Systems Design: Process Costing Chapter4 Systems Design: Process Costing

Types of Costing Systems Used to Determine Product Costs Process Costing Job-order Costing Many units of a single, homogeneous product flow evenly through a continuous production process. One unit of product is indistinguishable from any other unit of product.. Each unit of product is assigned the same average cost. Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

Differences Between Job-Order and Process Costing 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.

Sequential Processing Departments Start Basic raw materials Processing Department 1 Processing costs Processing Department 2 Partially completed goods Processing costs Processing Department 3 Partially completed goods Processing costs Finished Goods Completed goods

Parallel Processing Departments Start Basic raw materials Processing Department 1 Processing costs Processing Department A Processing Department 2 Partially completed goods Processing costs Processing Department 3 Partially completed goods Processing costs Finished Goods Completed goods

Flow of Materials, Labor and Overhead Costs Direct Material Processing Department Finished Goods Direct Labor ManufacturingOverhead Cost of Goods Sold

Flow of Materials, Labor and Overhead Costs Work in Process Mixing Department Raw Materials Direct Material Direct Material Purchases Indirect Material Indirect Material Manufacturing Overhead Work in Process Finishing Department Actual Applied Other Overhead

Flow of Materials, Labor and Overhead Costs Work in Process Mixing Department Wages Payable Direct Material Direct Labor Direct Labor Indirect Labor Indirect Labor Manufacturing Overhead Work in Process Finishing Department Actual Applied Direct Material Other Overhead Indirect Material

Flow of Materials, Labor and Overhead Costs Work in Process Mixing Department Wages Payable Direct Material Direct Labor Direct Labor Indirect Labor Overhead Applied to Work in Process Applied Overhead Manufacturing Overhead Work in Process Finishing Department Actual Applied Direct Material Other Overhead Direct Labor Indirect Material Indirect Labor

Flow of Materials, Labor and Overhead Costs Now, let’s transfer the partially completed goods from Mixing Department to Finishing Department.

Flow of Materials, Labor and Overhead Costs Work in Process Mixing Department Work in Process Finishing Department Direct Material Transferred to Finishing Transferred from Mixing Direct Material Direct Labor Direct Labor Applied Overhead Applied Overhead

Flow of Materials, Labor and Overhead Costs The goods have been completed in the Finishing Department and will be transferred to Finished Goods Inventory when they are ready to be sold.

Flow of Materials, Labor and Overhead Costs Work in Process Finishing Department Finished Goods Direct Material Cost of Goods Manufactured Cost of Goods Sold Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold

Materials, Labor, and Overhead Cost Entries

Flow of Materials, Labor and Overhead Costs

Flow of Materials, Labor and Overhead Costs

Flow of Materials, Labor and Overhead Costs

Flow of Materials, Labor and Overhead Costs

Flow of Materials, Labor and Overhead Costs

Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. It is the concept of expressing partially completed products as a smaller number of fully completed units. + = Two one-half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 complete units.

Quick  For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

Quick  For the current period, Matrix 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 Matrix have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units

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

Quick  Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

Quick  Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s 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

Weighted Average Method Under the weighted-average method equivalent units will always be calculated as follows:

Weighted Average Method Matrix, Inc. reported the following activity in Mixing Department for the month of June:

Weighted Average Method Equivalent units are calculated as follows:

Weighted Average Method Equivalent units are calculated as follows:

Weighted Average Method Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Equivalent units are calculated as follows:

Weighted Average Method Materials 6,000 Units Started Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 60% Complete 5,100 Units Started and Completed 5,400 Units Completed 5,400 Units Completed 900 × 60% 540 Equivalent Units 5,940 Equivalent units of production

Weighted Average Method Conversion 6,000 Units Started Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 30% Complete 5,100 Units Started and Completed 5,400 Units Completed 900 × 30% 270 Equivalent Units 5,670 Equivalent units of production

Production Report Production Report Section 1 Section 2 Section 3 Quantity schedule with computation of equivalent units. Section 1 A computation of cost per equivalent unit. Section 2 A reconciliation of cost flows for the period. Section 3

Production Report Example 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 Work in process, May 1: 200 units Materials: 50% complete. $ 3,000 Conversion: 30% complete. 1,000 Units started into production in May: 5,000 Units completed and transferred out in May: 4,800 Costs added to production in May Materials cost $ 74,000 Conversion cost 70,000 Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete. Cost

Production Report Example Step: Quantity Schedule with Equivalent Units

Production Report Example Step: Quantity Schedule with Equivalent Units

Production Report Example Section: Compute cost per equivalent unit

Production Report Example Section: Compute cost per equivalent unit $77,000 ÷ 4,960 units = $15.524 (rounded)

Production Report Example Section: Compute cost per equivalent unit $71,000 ÷ 4,900 units = $14.490 (rounded)

Production Report Example Section : Cost Reconciliation

Production Report Example Section : Cost Reconciliation 4,800 units @ $30.014

Production Report Example Section : Cost Reconciliation 160 units @ $15.524 100 units @ $14.49 All costs accounted for

End of Chapter 4