Contrôle Interne Avancé-HEC Lausanne-2007/2008 CHAPTER 17 Process Costing

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Job-Costing and Process Costing: Opposite Ends of a Continuum Job-Costing Systems Distinct, identifiable units of a product or service Examples: Custom-made machines, Houses Process-Costing Systems Masses of identical or similar units of a product or service Examples: Food, Chemical processing

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Process Costing Job Order Costing F Used for production of large, unique, high-cost items. F Built to order rather than mass produced. F Many costs can be directly traced to each job. Basic Cost Accounting Procedures

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Process Costing Job Order Costing F Typical job order cost applications: v Special-order printing v Building construction F Also used in service industry v Hospitals v Law firms Basic Cost Accounting Procedures

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Process Costing Job Order Costing F Used for production of small, identical, low-cost items. F Mass produced in automated continuous production process. F Costs cannot be directly traced to each unit of product. Basic Cost Accounting Procedures

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill Process Costing Job Order Costing Basic Cost Accounting Procedures

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Direct Materials Finished Goods Cost per unit for each job Direct Labor Factory Overhead Jobs The Work in Process account consists of individual jobs in job costing. Job and Process Costing

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Direct Materials Finished Goods Direct Labor Factory Overhead Processes Job and Process Costing The Work in Process account consists of specific processes in process costing. Cost per unit processed

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Job and Process Costing Similarities Same objective: to determine the cost of products Same inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method: predetermined rate times actual activity

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Work in Process Accounts — The Key to Process Costing Work in Process Assembly Labor Materials Indirect Finished Goods Factory Overhead Direct Delivered to Customers Applied Overhead Work in Process Packaging

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Process Costing Process costing is a system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units, Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead, Unit costs are computed by dividing total costs incurred by the number of units of output from the production process.

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Process-Costing Assumptions Direct Materials are added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line, Conversion Costs are added equally along the production process.

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. Understanding Cost Flows

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Unit cost is computed by dividing the accumulated costs by the number of units produced in the period. If partially complete units remain in process, we must use equivalent units as the divisor to obtain unit costs. Understanding Cost Flows Costs are accumulated for a period of time by process or department.

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Two one-half full pitchers are equivalent to one full pitcher. + = 1 Process Costing and Equivalent Units

Contrôle Interne Avancé-HEC Lausanne-2007/2008 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 Process Costing and Equivalent Units

Contrôle Interne Avancé-HEC Lausanne-2007/2008 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 For the current period, PencilCo 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 PencilCo have for the period? a.10,000 b.11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Process Costing and Equivalent Units

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Cost per equivalent unit = Product costs for the period Equivalent units for the period Cost per Equivalent Unit

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Cost per Equivalent Unit

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per 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 Cost per Equivalent Unit

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Weighted-Average Process-Costing Method Calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done), Assigns this cost to equivalent units completed and transferred out of the process, and to incomplete units still in process.

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Weighted-Average Process-Costing Method Weighted-average cost is the total of all costs in the Work-in-Process account divided by the total equivalent units of work done to date, The beginning balance of the Work-in- Process account (work done in a prior period) is blended in with current period costs.

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Five-Step Process-Costing Allocation 1. Summarize the flow of physical units of output, 2. Compute output in terms of equivalent units, 3. Compute cost per equivalent unit, 4. Summarize total costs to account for, 5. Assign total costs to units completed and to units in ending Work in Process.

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Steps Weighted-Average Method

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Step 1: Summarize Output Step 2: Compute Equivalent Units

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Step 3: Compute Cost per Unit Step 4: Summarize Total Costs

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Step 5: Assign Costs to Units Completed and Ending Work in Process

Contrôle Interne Avancé-HEC Lausanne-2007/2008 Result of the Process (as before) Two critical figures arise out of Step Five of the cost allocation process: 1. The amount of the Journal Entry transferring the allocated cost of units completed and sent from Work-in-Process Inventory to Finished Goods Inventory, 2. The ending balance of the Work-in- Process Inventory account that will appear on the Balance Sheet.