2Cost Accounting Systems determine the costs associated with products (or services)._________ Cost System (last chapter)used for unique or custom ordered products_________ Cost System (this chapter)is used for mass produced items
3Process CostingProcess costing is used to attach cost to units produced that areIdentical and low in costMass producedManufactured with an automated and continuous flow of production_____________ is used when costs cannot be directly traced to each individual unit_____________ = department or process rather than the individual job.
4Flow of CostsWe must be able to understand the flow of costs through a process costing system. Remember thoughThe flow of costs is similar to that for a job cost system exceptEach department or process has its own WIP inventory accountThe products may go through several processing departments ________ being transferred to Finished Goods Inventory.
5Job Order and Process Cost Systems Compared Job Order Cost SystemDirect materialsJob CostSheetsDept. A and Dept. BDirect laborFinished goodsFactory overheadProcess Cost SystemDirectmaterialsDept. BFinished goodsDept. ADirectlaborFactoryoverheadDirectlaborFactoryoverhead
6Both systems:determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhead costs.allocate overhead using a predetermined overhead rate (or activity-based costing).maintain perpetual records with subsidiary ledgers for materials, work in process, and finished goods.
7Job Costing versus Process Costing The cost of goods transferred to finished goods equals the number of completed units times the _____ _________________Job order costingThe cost of goods transferred to finished goods is equal to the sum of all of the completed jobs for that period
8Cost CategoriesAt its simplest, we use cost categories in the first department_____________added all at the beginning of the process_____________– (direct labor and overhead)added evenly throughout each processIn a subsequent processing departments, we will have an additional cost categorycosts attaching in all previous departments
9Flow of Costs in a Process Cost System FOH – MeltingWIP – MeltingFinished GoodsDMActualcostsincurredDLCost of Goods SoldFOH – CastingWIP – CastingActualcostsincurredDLDirect materials used in productionDMDirect labor used in productionDL
10Flow of Costs in a Process Cost System FOH – MeltingWIP – MeltingFinished GoodsDMActualcostsincurredFOHADLFOHACost of Goods SoldFOH – CastingWIP – CastingActualcostsincurredFOHADLFOHAFactory overhead applied to work in processFOHA
11Flow of Costs in a Process Cost System FOH – MeltingWIP – MeltingFinished GoodsActualcostsincurredFOHADMTRANDLFOHACost of Goods SoldFOH – CastingWIP – CastingFOHATRANActualcostsincurredDLFOHATRANCost of goods transferred to WIP – Casting
12Flow of Costs in a Process Cost System FOH – MeltingWIP – MeltingFinished GoodsActualcostsincurredFOHADMTRANCOGMDLFOHACost of Goods SoldFOH – CastingWIP – CastingActualcostsincurredFOHATRANCOGMDLFOHACost of goods manufactured and transferred to finished goodsCOGM
13Flow of Costs in a Process Cost System FOH – MeltingWIP – MeltingFinished GoodsActualcostsincurredFOHADMTRANCOGMSOLDDLFOHACost of Goods SoldFOH – CastingWIP – CastingSOLDTRANCOGMActualcostsincurredFOHADLFOHAFinished goods soldSOLD
14Flow of Costs in a Process Cost System FOH – MeltingWIP – MeltingFinished GoodsActualcostsincurredFOHADMTRANCOGMSOLDDLFOHACost of Goods SoldFOH – CastingWIP – CastingSOLDTRANCOGMActualcostsincurredFOHADLFOHASummary of cost flows
15Four Step ProgramTo attach cost to the units worked on during the period, we follow a five step process1. Summarize the physical flow of units2. Calculate the equivalent units of production.3. Calculate Costs per Equivalent Unit for each component of cost.4. Assign costs to the units completed and transferred out and to the WIP EI units.After the four steps are completed, we will prepare the production cost report.
16Beginning and Ending WIP Inventories We need to make an assumption about how costs flow through a department._____________ is where we will focus our study and will be used in all of our problems.We will not cover the FIFO method.
17The Four Steps… Step 1: Determine the physical flow of goods. We will summarize the actual units that were worked on during the month:Beginning Inventory (BI)+ Units Started= Total Number of Units Accounted forThen reconcile to the actual units transferred out to the next dept. during the month:Completed & Transferred Out (C&T Out)+ Ending Inventory (EI)
18CommentsWe make separate unit calculations for direct materials and conversion costs (DL and FOH) becauseThey are typically added at different times.If direct materials are all added at the beginning of the process, then any units left on hand will be ______% complete with respect to the materials.
19Step 2: Equivalent units Compute _________________of Production: In accounting for the units in process during the period, we must compute the equivalent units worth of work done during the period forMaterial costsConversion costsDirect LaborFactory Overhead
20QuestionC2For the current period, PencilCo 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 PencilCo have for the period?a. 10,000b. 11,500c. 1,500d. 15,000Here is the first of your two questions..
21Step 3: Calculating Costs per Equivalent Unit Once you know how many equivalent units of material, labor and OH have been completed on all units in process during the period, you can express _________________________Cost incurred to date / equivalent unitsCalculate cost/EU for each component of costdirect materials andconversion costs (DL & FOH).
22Step 3: Calculating Costs per Equivalent Unit (Weighted Average) We focus on the equivalent units of work done in the previous period and in the current period.The W/A method combines the Costs of Beginning Inventory in Process with Costs Incurred during the period.
23Step 4: Assigning & Reconciling Costs Multiply these unit costs times the equivalent units worth of work done onThe units completed and transferred out during the period.The units left in ending inventoryThe total of the cost of units completed and transferred out during the period Goes out of WIP(1) and into WIP(2).The Cost of units left remains in ending WIP inventory