1. Systems Design: Process Costing 2/23/04
Chapter 4
Systems Design: Process Costing 2/23/04

2. 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.

3. Types of Costing Systems Used to Determine Product Costs
Process Costing
Job-order Costing
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill

4. 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.

5. 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.

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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

12. 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

13. Next, transfer work from Department A to Department B.
Process Cost Flows
Next, transfer work from Department A to Department B.

14. 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

15. 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.

16. 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

17. 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.

18. 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.

19. 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

20. 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

21. 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 =

22. 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

23. 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

24. 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!

25. Weighted Average Method
Equivalent units of production = Units completed and transferred to the next department + equivalent units in ending WIP

26. Weighted Average Example
Smith Company reported the following activity in Department A for the month of June:

27. Weighted Average Example
Equivalent units are calculated as follows:

28. Weighted Average Example
Equivalent units are calculated as follows:

29. Weighted Average Example
Equivalent units are calculated as follows:

30. Weighted Average Example
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process

31. 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

32. 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.

33. 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.

34. 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.

35. 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.

36. Production Report Example
Section 1: Quantity Schedule with Equivalent Units

37. Production Report Example
Section 1: Quantity Schedule with Equivalent Units

38. Production Report Example
Section 1: Quantity Schedule with Equivalent Units

39. Production Report Example
Section 2: Compute cost per equivalent unit

40. Production Report Example
Section 2: Compute cost per equivalent unit
$378,200 ÷ 4,960 units = $76.25

41. Production Report Example
Section 2: Compute cost per equivalent unit
$356,475 ÷ 4,900 units = $72.75

42. Production Report Example
Section 3: Cost Reconciliation

43. Production Report Example
Section 3: Cost Reconciliation
4,800 $149.00

44. Production Report Example
Section 3: Cost Reconciliation
160 $76.25
100 $72.75
All costs accounted for
(See VG 42)

45. 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!

46. End of Chapter 4