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Systems Design: Process Costing 2/23/04
Chapter 4 Systems Design: Process Costing 2/23/04
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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.
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Types of Costing Systems Used to Determine Product Costs
Process Costing Job-order Costing Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill
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Differences Between Job-Order and Process Costing
Job order costing Many products are produced 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.
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Process Costing Direct Materials
Direct labor costs may be small in comparison to other product costs in process cost systems. Conversion Dollar Amount Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called conversion.
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Comparing Job-Order and Process Costing
Costs are traced and applied to individual jobs in a job-order cost system. Direct Materials Jobs Finished Goods Direct Labor ManufacturingOverhead Cost of Goods Sold
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Comparing Job-Order and Process Costing
Costs are traced and applied to departments in a process cost system. Direct Materials Processing Departments Finished Goods Direct Labor ManufacturingOverhead Cost of Goods Sold
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Process Cost Systems Exh. 4-2 Sequential Processing, p.152
Exh. 4-3 Parallel Processing, p. 153 Exh. 4-4 T-Account Model, p. 154 Exh. 4-5 Double Diamond, p. 156
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Process Cost Flows Let’s look at cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials.
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Manufacturing Overhead
Process Cost Flows Work in Process Department A Raw Materials Direct Materials Direct Materials Purchases Indirect Materials Manufacturing Overhead Work in Process Department B Actual Applied Direct Materials Other Overhead Indirect Materials
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Manufacturing Overhead
Process Cost Flows Work in Process Department A Wages Payable Direct Materials Direct Labor Direct Labor Indirect Labor Manufacturing Overhead Work in Process Department B Actual Applied Direct Materials Other Overhead Direct Labor Indirect Materials Indirect Labor
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Process Cost Flows (MOH is applied using Departmental rates)
Work in Process Department A Direct Materials Direct Labor Applied Overhead Manufacturing Overhead Work in Process Department B Actual Applied Direct Materials Other Overhead Overhead Applied to Work in Process POHR Direct Labor Indirect Materials Applied Overhead Indirect Labor
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Next, transfer work from Department A to Department B.
Process Cost Flows Next, transfer work from Department A to Department B.
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Process Cost Flows Work in Process Department A
Work in Process Department B Direct Materials Transferred to Dept. B Direct Materials Direct Labor Direct Labor Applied Overhead Applied Overhead Transferred from Dept. A
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Now let’s complete the goods in Department B and sell them.
Process Cost Flows Now let’s complete the goods in Department B and sell them.
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Cost of Goods Manufactured
Process Cost Flows Work in Process Department B Finished Goods Direct Materials Cost of Goods Manufactured Cost of Goods Manufactured Cost of Goods Sold Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold Cost of Goods Sold
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Equivalent Units of Production (Accounting for partially completed units in WIP)
Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.
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Equivalent Units of Production
Two half completed products are equivalent to one completed product. + = 1 So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.
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Quick Check 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
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Quick Check 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 10,000 units + (5,000 units × 0.30) = 11,500 equivalent units
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Calculating and Using 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 =
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Quick Check Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90
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Quick Check Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ 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
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Equivalent Units of Production – Weighted Average Method
The weighted average method . . . Makes no distinction between work done in prior and current period. Blends together units and costs from prior period and current period. Let’s see how this works!
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Weighted Average Method
Equivalent units of production = Units completed and transferred to the next department + equivalent units in ending WIP
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Weighted Average Example
Smith Company reported the following activity in Department A for the month of June:
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Weighted Average Example
Equivalent units are calculated as follows:
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Weighted Average Example
Equivalent units are calculated as follows:
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Weighted Average Example
Equivalent units are calculated as follows:
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Weighted Average Example
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
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Production Report Production Report
Shows the flow of units and costs through work in process Becomes the job cost sheet in process costing Helps managers control their departments Provides cost information for financial statements Production Report
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A computation of cost per equivalent unit.
Production Report Section 1 Section 2 Section 3 Production Report A quantity schedule showing the flow of units and the computation of equivalent units. A computation of cost per equivalent unit.
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Production Report Section 1 Section 2 Section 3 Production Report
A reconciliation of cost flows for the period, including: Total cost for units completed and transferred from the processing department. Total cost for partially completed units remaining in work in process.
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Production Report Example Page 160
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.
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Production Report Example
Work in process, May 1: units Materials: 55% complete. $ ,600 Conversion: 30% complete ,575 Production started during May: 5,000 units Production completed during May: 4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost ,900 Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete.
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Production Report Example
Section 1: Quantity Schedule with Equivalent Units
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Production Report Example
Section 1: Quantity Schedule with Equivalent Units
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Production Report Example
Section 1: Quantity Schedule with Equivalent Units
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Production Report Example
Section 2: Compute cost per equivalent unit
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Production Report Example
Section 2: Compute cost per equivalent unit $378,200 ÷ 4,960 units = $76.25
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Production Report Example
Section 2: Compute cost per equivalent unit $356,475 ÷ 4,900 units = $72.75
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Production Report Example
Section 3: Cost Reconciliation
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Production Report Example
Section 3: Cost Reconciliation 4,800 $149.00
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Production Report Example
Section 3: Cost Reconciliation 160 $76.25 100 $72.75 All costs accounted for (See VG 42)
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Do You Want to See Journal Entries?
I’m going to end this chapter and process some leisure time, unless you want to see some journal entries. Noooo!
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End of Chapter 4
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