1. 18-1 Copyright  Houghton Mifflin Company. All rights reserved. Chapter 18 Costing Systems: Process Costing Belverd E. Needles, Jr. Marian Powers Sherry K. Mills Henry R. Anderson - - - - - - - - - - - Multimedia Slides by: Dr. Paul J. Robertson New Mexico State University Steve Leask Steve Leask New Mexico State University

2. 18-2 Copyright  Houghton Mifflin Company. All rights reserved. Patterns of Product Flows OBJECTIVE 2 Relate the patterns of product flows in a process costing environment to the process cost flow approaches. Relate the patterns of product flows in a process costing environment to the process cost flow approaches.

3. 18-3 Copyright  Houghton Mifflin Company. All rights reserved. Product Flows »During production in a process costing environment, products flow through several departments or processes. »A company may use a number of separate processes to manufacture many different components, which will become direct materials.

4. 18-4 Copyright  Houghton Mifflin Company. All rights reserved. Cost Flow Approaches »In process costing, costs are accumulated by department and are passed to each subsequent department as the product is made. »The accumulated costs may be assigned to products using either the FIFO costing approach or the average costing approach.

5. 18-5 Copyright  Houghton Mifflin Company. All rights reserved. Cost Flows Through the Work in Process Inventory Accounts OBJECTIVE 3 Explain the role of the Work in Process Inventory account(s) in a process costing system. Explain the role of the Work in Process Inventory account(s) in a process costing system.

6. 18-6 Copyright  Houghton Mifflin Company. All rights reserved. Cost Flows »The main difference between job order costing and process costing is the way in which costs are assigned to products.

7. 18-7 Copyright  Houghton Mifflin Company. All rights reserved. Cost Flows »In a job order costing system, costs are traced to specific jobs and products. »In a process costing system, an averaging technique is used.

8. 18-8 Copyright  Houghton Mifflin Company. All rights reserved. Process Costing System »All products worked on during a specific time period are used for computing unit cost.  Total costs of direct materials, direct labor, and manufacturing overhead accumulated in the Work in Process Inventory account are divided by the equivalent units for products worked on during the period.

9. 18-9 Copyright  Houghton Mifflin Company. All rights reserved. Work in Process Inventory »There is one Work in Process Inventory account for each process or department in the production process.

10. 18-10 Copyright  Houghton Mifflin Company. All rights reserved. The Process Cost Report »The process cost report consists of three schedules: 1. The schedule of equivalent production. 2. The unit cost analysis schedule. 3. The cost summary schedule. »A process cost report helps managers track and analyze costs in a process costing system.

11. 18-11 Copyright  Houghton Mifflin Company. All rights reserved. Equivalent Production »Equivalent production is a measure of the number of equivalent whole units produced in a period of time.

12. 18-12 Copyright  Houghton Mifflin Company. All rights reserved. Equivalent Units »Equivalent units under the FIFO costing approach are the sum of several elements.  Units started and completed during the period.  Units in ending work in process times their percentage of completion.  Units in beginning work in process (one minus their percentage of completion).

13. 18-13 Copyright  Houghton Mifflin Company. All rights reserved. Computation of Equivalent Units.5.25.75 AE Equivalent production for conversion costs for Week 2 = 4.25 units Week 1Week 3 BCD 1.0 Week 2 Units started and completed during Week 2 = 3.0 units

14. 18-14 Copyright  Houghton Mifflin Company. All rights reserved. The Schedule of Equivalent Production  Materials.  Conversion costs. »The schedule of equivalent production includes unit figures for two elements.

15. 18-15 Copyright  Houghton Mifflin Company. All rights reserved. Step 1: Schedule of Equivalent Production: With Beginning Inventory Kernan Computer Products Company Schedule of Equivalent Production - Cables For the Month Ended February 28, 20xx Equivalent Units Units - Stage of Completion Units to Be Accounted For Direct Materials Costs Conversion Costs Beginning inventory - units started last period but completed in this period (Direct materials costs 100% complete) (Conversion costs 60% complete) 6,200 2,480 Units started and completed in this period 52,500 Ending inventory - units started but not completed in this period (Direct materials costs 100% complete) (Conversion costs 60% complete) 5,000 2,250 Totals63,70057,50057,230

16. 18-16 Copyright  Houghton Mifflin Company. All rights reserved. Step 2: Unit Cost Determination Kernan Computer Products Company Unit Cost Analysis Schedule - Cables For the Month Ended February 28, 20xx Total Cost AnalysisCosts from Beginning Inventory Costs Current Period Total Costs to Be Accounted For Direct materials cost Conversion costs Totals $20,150 21,390 $41,540 $189,750 320,488 $510,238 $209,900 341,878 $551,778 Computation of Equivalent Unit Costs Costs from Current Period Equivalent + Units Cost per Equivalent = Unit Direct materials costs Conversion costs Totals $189,750 320,488 $510,238 57,500 $ 3.30 5.60 $ 8.90

17. 18-17 Copyright  Houghton Mifflin Company. All rights reserved. Step 3: Cost Summary Schedule Kernan Computer Products Company Cost Summary Schedule - Cables For the Month Ended February 28, 20xx Cost of Goods Transferred to Finished Goods Inventory Cost of Ending Work in Process Inventory Total Costs to Be Accounted For Beginning inventory Costs from preceding period $ 41,540 Direct materials costs: none ---- Conversion costs: 2,480 units x $5.60 13,888 Subtotal $ 55,428 Totals $522,678 + $29,100 = $551,778 Costs to complete this period Units started and completed 52,500 units x $8.90 467,250 Ending inventory Direct materials costs: 5,000 units x $3.30 $16,500 Conversion costs: 2,250 units x $5.60 12,600

18. 18-18 Copyright  Houghton Mifflin Company. All rights reserved. Process Costing and Activity-Based Costing OBJECTIVE 5 Apply activity-based costing to a process costing system. Apply activity-based costing to a process costing system.

19. 18-19 Copyright  Houghton Mifflin Company. All rights reserved. Traditional Process Costing System »In a traditional process costing system, only costs that can be traced directly to the process and indirect production costs are assigned to the Work in Process Inventory account.

20. 18-20 Copyright  Houghton Mifflin Company. All rights reserved. Activity-Based Costing »In an activity-based costing system, all costs are first divided into two groups:  Those that are directly traceable to a product, process, or department.  Those that are not directly traceable to a cost object.

21. 18-21 Copyright  Houghton Mifflin Company. All rights reserved. Activity-Based Costing System »The first step is the calculation of the assignment rate for each cost driver for the overall company. »The second step is to assign the costs applicable to the department. »The third step is to prepare a process cost report.