CHAPTER 3 Process Costing

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

Process Costing Example

Job-Order Costing System

Process Costing System

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

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

Flow of Cost Between Processing Departments

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

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

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

Calculating Unit Cost Equivalent Units Partially completed units are converted to a comparable number of completed units

Equivalent units – Material and Converision costs

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.

Example Exercise #1 Solution Materials Units completed 2,500 Equivalent units (300*85%) 255 2,755 units Labor Equivalent units (300*50%) 150 2,650 units

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

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.

Example Exercise #2 Solution Direct Labor Beginning WIP $135,000 March labor $650,000 Total Labor Cost $785,000 Units Units completed 25,000 Equivalent units (8,000*50%) 4,000 Total Units 29,000 Cost per Equivalent Unit $785,000 / 29,000 pounds = $27.07 per pound

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

Reconciliation of Units

Reconciliation of Costs

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

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

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

Full and Incremental Cost

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