19-1 P ROCESS C OST S YSTEMS CHAPTER 19

19-2 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. 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. Process Costing

19-3 Similarities for Job and Process Costing 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

19-4 Differences for Job and Process Costing Job costingProcess costing Costs accumulated by the job Costs accumulated by department or process Work in process account for each job Work in process account for each department or process A few identical, low-cost products Many unique, high cost jobs Jobs are built to customer order Units continuously produced for inventory in automated process Relatively small direct labor cost component Relatively large direct labor cost component

19-5 Process Costing Direct Material Type of Product Cost Dollar Amount Manufacturing Overhead Direct Labor Direct labor costs are small compared to other product costs because of the high level of automation. So, direct labor and manufacturing overhead are often combined into one product cost called conversion.

19-6 Process Costing Direct Material Conversion So, direct labor and manufacturing overhead are often combined into one product cost called conversion. Type of Product Cost Dollar Amount Direct labor costs are small compared to other product costs because of the high level of automation.

19-7 Comparing Cost Flows for Job and Process Costing Direct Material Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Work in Process From Previous Chapter

19-8 Direct Material Finished Goods Cost of Goods Sold Direct Labor Manufacturing Overhead Jobs The work in process account consists of individual jobs in a job cost system. Comparing Cost Flows for Job and Process Costing

19-9 Direct Material Finished Goods Cost of Goods Sold Direct Labor Products The work in process account consists of individual products in a process cost system. Manufacturing Overhead Comparing Cost Flows for Job and Process Costing

19-10 Direct Material Finished Goods Cost of Goods Sold Direct Labor & Overhead ( Conversion) When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead. Products Comparing Cost Flows for Job and Process Costing

19-11 Process Costing Cost Flows Let’s examine the cost flows in a process cost system with two departments. We will start with materials.

19-12 Raw Materials Purchases Mfg. Overhead Work in Process-A Work in Process-B Transferred from Dept. A Process Costing Cost Flows

19-13 Work in Process-B Raw Materials Purchases Mfg. Overhead Work in Process-A Transferred from Dept. A Direct Material Direct Material Process Costing Cost Flows

19-14 Work in Process-B Raw Materials Purchases Mfg. Overhead Work in Process-A Transferred from Dept. A Direct Material Direct Material Direct Material Indirect Material Process Costing Cost Flows Actual Overhead Costs

19-15 Next, let’s add labor costs to the process cost flows. Are you with me? Process Costing Cost Flows

19-16 Work in Process-B Payroll Summary Actual Wages Mfg. Overhead Work in Process-A Transferred from Dept. A Direct Material Direct Material Actual Overhead Costs Process Costing Cost Flows

19-17 Work in Process-B Payroll Summary Mfg. Overhead Work in Process-A Transferred from Dept. A Direct Material Direct Labor Direct Labor Direct Material Direct Labor Actual Overhead Costs Actual Wages Process Costing Cost Flows

19-18 Work in Process-B Payroll Summary Mfg. Overhead Actual Overhead Costs Work in Process-A Transferred from Dept. A Direct Material Direct Labor Direct Labor Indirect Labor Direct Material Direct Labor Actual Wages Process Costing Cost Flows

19-19 Work in Process-B Payroll Summary Mfg. Overhead Actual Overhead Costs Overhead Applied to Work in Process Work in Process-A Transferred from Dept. A Direct Material Direct Labor Overhead Direct Labor Indirect Labor Direct Material Direct Labor Overhead Actual Wages Process Costing Cost Flows

19-20 Work in Process-B Payroll Summary Mfg. Overhead Actual Overhead Costs Overhead Applied to Work in Process Work in Process-A Transferred from Dept. A Direct Material Direct Labor Overhead Current Transfers to Dept. B Direct Labor Indirect Labor Direct Material Direct Labor Overhead Actual Wages Process Costing Cost Flows

19-21 Now, let’s complete the goods and sell them. Still with me? Process Costing Cost Flows

19-22 Finished Goods Cost of Goods Sold Work in Process-B Transferred from Dept. A Direct Material Direct Labor Overhead Process Costing Cost Flows

19-23 Finished Goods Cost of Goods Sold Cost of Goods Mfg. Work in Process-B Transferred from Dept. A Direct Material Direct Labor Overhead Cost of Goods Mfg. Process Costing Cost Flows

19-24 Finished Goods Cost of Goods Sold Cost of Goods Mfg. Cost of Goods Sold Work in Process-B Transferred from Dept. A Direct Material Direct Labor Overhead Cost of Goods Mfg. Process Costing Cost Flows

19-25 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 equivalent units produced in the period. Process Costing Equivalent Units

19-26 Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Process Costing Equivalent Units

19-27 Two one-half full pitchers are equivalent to one full pitcher. + = Equivalent Units Example So, 10,000 units 70 percent complete is the equivalent of 7,000 complete units.

19-28 Equivalent Units Question 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.13,500 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.13,500 d. 15,000

19-29 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.13,500 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.13,500 d. 15,000 10,000 units + (5,000 units ×.30) = 11,500 equivalent units Equivalent Units Question

19-30 Cost Per Equivalent Unit Cost per equivalent unit = Product costs for the period Equivalent units for the period

19-31 Equivalent Units Question 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

19-32 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 Equivalent Units Question

19-33 Production Cost Report Shows the flow of units and costs through work in process. Shows division of costs between units transferred and units remaining in process. Helps managers control their departments. Provides cost information for financial statements.

