3 Difference Between Job-Order and Process Costing Systems Job-Order CostingEach unique product or batch is considered a jobManufacturing costs are traced to specific jobsProcess CostingUsed when homogenous items are producedTotal costs are divided by total units produced
10 Study Break #1Which one(s) of the following characteristics are associated with a process costing system?Heterogeneous productsHomogeneous productsContinuous productionDiscontinuous productionCosts are traced to jobsCosts are traced to processing departmentsAnswer:b, c, and f
11 Study Break #2The best example of a business requiring a process costing system would be a(n):Custom cabinet shopAntique furniture restorerSoap manufacturerAutomobile repair shopAnswer:c. Soap manufacturer
12 Study Break #3 The costs in a process cost system are traced to: Specific jobsSpecific customersSpecific company administratorsSpecific production departmentsAnswer:d. Specific production departments
13 Calculating Unit Cost Equivalent Units Partially completed units are converted to a comparable number of completed units
14 Equivalent units – Material and Converision costs
15 Example Exercise #1McMillian Tire Company produces tires used on small trailers. The month of June ended with 300 tires in process, 85% complete as to direct materials and 50% complete as to conversion costs; 2,500 tires were transferred to finished goods during the month and 2,300 were started during the month. The beginning WIP inventory was 65% complete as the direct materials and 45% complete as to conversion costs.Determine the denominators to be used in the calculations of cost per equivalent unit for materials and conversion costs.
16 Example Exercise #1 Solution MaterialsUnits completed 2,500Equivalent units (300*85%)2,755 unitsLaborEquivalent units (300*50%)2,650 units
17 Calculating Unit Cost Cost Per Equivalent Unit Average unit cost FormulaCost in Beginning WIP + Cost incurred in current periodUnits completed + Equivalent units in Ending WIP
18 Example Exercise #2The balance in beginning WIP at Bing Rubber Company for direct labor was $135,000. During the month of March, an additional $650,000 of direct labor was incurred, and 25,000 pounds of rubber were produced. At the end of March, 8,000 pounds of rubber were in process and the units were 50% complete. At the start of March, the company had 5,000 pounds of rubber that were 30% complete.Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process.
19 Example Exercise #2 Solution Direct LaborBeginning WIP $135,000March labor $650,000Total Labor Cost $785,000UnitsUnits completed ,000Equivalent units (8,000*50%) ,000Total Units ,000Cost per Equivalent Unit$785,000 / 29,000 pounds = $27.07 per pound
20 Production Cost Report Reconciliation of UnitsReconciliation of CostsDetails of Cost per Equivalent Unit Calculations
23 Basic Steps in Process Costing Account for the number of physical unitsCalculate the cost per equivalent unit for materials, labor, and overheadAssign cost to items completed and items in ending Work in ProcessAccount for the amount of product cost
24 Dealing with Transferred-In Cost Process Costing Systems generally use multiple processesItems completed in one processing department, costs are transferred to the next departmentWhen units are completed in the final process, the costs are transferred to finished goods
25 Process Costing and Incremental Analysis Compare change in revenue with change in costProcess CostingUtilizes an average of fixed and variable costsCould impact decision making when considering additional production