1. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Four Systems Design: Process Costing

2. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-2 Chapter 4 You are responsible for the Weighted Average Method only. None of the Appendices are assigned.

3. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-3 Processing Departments Any unit in an organization where materials, labor or overhead are added to the product. The activities performed in a processing department are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogeneous.

4. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-4 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

5. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-5 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

6. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-6 Process Cost Flows (in T-account form) Work in Process Department B Work in Process Department A Manufacturing Overhead Overhead Applied to Work in Process Applied Overhead Direct Labor Direct Materials Direct Labor Direct Materials Actual Overhead

7. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-7 Process Cost Flows (in T-account form) 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

8. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-8 Equivalent Units of Production Equivalent units are the product of the number of partially completed units and the percentage completion of those units. We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory.

9. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-9 Equivalent Units – The Basic Idea Two half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 complete units. + = 1

10. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-10 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

11. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-11 Equivalent Units of Production Weighted-Average Method The weighted-average method... Makes no distinction between work done in prior or current periods. Blends together units and costs from prior and current periods. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending work in process inventory.

12. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-12 Weighted-Average Example Double Diamond Skis reported the following activity in Shaping and Milling Department for the month of May:

13. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-13 The first step in calculating the equivalent units is to identify the units completed and transferred out of the Department in May (4,800 units) Weighted-Average Example

14. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-14 The second step is to identify the equivalent units of production in ending work in process with respect to materials for the month (160 units) and add this to the 4,800 units from step one. Weighted-Average Example

15. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-15 Weighted-Average Example The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month (100 units) and add this to the 4,800 units from step one.

16. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-16 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

17. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-17 Learning Objective 3 Compute the cost per equivalent unit using the weighted-average method.

18. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-18 Beginning work in process: 200 units Materials: 55% complete $9,600 Conversion: 30% complete5,575 Production started during May5,000 units Production completed during May4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Ending work in process 400 units Materials: 40% complete Conversion: 25% complete Beginning work in process: 200 units Materials: 55% complete $9,600 Conversion: 30% complete5,575 Production started during May5,000 units Production completed during May4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Ending work in process 400 units Materials: 40% complete Conversion: 25% complete Compute and Apply Costs

19. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-19 Compute and Apply Costs The formula for computing the cost per equivalent unit is : Cost per equivalent unit = Cost of beginning work in process inventory Cost added during the period Equivalent units of production +

20. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-20 Here is a schedule with the cost and equivalent unit information. Compute and Apply Costs

21. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-21 Compute and Apply Costs $356,475 ÷ 4,900 units = $72.75 $378,200 ÷ 4,960 units = $76.25 Here is a schedule with the cost and equivalent unit information.

22. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-22 Computing the Cost of Units Transferred Out

23. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-23 Reconciling Costs

24. Copyright © 2008, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 4-24 Reconciling Costs