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CHAPTER 3 Process Costing. CHAPTER 3 Process Costing.

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Presentation on theme: "CHAPTER 3 Process Costing. CHAPTER 3 Process Costing."— Presentation transcript:


2 CHAPTER 3 Process Costing

3 Difference Between Job-Order and Process Costing Systems
Job-Order Costing Each unique product or batch is considered a job Manufacturing costs are traced to specific jobs Process Costing Used when homogenous items are produced Total costs are divided by total units produced

4 Process Costing Example

5 Job-Order Costing System

6 Process Costing System

7 Product and Cost Flows Product Flows Through Departments
A product typically passes through multiple departments Conversion Costs (Labor and Overhead)

8 Product and Cost Flows Cost Flows Through Accounts Direct Material
Direct Labor Manufacturing Overhead Transferred-in Cost

9 Flow of Cost Between Processing Departments

10 Study Break #1 Which one(s) of the following characteristics are associated with a process costing system? Heterogeneous products Homogeneous products Continuous production Discontinuous production Costs are traced to jobs Costs are traced to processing departments Answer: b, c, and f

11 Study Break #2 The best example of a business requiring a process costing system would be a(n): Custom cabinet shop Antique furniture restorer Soap manufacturer Automobile repair shop Answer: c. Soap manufacturer

12 Study Break #3 The costs in a process cost system are traced to:
Specific jobs Specific customers Specific company administrators Specific production departments Answer: 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 #1 McMillian 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
Materials Units completed 2,500 Equivalent units (300*85%) 2,755 units Labor Equivalent units (300*50%) 2,650 units

17 Calculating Unit Cost Cost Per Equivalent Unit Average unit cost
Formula Cost in Beginning WIP + Cost incurred in current period Units completed + Equivalent units in Ending WIP

18 Example Exercise #2 The 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 Labor Beginning WIP $135,000 March labor $650,000 Total Labor Cost $785,000 Units Units completed ,000 Equivalent units (8,000*50%) ,000 Total Units ,000 Cost per Equivalent Unit $785,000 / 29,000 pounds = $27.07 per pound

20 Production Cost Report
Reconciliation of Units Reconciliation of Costs Details of Cost per Equivalent Unit Calculations

21 Reconciliation of Units

22 Reconciliation of Costs

23 Basic Steps in Process Costing
Account for the number of physical units Calculate the cost per equivalent unit for materials, labor, and overhead Assign cost to items completed and items in ending Work in Process Account for the amount of product cost

24 Dealing with Transferred-In Cost
Process Costing Systems generally use multiple processes Items completed in one processing department, costs are transferred to the next department When 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 cost Process Costing Utilizes an average of fixed and variable costs Could impact decision making when considering additional production

26 Full and Incremental Cost

27 Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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