1. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 4 Process Costing and Hybrid Product- Costing Systems

2. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 1

3. 4-3 Comparison of Job-Order Costing and Process Costing 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.

4. 4-4 Process Costing Job-order Costing Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill Comparison of Job-Order Costing and Process Costing

5. 4-5 Job-order costing –Costs accumulated by the job. –Work in process has a job-cost sheet 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. Comparison of Job-Order Costing and Process Costing

6. 4-6 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-order cost system. Differences Between Job-Order and Process Costing

7. 4-7 Direct Material Finished Goods Cost of Goods Sold Products The work-in-process account consists of individual products in a process cost system. Differences Between Job-Order and Process Costing Direct Labor & Overhead ( Conversion) When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.

8. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 2

9. 4-9 Process Cost Flows

10. 4-10 Process Cost Flows

11. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 3

12. 4-12 Equivalent Units: A Key Concept Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

13. 4-13 Equivalent Units Example Two one-half completed products are equivalent to one completed product. So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. + = l

14. 4-14 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 Equivalent Units Question 1

15. 4-15 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 ×.30) = 11,500 equivalent units Equivalent Units Question 1

16. 4-16 If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units Question 2

17. 4-17 If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a.$1.84 b.$2.40 c.$2.76 d.$2.90 Equivalent Units Question 2 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit

18. 4-18 Calculating and Using Equivalent Units of Production To calculate the direct materials and conversion costs per equivalent unit for the period: Materials cost per equivalent unit = Materials cost for the period Materials equivalent units for the period Conversion cost per equivalent unit = Conversion cost for the period Conversion equivalent units for the period

19. 4-19 Departmental Production Report Production Report Ê Analysis of physical flow of units. Ë Calculation of equivalent units. Ì Computation of unit costs. Í Analysis of total costs.

20. 4-20 Equivalent Units of Production – Weighted-Average Method 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 from the prior period and the current period. The FIFO method is a more complex method and is rarely used in practice.

21. 4-21 MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. MVP uses the weighted-average cost procedure. Material is added at the beginning of the Cutting Department, and conversion is incurred uniformly throughout the process. Using the following information for the month of March, let’s prepare a production report for the Cutting Department. Production Report Example

22. 4-22 Work in process, March 1: 20,000 units Cost Materials: 100% complete. $ 50,000 Conversion: 10% complete. 7,200 Units started into production in March:30,000 units Units completed and transferred out in March:40,000 units Work in process, March 31: 10,000 units Materials100% complete. Conversion 50% complete. Costs incurred during March Materials cost 90,000 Conversion costs: Direct labor$ 86,000 Applied manufacturing overhead 107,500 Total conversion costs 193,500 Total costs to account for $ 340,700 Production Report Example

23. 4-23 Ê Analysis of Physical Flow of Units Production Report Example

24. 4-24 Production Report Example Ë Calculation of Equivalent Units 50% of 10,000 units Beginning inventory % is not used in weighted-average method.

25. 4-25 Production Report Example Ë Calculation of Equivalent Units 100% of 10,000 units, all material added at beginning

26. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 4

27. 4-27 Ì Computation of unit costs Production Report Example $140,000 ÷ 50,000 equivalent units $200,700 ÷ 45,000 equivalent units $2.80 + $4.46

28. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 5

29. 4-29 Production Report Example Í Analysis of total costs

30. 4-30 Production Report Example Í Analysis of total costs

31. 4-31 Production Report Example Í Analysis of total costs All costs accounted for

32. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 6

33. 4-33

34. 4-34 Manufacturing overhead is applied to Work-in- Process Inventory using a predetermined overhead rate Actual costs of manufacturing overhead are entered in Work-in- Process Inventory Actual Costingvs.Normal Costing

35. 4-35 Departmental Production Report Ê Analysis of physical flow of units. Ë Calculation of equivalent units. Ì Computation of unit costs. Í Analysis of total costs.

36. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Learning Objective 7

37. 4-37 Operation Costing Operation costing employs some aspects of both job-order and process costing. Operation Costing (Products produced in batches) Job-order Operation Costing Process Costing (Products produced in batches) Costing

38. 4-38 Operation Costing Operation costing employs some aspects of both job-order and process costing. Operation Costing (Products produced in batches) Job-order Operation Costing Process Costing (Products produced in batches) Costing Conversion costs assigned to batches as in process costing. Material Costs charged to batches as in job-order costing.

39. 4-39 I’m ready to process some leisure time. End of Chapter 4