1. Systems Design: Process Costing
Chapter4
Systems Design: Process Costing

2. Process Costing To help set prices To evaluate products
How are unit costs used?
To determine balance sheet inventory
To evaluate production efficiency

3. Comparing Job Costing and Process Costing
Costs accumulated by the job.
Work in process has a job cost record for each job.
Many unique, high cost jobs.
Jobs built to customer order.
Process costing
Costs accumulated by department or process.
Work in process has a production report for each batch of products.
A few identical, low cost products.
Units continuously produced for inventory in automated process.

4. Comparing Job Costing and Process Costing
Work in process contains individual jobs in a job cost system.
Direct Materials
Finished Goods
Work in Process
Direct Labor
ManufacturingOverhead
Cost of Goods Sold

5. Comparing Job Costing and Process Costing
Work in process contains homogenous products in a process cost system.
Direct Materials
Direct Labor & Overhead (Conversion)
Finished Goods
Products
Cost of Goods Sold

6. Comparing Job Costing and Process Costing
Same objective: 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

7. Assigning Costs to Products – All Units Fully Completed
No beginning or ending Work in Process Inventory
Common when a company is successful at just-in-time production
Cost per unit =
Manufacturing costs for a period Units produced for the period

8. Assigning Costs to Products – Some Units Not Fully Completed
Same objective: determine the cost of products
No beginning Work in Process Inventory
Ending Work in Process Inventory consists of units started during the period, but incomplete at the end of the period.
Same Inventory accounts: raw materials, work in process, and finished goods
We must now deal with the concept of equivalent units.
Same overhead assignment method: predetermined rate times actual activity

9. Assigning Costs to Products – Some Units Not Fully Completed
We must now deal with the concept of equivalent units.
Same objective: determine the cost of products
Equivalent units is a concept expressing partially complete units as a smaller number of fully complete units.
Same Inventory accounts: raw materials, work in process, and finished goods
Transition to next slide: now 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.
Cost per equivalent unit =
Manufacturing costs for a period Equivalent units for the period
Same overhead assignment method: predetermined rate times actual activity

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
Then direct labor
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
Then indirect labor
Other Overhead
Direct Labor
Indirect Materials
Indirect Labor

12. Manufacturing Overhead Overhead Applied to Work in Process
Process Cost Flows
Work in Process Department A
Wages Payable
Direct Materials
Direct Labor
Direct Labor
Indirect Labor
Applied Overhead
Manufacturing Overhead
Work in Process Department B
Actual
Applied
Direct Materials
Next, transfer from department A to B
Other Overhead
Overhead Applied to Work in Process
Direct Labor
Indirect Materials
Applied Overhead
Indirect Labor

13. 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
Now, let’s complete the goods in B and sell them

14. 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

15. Production Report Production Report
Shows the flow of units and costs through work in process
Provides cost information for financial statements
Production Report
Becomes the job cost sheet in process costing
Helps managers control their departments

16. 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.

17. 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.

18. Equivalent Units of Production
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.
Equivalent units = # of partially completed units * percentage completion <-> equivalent amount of material and labor

19. Equivalent Units of Production
Two half completed products are equivalent to one completed product. + =
So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.

20. Assigning Costs Using Weighted-Average Costing
The weighted average method . . .
Makes no distinction between work done in the prior period and work done in the current period.
Blends together units and costs in beginning inventory with units and costs in the current period.

21. Assigning Costs Using Weighted-Average Costing
Beginning
Inventory 250 units
1,250 units
1,100 units completed
1,000 units started
Ending Inventory 150 units
Now let’s examine the five-step process.

22. Weighted Average Example
Materials
1,000 Units Started
Beginning Work in Process 250 Units 100% Complete
Ending Work in Process 150 Units 100% Complete
850 Units Started and Completed
1,100 Units Completed
150 × 100%
150 Equivalent Units
1,250 Equivalent units of production

23. Weighted Average Example
Conversion
1,000 Units Started
Beginning Work in Process 250 Units 80% Complete
Work to Complete Process 20%
250 Units
Ending Work in Process 150 Units 33 1/3% Complete
850 Units Started and Completed
1,100 Units Completed
150 × .333%
50 Equivalent Units
1,150 Equivalent units of production

24. Costs Transferred in from Prior Departments
Multiple departments in a process result in units and costs that are transferred from a prior department to the current department.
These transferred-in costs are treated exactly like a direct material that is added at the beginning of a production process.
Let’s see an example.

25. Costs Transferred in from Prior Departments
Complete the five-step process for Ace CD Inc. to assign costs to units completed and to units left in process for June.

26. Costs Transferred in from Prior Departments

27. Costs Transferred in from Prior Departments
100% complete for material, conversion, and transferred-in units.

28. Costs Transferred in from Prior Departments
60% of 15,000 units
40% of 15,000 units
Transferred-in units are 100% complete

29. Costs Transferred in from Prior Departments