2. McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Process Costing Chapter 8

3. 8-2 Learning Objectives: 1.Explain the concept and purpose of equivalent units. 2. Assign costs to products using a five-step process. 3.Assign costs to products using weighted-average costing. 4. Prepare and analyze a production cost report. 5.Assign costs to products using first-in, first-out (FIFO) costing. 6.Analyze the accounting choice between FIFO and weighted- average costing. 7.Know when to use process or job costing. 8.Compare and contrast operation costing with job costing and process costing.

4. 8-3 Job versus Process costing Direct Materials, Direct Labor, and Factory Overhead Job 121 Job 122 Job 123 Finished Goods Cost of Goods Sold Direct Materials, Direct Labor, and Factory Overhead Process A Process B Process C Finished Goods Cost of Goods Sold Job Costing Process Costing Is there a conceptual difference between job costing and process costing?

5. 8-4 Choosing between Job Order and Process Costing LO7Know when to use process or job costing. Job CostingProcess Costing An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods. An accounting system used when identical units are produced through a series of uniform production steps. Custom Homes Movies Services Cornflakes Beverages Paint

6. 8-5 Equivalent Units LO1Explain the concept and purpose of equivalent units. When manufacturing a product using a continuous process we assume all units have the same costs. Some units are not completed Equivalent units Problem: Answer:

7. 8-6 Equivalent Units, Continued... Number of complete physical units to which units in inventories are equal in terms of work done to date. Equivalent Units (EqU) Number of units in process EqU =x = 3 x.65 1.95 EqU Average Completion of 65%.3 +=.75 +.9 Average Can is 65% Complete 3

8. 8-7 Product Costing in a Process Industry LO2Assign costs to products using a five-step process. Five steps to Costing a Product 1. Measure the physical flow of resources. 2. Compute the equivalent units of production. 3. Identify the product costs for which to account. 4. Compute the costs per equivalent unit. 5. Assign product cost to batches of work.

9. 8-8 Assumptions about Costs in WIP Current PeriodBeginning Balance Current PeriodPrior Period How do we account for beginning balance and current period activities and costs? An inventory method that for product costing purposes combines costs and equivalent units of a period with the cost and equivalent units in beginning inventory. Unit costs are aweighted average One Method: weighted average

10. 8-9 Assumptions about Costs in WIP, Continued... An inventory method whereby the first goods received are the first ones charged out when sold or transferred. Prior PeriodCurrent Period Another Method: We assume units from last period are completed and transferred out first. First-in, First-out (FIFO) Prior PeriodCurrent Periodthen FIFO

11. 8-10

12. 8-11 Example: Process Costing – Torrance Tape (2T) Torrance Tape – Compounding Department Units Materials Costs Conversion Costs WIP March 120,000 a $16,160$8,126 March activity92,00084,640213,634 Total112,000$100,800$221,760 96,000Transferred out WIP March 3116,000 b Total112,000 25% complete with respect to conversion costs. b 30% complete with respect to conversion costs. Note: All materials are added at the beginning of the process.

13. 8-12 Process Costing: Weighted Average (5 steps) LO3Assign costs to products using weighted-average costing. 1. Measure the physical flow of resources. 2. Compute the equivalent units of production. 3. Identify the product costs for which to account. 4. Compute the costs per equivalent unit. 5. Assign product cost to batches of work. Use the five step process: Weighted Average

14. 8-13 Step 1: Measure the Physical Flow of Resources BB+ Units Started = Units Transferred Out EB + 20,000 a +92,000 112,000 Total gallons to account for =96,000+16,000 b 112,000 Total gallons accounted for a 25% complete with respect to conversion costs. b 30% complete with respect to conversion costs.

15. 8-14 Step 2: Compute the Equivalent Units of Production 96,000Transferred out96,000 Work in process, March 31 16,00016,000 a 4,800 b Equivalent units112,000100,800 Physical Units MaterialsConversion Equivalent Units a 16,000 units x 100% (all materials added in beginning) b 16,000 units x 30%

16. 8-15 Step 3: Identify Costs for which to Account Total Costs Materials Costs Conversion Costs WIP March 1 March costs Total $322,560 $100,800 $221,760 $24,286 $16,160 $8,126 298,274 84,640 213,634

17. 8-16 Step 4: Compute the Cost per Equivalent Unit 112,000100,800Total EqU ( Step 2 ) Total costs ( Step 3 ) $322,560$100,800 $221,760 $0.90$2.20Cost per EqU Total Costs Materials Costs Conversion Costs

18. 8-17 Step 5: Assign Product Cost to Batches of Work TotalMaterialsConversion Transferred out $0.90$2.20Cost per EqU (Step 4) 96,000 EqU (Step 2) $297,600$86,400$211,200Costs transferred out WIP, March 31 $0.90$2.20Cost per EqU (Step 4) 16,0004,800EqU (Step 2) 24,960Costs WIP, March 31$14,400$10,560 $322,560Total cost assigned$100,800$221,760

19. 8-18 The Production Cost Report LO4Prepare and analyze a production cost report. A report that summarizes production and costs for a period Used by managers to monitor production and cost flows Production cost report Why?

