed and transferred out
in May 4,800 Costs added to production in
May Materials cost 74,000 Conversion cost
70,000 Work in process, May 31 400
units Materials 40 complete. Conversion 25
complete.
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FIFO Method Example
Materials
5,000 Units Started
EndingWork in Process400 Units40 Complete
BeginningWork in Process200 Units50 Complete
4,600 Units Startedand Completed
200 50
4,600 Units Started and Completed
100 Equivalent Units
160 Equivalent Units
400 40
4,860 Equivalent units of production
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FIFO Method Example
Conversion
5,000 Units Started
BeginningWork in Process200 Units30 Complete
EndingWork in Process400 Units25 Complete
4,600 Units Startedand Completed
200 70
4,600 Units Started and Completed
140 Equivalent Units
100 Equivalent Units
400 25
4,840 Equivalent units of production
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Production Report FIFO Method Example
Section 1 Quantity Schedule with Equivalent
Units
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Production Report FIFO Method Example
Section 2 Cost per equivalent unit
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Production Report FIFO Method Example
Section 3 Cost Reconciliation
100 units _at_ 15.226
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Production Report FIFO Method Example
Section 3 Cost Reconciliation
140 units _at_ 14.463
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Production Report FIFO Method Example
Section 3 Cost Reconciliation
4,600 units _at_ 29.689
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Production Report FIFO Method Example
Section 3 Cost Reconciliation
160 units _at_ 15.226
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Production Report FIFO Method Example
Section 3 Cost Reconciliation
100 units _at_ 14.463
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Production Report FIFO Method Example
Section 3 Cost Reconciliation
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End of Chapter 4