Process Costing and Hybrid Product- Costing Systems

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Chapter Four

• Process Costing and Hybrid Product-Costing
  Systems

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Comparison of Job-Order Costing and Process
Costing
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Comparison of Job-Order Costing and Process
Costing
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Comparison of Job-Order Costing and Process
Costing

• Job-order costing
• Costs accumulated by the job.
• Work in process has a job-cost sheet for each
  job.
• Many unique, high cost jobs.
• Jobs built to customer order.

• Process costing
• Costs accumulated by department or process.
• Work in process has a production report for each
  batch of products.
• A few identical, low cost products.
• Units continuously produced for inventory in
  automated process.

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Process Cost Flows
Lets examine the cost flows in a process cost
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

• Direct Material

• DirectMaterial

• Purchases

• Indirect Material

Factory Overhead

• OtherOverhead

• Indirect Material

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Process Cost Flows
Next lets add labor and manufacturing overhead
to the process cost flows. Are you with me?
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Process Cost Flows
Work in Process Department A
Salaries andWages Payable

• Direct Material

• Direct Labor

• Direct Labor

• IndirectLabor

Factory Overhead

• Other Overhead

• Indirect Material

• IndirectLabor

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Process Cost Flows
Next lets transfer work from Department A to
Department B. Are you ready?
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Process Cost Flows
Work in Process Department A

• Direct Material

• Transferred to Dept. B

• Direct Labor

• Overhead

Work in Process Department B

• Transferred from Dept. A

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Process Cost Flows
Next lets add material, labor, and manufacturing
overhead to Department B. Are you with me?
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Process Cost Flows
Work in Process Department A
Raw Materials

• Direct Material

• DirectMaterial

• Purchases

• Transferred to Dept. B

• Direct Labor

• Overhead

Work in Process Department B

• Transferred from Dept. A

Salaries andWages Payable

• Direct Material

• Direct Labor

• Direct Labor

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Process Cost Flows
Work in Process Department A

• Direct Material

• Transferred to Dept. B

• Direct Labor

• Overhead

Factory Overhead

• OverheadApplied to Work inProcess

• Other Overhead

Work in Process Department B

• Indirect Material

• Transferred from Dept. A

• IndirectLabor

• Direct Material

• Direct Labor

• Overhead

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

• Cost of Goods Mfd.

• Transferred from Dept. A

• Cost of GoodsMfd.

• Cost of GoodsSold

• Direct Material

• Direct Labor

• Overhead

Cost of Goods Sold

• Cost of GoodsSold

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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
Direct-labor costsare usually smallin
comparison toother product costs in processcost
systems.(high level of automation)
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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Differences Between Job-Order and Process Costing
The work-in-process account consists of
individual jobs in a job-order cost system.
Direct Material
FinishedGoods
Direct Labor
Jobs
ManufacturingOverhead
Cost of GoodsSold
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Differences Between Job-Order and Process Costing
The work-in-process account consists of
individual products in a process cost system.
Direct Material
FinishedGoods
Direct Labor Overhead(Conversion)
Products
Cost of GoodsSold
When direct labor is a relatively small amount
compared to material and overhead, it is often
combined with overhead.
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Equivalent Units A Key Concept

• 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 Example
Two one-half completed products are equivalent to
one completed product.
So, 10,000 units 70 percent completeare
equivalent to 7,000 complete units.
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Equivalent Units Question 1
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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Equivalent Units Question 1
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 .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 for the
period

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Equivalent Units Question 2
If Jones incurred 27,600 inproduction costs
for the 11,500 equivalent units. What was
Joness 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 Question 2
If Jones incurred 27,600 inproduction costs
for the 11,500 equivalent units. What was
Joness cost per equivalent unit for the
period? a. 1.84 b. 2.40 c. 2.76 d. 2.90
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Departmental Production Report
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Equivalent Units of Production Weighted-Average
Method

• The 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.

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Production Report Example
At this point, we need to look at an example to
illustrate the departmental production report.
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Production Report Example

• MVP Sports Equipment Company makes baseball
  gloves in two departments, Cutting and Stitching.
  
• MVP uses the weighted-average cost procedure.
• Material is added at the beginning of the Cutting
  Department, and conversion is incurred uniformly
  throughout the process.
• Using the following information for the month of
  March, lets prepare a production report for the
  Cutting Department.

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Production Report Example
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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Production Report Example

• Analysis of Physical Flow of Units

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Production Report Example

• Calculation of Equivalent Units

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Production Report Example

• Calculation of Equivalent Units

100 of 10,000 units, allmaterial added at
beginning
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Production Report Example

• Computation of unit costs

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Production Report Example

• Analysis of total costs

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Operation Costing
Operation costing employs some aspectsof both
job-order and process costing.
Job-order Operation Costing
Process Costing
(Products produced in batches) Costing
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Process CostingTypical Accounting Entries
Lets look at the accounting journal entries for
a process cost system. Well omit the numbers
so that we can focus on accounts.
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Process CostingTypical Accounting Entries
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Process CostingTypical Accounting Entries
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Process CostingTypical Accounting Entries
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Process CostingTypical Accounting Entries
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Process CostingTypical Accounting Entries
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Process CostingTypical Accounting Entries
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End of Chapter 4
Im ready to processsome leisure time.