19-34 Preparation includes four major steps:  Trace the physical flow of units  Convert actual units to equivalent units each  Compute cost per equivalent unit for each cost element (material, conversion)  Use unit costs to determine cost of ending Work in Process (WIP) inventory and cost of goods transferred to Finished Goods. Preparation includes four major steps:  Trace the physical flow of units  Convert actual units to equivalent units each  Compute cost per equivalent unit for each cost element (material, conversion)  Use unit costs to determine cost of ending Work in Process (WIP) inventory and cost of goods transferred to Finished Goods. Production Cost Report

19-35 At this point, we need to look at an example to illustrate the concepts. Production Cost Report

19-36 Sipp-Fizz Cola uses process costing to determine unit costs. It has only one processing department. Sipp-Fizz uses the average cost procedure: The number of equivalent units for each cost element equals the number of units completed and transferred to finished goods plus the number of equivalent units in ending work in process inventory for that cost element. Sipp-Fizz uses the average cost procedure: The number of equivalent units for each cost element equals the number of units completed and transferred to finished goods plus the number of equivalent units in ending work in process inventory for that cost element. Production Cost Report Example

19-37 Production Cost Report Example The following information is from Sipp- Fizz records for the month of August. Using this information, compute:  Equivalent units.  Cost per equivalent unit.  Cost of goods completed and transferred.  Cost of ending work in process inventory. Using this information, compute:  Equivalent units.  Cost per equivalent unit.  Cost of goods completed and transferred.  Cost of ending work in process inventory. One 12-can case equals one unit.

19-38 Beginning work in process, August 1 Units, conversion 50% complete 4,000 cases/units Costs: Direct materials $ 12,000 Direct labor $ 6,120 Manufacturing overhead applied $ 8,000 12,000 units were started in August. Costs incurred in August Direct materials $ 36,000 Direct labor $ 48,000 Manufacturing overhead applied $ 60,000 Ending work in process inventory, August 31 Units, conversion 70% complete 6,000 cases/units All materials are added at the beginning of processing Production Cost Report Example

19-39 l Our first two steps are...  Trace the physical flow of units.  Convert actual units to equivalent units. l Because material is added at the beginning of the process, the Sipp-Fizzies are 100 percent complete as to material when the process starts. Production Cost Report Example

19-40 Trace the Physical Flow of Units Units in beginning inventory 4,000 Units started during month 12,000 Units to account for 16,000 6,000 Less: Units in ending inventory 10,000 Units completed & transferred 1 Production Cost Report Example

19-41 Conversion Convert Actual Units to Equivalent Units Actual Equivalent Units Units Units completed & transferred10,000 Units in ending inventory* 6,000 Units accounted for 16,000 *Units in ending inventory are 100% complete as to materials and 70%complete as to conversion. 2 Production Cost Report Example Materials

19-42 Conversion Convert Actual Units to Equivalent Units Actual Equivalent Units Units Units completed & transferred10,000 Units in ending inventory* 6,000 Units accounted for 16,000 *Units in ending inventory are 100% complete as to materials and 70%complete as to conversion. 2 Production Cost Report Example Materials 10,000 6,000 16,000 10,000 4,200** 14,200 ** 6,000 units x 70%complete = 4,200

19-43 Now that we have calculated equivalent units for Sipp-Fizz, let’s calculate the cost per equivalent unit. Production Cost Report Example

19-44 Our next two steps are...  Using equivalent units for each cost item, compute the cost per equivalent unit for l Materials l Conversion l Total  Use cost per equivalent unit from to determine cost of goods completed and transferred and cost of ending work in process inventory. 3 Production Cost Report Example

19-45 Production Cost Report Example MaterialsConversionTotal Beginning inventory12,000$14,120$26,120$ Cost added in August36, , ,000 Costs to account for48,000$122,120$170,120$

19-46 Production Cost Report Example MaterialsConversionTotal Beginning inventory12,000$14,120$26,120$ Cost added in August36, , ,000 Costs to account for48,000$122,120$170,120$ Equivalent units 16,00014,200 Equivalent units from and 12

19-47 Production Cost Report Example MaterialsConversionTotal Beginning inventory12,000$14,120$26,120$ Cost added in August36, , ,000 Costs to account for48,000$122,120$170,120$ Equivalent units Cost per unit Cost per unit for each cost element = Cost to account for ÷ Equivalent units 16,00014, $8.60$11.60$ 3

19-48 Production Cost Report Example MaterialsConversionTotal Beginning inventory12,000$14,120$26,120$ Cost added in August36, , ,000 Costs to account for48,000$122,120$170,120$ Equivalent units Cost per unit Cost transferred out 4 Cost per unit for each cost element = Cost to account for ÷ Equivalent units 16,00014, $8.60$11.60$ 3 30,000$ 86,000$116,000$ Cost transferred out = 10,000 units completed × cost per unit

19-49 Production Cost Report Example MaterialsConversionTotal Beginning inventory12,000$14,120$26,120$ Cost added in August36, , ,000 Costs to account for48,000$122,120$170,120$ Equivalent units Cost per unit Cost transferred out Ending WIP inventory cost Costs accounted for 4 Cost per unit for each cost element = Cost to account for ÷ Equivalent units 16,00014, $8.60$11.60$ 3 30,000$ 86,000$116,000$ 18,000 36,120 54,120 48,000$122,120$170,120$ Cost transferred out = 10,000 units completed × cost per unit Ending WIP inventory cost = equivalent units in ending inventory × cost per unit

19-50 Process Costing Spoilage Cost of goods lost during production Normal spoilage is an expected amount in an efficient process. Abnormal spoilage exceeds the expected amount in an efficient process. Cost is a loss in the period of production Cost is part of cost of good units produced

19-51 Process Costing I see some journal entries for process costing on the horizon!

19-52 Process Costing Typical Accounting Entries

19-53 Process Costing Typical Accounting Entries

19-54 Process Costing Typical Accounting Entries

19-55 Process Costing Typical Accounting Entries

19-56 THE END It’s been a long day. I’m ready to process some leisure time.