20. 8-19 The Production Cost Report Month Ending May 31 Blending Department MaterialsConversionPhysicalUnits to be accounted for Units accounted for WIP beginning inventory20,000 Completed & transf. out 96,000 Total units to account for112,000 a 16,000 units x 100% b 16,000 units x 30% Units started in this period92,000 WIP ending inventory16,00016,000 a 4,800 b Total units to account for112,000 100,800 Units Equivalent Units Weighted Average

21. 8-20 The Production Cost Report Costs to be accounted for Costs assigned to units transferred out297,60086,400 e 211,200 f Costs assigned to WIP ending inventory24,96014,400 g 10,560 h Total costs accounted for$322,560$100,800$221,760 WIP beginning inventory$24,28616,1608,126 Total costs to be accounted for$322,560$100,800$221,760 Current period costs84,640213,634298,274 MaterialsConversionTotalCosts to be accounted for Costs per equivalent unit$0.90 c $2.20 d c $100,800/112,000 units d $221,760/100,800 units e $0.90 x 96,000 units f $2.20 x 96,000 units g $0.90 x 16,000 units h $2.20 x 4,800 units

22. 8-21 Assigning Costs using FIFO LO5Assign costs to products using first-in, first-out (FIFO) costing. Use the same five step process. 1. Measure the physical flow of resources. 2. Compute the equivalent units of production. 3. Identify the product costs for which to account. 4. Compute the costs per equivalent unit. 5. Assign product cost to batches of work. FIFO

23. 8-22 Step 1: Measure the Physical Flow of Resources BB+ Units Started = Units Transferred Out EB + 20,000 a +92,000 112,000 Total gallons to account for =96,000+16,000 b 112,000 Total gallons accounted for a 25% complete with respect to conversion costs. b 30% complete with respect to conversion costs. Exactly the same as weighted average.

24. 8-23 Step 2: Compute the Equivalent Units of Production 16,000 c 4,800 d MaterialsConversion Physical UnitsEquivalent Units -0- a 15,000 b Transferred out WIP March 31 st Equivalent units From WIP March 1 st Units started and completed in March 96,000 16,000 20,000 76,000 c 16,000 units x 100% d 16,000 units x 30% a 20,000 units x 0% b 20,000 units x 75% 92,00095,800

25. 8-24 Step 3: Identify Cost for which to Account Exactly the same as weighted average. Total Costs Materials Costs Conversion Costs WIP March 1 March costs Total $322,560 $100,800 $221,760 $24,286 $16,160 $8,126 298,274 84,640 213,634

26. 8-25 Step 4: Compute the Cost per Equivalent Unit TotalMaterialsConversion $84,640$213,634$298,274March costs 92,00095,800 Equivalent units (Step 2) Note:Include only current period costs and activities. $0.92$2.23 Cost per equivalent unit

27. 8-26 Step 5: Assign Product Cost to Batches of Work TotalMaterialsConversion Transferred out Units in WIP March 1 st Complete beginning WIP $24,286$16,160$8,126Prior period costs EU (Step 2) [A] -0-15,000 $0.92$2.23Cost per EU (Step 4) [B] Cost to complete beginning WIP [A x B] 33,450-0-33,450 Units started and completed in March $0.92$2.23Cost per EU [B] Cost of units started, completed and transferred out [B x C] 239,40069,920169,480 $86,080$211,056 Total cost of units transferred out $297,136 76,000 Number of units [C]

28. 8-27 Step 5: Assign Product Cost to Batches of Work, Continued... TotalMaterialsConversion WIP, March 31 st $0.92$2.23Cost per EU (Step 4) 16,0004,800EU (Step 2) 25,424Costs WIP, March 31 st $14,720$10,704 $322,560Total cost assigned$100,800$221,760 * From previous page Transferred out*$86,080*$211,056*$297,136*

29. 8-28 Comparison of FIFO and Weighted Average Separates prior period and current period activities and traces the prior period and current period costs to the respective units. FIFO Does not separate prior period and current period activities and costs. Weighted Average LO6Analyze the accounting choice between FIFO and weighted-average costing.

30. 8-29 Comparison of FIFO and Weighted Average, Continued... Torrance Tape – Compounding Department FIFO Weighted Average Costs to account for $322,560 Cost per EU Materials Conversion $0.92 $2.23 $0.90 $2.20 Cost of goods transferred out$297,136 25,424Costs WIP, March 31 st $322,560Costs accounted for $297,600 24,960 $322,560

31. 8-30 Operating Costing LO8Compare and contrast operation costing with job costing and process costing. Job CostingProcess Costing An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods. An accounting system used when identical units are produced through a series of uniform production steps. Operation Costing A hybrid costing system often used in manufacturing goods that have some common characteristics plus some individual characteristics. Automobiles Computers Clothing

32. 8-31 Chapter 8: END!

33. 8-32

34. 8-33 Required 1.Determine the number of units completed and transferred to the Packaging Department in July. 2.Compute the equivalent units using the FIFO method. 3.Compute the cost per equivalent unit using the FIFO method. 4.Compute the costs of goods transferred out and the ending work-in-process inventory using the FIFO method.