1. Systems Design: Process Costing Chapter 4

2. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Job-order Costing Process Costing F Many units of a single, homogeneous product flow evenly through a continuous production process. F One unit of product is indistinguishable from any other unit of product. F Each unit of product is assigned the same average cost. F Many units of a single, homogeneous product flow evenly through a continuous production process. F One unit of product is indistinguishable from any other unit of product. F Each unit of product is assigned the same average cost. Types of Costing Systems Used to Determine Product Costs

3. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Types of Costing Systems Used to Determine Product Costs Job-order Costing Process Costing Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill

4. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Job order costing Many jobs are worked during the period. Costs are accumulated by individual jobs. Job cost sheet is the key document. Unit cost computed by job. Job order costing Many jobs are worked during the period. Costs are accumulated by individual jobs. Job cost sheet is the key document. Unit cost computed by job. Process costing A single product is produced for a long period of time. Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department. Process costing A single product is produced for a long period of time. Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department. Differences Between Job- Order and Process Costing

5. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process costing is used for products that are: a.Different and produced continuously. b.Similar and produced continuously. c.Individual units produced to customer specifications. d.Purchased from vendors. Process costing is used for products that are: a.Different and produced continuously. b.Similar and produced continuously. c.Individual units produced to customer specifications. d.Purchased from vendors. Quick Check

6. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process costing is used for products that are: a.Different and produced continuously. b.Similar and produced continuously. c.Individual units produced to customer specifications. d.Purchased from vendors. Process costing is used for products that are: a.Different and produced continuously. b.Similar and produced continuously. c.Individual units produced to customer specifications. d.Purchased from vendors. Quick Check

7. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Direct labor costs may be small in comparison to other product costs in process cost systems. Direct labor costs may be small in comparison to other product costs in process cost systems. Direct Materials Type of Product Cost Dollar Amount Direct Labor Conversion

8. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Type of Product Cost Dollar Amount Conversion So, direct labor and manufacturing overhead are often combined into one product cost called conversion. Direct labor costs may be small in comparison to other product costs in process cost systems. Direct labor costs may be small in comparison to other product costs in process cost systems. Direct Materials

9. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Comparing Job-Order and Process Costing Finished Goods Cost of Goods Sold Work in Proces s Direct Materials Direct Labor Manufacturing Overhead

10. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Comparing Job-Order and Process Costing Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Jobs Costs are traced and applied to individual jobs in a job-order cost system. Direct Materials

11. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Comparing Job-Order and Process Costing Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Processing Department Processing Department Costs are traced and applied to departments in a process cost system. Direct Materials

12. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Cost Flows Let’s look at cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials.

13. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Raw Materials Purchases Direct Materials Process Cost Flows Indirect Materials Direct Materials Work in Process Department B Work in Process Department A Other Overhead Manufacturing Overhead ActualApplied Indirect Materials Direct Materials Direct Labor

14. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Cost Flows Work in Process Department B Direct Labor Work in Process Department A Other Overhead Manufacturing Overhead ActualApplied Indirect Materials Indirect Labor Wages Payable Direct Labor Indirect Labor Direct Materials Direct Labor Direct Materials

15. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Cost Flows Work in Process Department B Work in Process Department A Overhead Applied to Work in Process Applied Overhead Other Overhead Manufacturing Overhead ActualApplied Indirect Materials Indirect Labor Direct Labor Direct Materials Direct Labor Direct Materials

16. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Cost Flows Next, transfer work from Department A to Department B.

17. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Cost Flows Work in Process Department B Work in Process Department A Direct Materials Direct Labor Applied Overhead Direct Materials Direct Labor Applied Overhead Transferred to Dept. B Transferred from Dept. A

18. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Cost Flows Now let’s complete the goods in Department B and sell them.

19. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Finished Goods Cost of Goods Sold Process Cost Flows Work in Process Department B Cost of Goods Manufactured Direct Materials Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold Cost of Goods Manufactured

20. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

21. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Equivalent Units of Production Two half completed products are equivalent to one completed product. So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. + = 1

22. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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 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 Quick Check

23. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 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 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 × 0.30) = 11,500 equivalent units Quick Check

24. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit = Costs for the period Equivalent units of production for the period

25. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Quick Check

26. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit Quick Check

27. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Equivalent Units of Production – Weighted Average Method The weighted average method... Makes no distinction between work done in prior and current period. Blends together units and costs from prior period and current period. Let’s see how this works!

28. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Weighted Average Example Smith Company reported the following activity in Department A for the month of June:

29. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Equivalent units are calculated as follows: Weighted Average Example

30. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Equivalent units are calculated as follows: Weighted Average Example

31. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Equivalent units are calculated as follows: Weighted Average Example

32. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Weighted Average Example

33. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 60% Complete 6,000 Units Started 5,400 Units Completed 5,100 Units Started and Completed Weighted Average Example Materials 5,400 Units Completed 540 Equivalent Units 900 × 60% 5,940 Equivalent units of production

34. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 6,000 Units Started 5,400 Units Completed 5,100 Units Started and Completed 270 Equivalent Units 900 × 30% 5,670 Equivalent units of production Beginning Work in Process 300 Units 20% Complete Ending Work in Process 900 Units 30% Complete Weighted Average Example Conversion

35. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Production Report Helps managers control their departments Provides cost information for financial statements Shows the flow of units and costs through work in process Becomes the job cost sheet in process costing

36. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Production Report  A computation of cost per equivalent unit. Section 1 Section 2 Section 3 Production Report  A quantity schedule showing the flow of units and the computation of equivalent units.

37. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Production Report  A reconciliation of cost flows for the period, including: v Total cost for units completed and transferred from the processing department. v Total cost for partially completed units remaining in work in process.  A reconciliation of cost flows for the period, including: v Total cost for units completed and transferred from the processing department. v Total cost for partially completed units remaining in work in process. Section 1 Section 2 Section 3 Production Report

38. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. Double Diamond uses the weighted average cost procedure. Using the following information for the month of May, let’s prepare a production report for Shaping and Milling. Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. Double Diamond uses the weighted average cost procedure. Using the following information for the month of May, let’s prepare a production report for Shaping and Milling. Production Report Example

39. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Work in process, May 1: 200 units Materials:55% complete. $ 9,600 Conversion:30% complete. 5,575 Production started during May:5,000 units Production completed during May:4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Work in process, May 31: 400 units Materials40% complete. Conversion25% complete. Work in process, May 1: 200 units Materials:55% complete. $ 9,600 Conversion:30% complete. 5,575 Production started during May:5,000 units Production completed during May:4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Work in process, May 31: 400 units Materials40% complete. Conversion25% complete. Production Report Example

40. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Section 1: Quantity Schedule with Equivalent Units Production Report Example

41. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Production Report Example Section 1: Quantity Schedule with Equivalent Units

42. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Production Report Example Section 1: Quantity Schedule with Equivalent Units

43. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Section 2: Compute cost per equivalent unit Production Report Example

44. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Production Report Example Section 2: Compute cost per equivalent unit $378,200 ÷ 4,960 units = $76.25

45. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Production Report Example $356,475 ÷ 4,900 units = $72.75 Section 2: Compute cost per equivalent unit

46. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Section 3: Cost Reconciliation Production Report Example

47. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 4,800 units @ $149.00 Production Report Example Section 3: Cost Reconciliation

48. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin 160 units @ $76.25 Production Report Example Section 3: Cost Reconciliation All costs accounted for 100 units @ $72.75

49. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Operation Costing Operation costing employs some aspects of both job-order and process costing. Conversion costs assigned to batches as in process costing. Material Costs Charged to batches as in job-order costing. Job-order Costing Process Costing Operation Costing (Products produced in batches)

50. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin I’m going to end this chapter and process some leisure time, unless you want to see some journal entries. Do You Want to See Journal Entries?

51. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries Let’s look at the accounting journal entries for a process cost system. We’ll omit the numbers so that we can focus on concepts.

52. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries

53. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries

54. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries

55. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries

56. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries

57. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries

58. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Process Costing Typical Accounting Entries

59. © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin End of Chapter 4