CHAPTER 3

Process Costing

Difference Between Job-Order and Process Costing Systems

Job-Order Costing Each unique product or batch is considered a job for which cost information is needed Necessary to trace manufacturing costs to specific jobs When completed, cost of job is removed from Work in Process and included in Finished Goods
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Difference Between Job-Order and Process Costing Systems

Process Costing Large quantities produced of homogenous products Average cost = total costs divided by total number of items produced When completed, number of units completed times average cost determines cost to be moved from WIP to Finished Goods
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Which of the following characteristics are associated with a process costing system? a. Heterogeneous products b. Homogeneous products Answer: b

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Which of the following characteristics are associated with a process costing system? a. Continuous production b. Discontinuous production Answer: a

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Which of the following characteristics are associated with a process costing system?
a. Costs are traced to jobs b. Costs are traced to processing departments

Answer: b

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Type of Costing Used

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An example of a business requiring a process costing system would be a(n):

a. b. c. d. Custom cabinet shop Antique furniture restorer Soap manufacturer Automobile repair shop

Answer: c A soap manufacturer produces many identical units

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Job-Order Costing System

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Process Costing System

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Cost Flows through Departments

Manufacturing operations typically pass through two or more departments
Costs are accumulated in each department Easy to identify when materials are added Harder to identify when labor and overhead are added -Often grouped together as conversion costs -Assumed to be added evenly

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Learning objective 1: Describe how products flow through departments and how costs flow through accounts

The costs in a process costing system are traced to: a. Specific jobs b. Specific customers c. Specific company administrators d. Specific production departments

Answer: d Specific production departments

Slide 3-13 Learning objective 1: Describe how products flow through departments and how costs flow through accounts

Cost Flows through Accounts

Direct Material
Suppose that $142,000 of direct materials are used Journal entry:

(date)

Work in Process, Mixing Raw Materials To record use of raw material

142,000 142,000

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Learning objective 1: Describe how products flow through departments and how costs flow through accounts

Cost Flows through Accounts

Direct Labor
Suppose that $62,200 of direct labor costs are incurred Journal entry:
(date) Work in Process, Mixing Wages Payable To record direct labor cost 62,200 62,200

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Learning objective 1: Describe how products flow through departments and how costs flow through accounts

Cost Flows through Accounts

Manufacturing Overhead
Suppose manufacturing overhead is applied at a rate of $3 per direct labor dollar Journal entry:
(date) Work in Process, Mixing Manufacturing Overhead 186,600 186,600

To record manufacturing overhead applied to Work in Process

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Learning objective 1: Describe how products flow through departments and how costs flow through accounts

Cost Flows through Accounts

Transferred-in Cost
When a department completes its work, the items are transferred to the next department Related costs are transferred as well Suppose the Mixing Department completed units with a cost of $360,000
(date) Work in Process, Packaging Work in Process, Mixing To record transfer of units 360,000 360,000

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Learning objective 1: Describe how products flow through departments and how costs flow through accounts

Flow of Costs Between Processing Departments

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Learning objective 1: Describe how products flow through departments and how costs flow through accounts

Calculating Unit Cost

Equivalent Units
Partially completed units are converted to a comparable number of completed units, called equivalent units e.g. 100 units that are 50% complete are equivalent to 50 complete units (100 x 50%)
Equivalent units may be different for material and conversion costs if materials and conversion costs enter production at different times.

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Learning objective 2: Discuss the concept of an equivalent unit

Equivalent Units Material and Conversion Costs

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Learning objective 2: Discuss the concept of an equivalent unit

 Beginning Work in Process 500 units % complete = 65% materials, 45% conversion Units started: 2,300 Units finished: 2,500 Ending Work in Process 300 units % complete = 85% materials, 50% conversion 1. Calculate equivalent units for materials

Units finished Ending Work in Process Equivalent Units - Materials

2,500 X 100% 300 X 85%

2,500 255 2,755

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Learning objective 2: Discuss the concept of an equivalent unit

Beginning Work in Process 500 units

% complete: 65% materials, 45% conversion

Units started: 2,300 Units finished: 2,500 Ending Work in Process 300 units
% complete: 85% materials, 50% conversion

2. Calculate equivalent units conversion

Units finished 2,500 X 100% Ending Work in Process 300 X 50% Equivalent Units - Conversion Costs 2,500 150 2,650

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Learning objective 2: Discuss the concept of an equivalent unit

Calculating Unit Cost

Cost Per Equivalent Unit
The average unit cost is referred to as cost per equivalent unit

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Learning objective 3: Calculate the cost per equivalent unit

Calculating Cost per Equivalent Unit

Mixing Department
Beginning Work in Process: 10,000 gallons that are 80% complete -Direct material costs = $18,000 -Direct labor =$7,80 -Overhead = $23,400 70,000 gallons started, 60,000 gallons completed -Direct material costs = $142,000 -Direct labor cost = $62,200 - Overhead cost = $186,600

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Learning objective 3: Calculate the cost per equivalent unit

Cost per EU Mixing Department

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Learning objective 3: Calculate the cost per equivalent unit


1.

Equivalent units(EU):
Materials =2,650EU, conversion=2,755EU

Costs in beginning Work in Process

Materials = $3,180, conversion = $3,306

Costs incurred:
Materials = $18,020, conversion = $13,224 Calculate materials cost/equivalent unit

Costs in beginning WIP Materials costs incurred Total materials cost $21,200 / 2,650 EU
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3,180 18,020 21,200 8 per EU

Learning objective 3: Calculate the cost per equivalent unit

Equivalent units (EU):

Materials = 2,650EU, conversion = 2,755EU

2.

Costs in beginning Work in Process

Materials = $3,180, conversion = $3,306

Costs incurred:
Materials = $18,020, conversion = $13,224 Calculate conversion cost/equivalent unit
Costs in beginning WIP Conversion costs incurred Total conversion cost $16,530 / 2,755 EU 3,306 13,224 16,530 6

per EU

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Learning objective 3: Calculate the cost per equivalent unit

Costs Transferred Out

60,000 gallons completed by the Mixing Department Unit cost is $6 per gallon $360,000 (60,000 X $6) of cost transferred to the Packaging Department

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Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

Ending Work in Process

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Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

Summary of Cost Activity Mixing Department

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Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department

Production Cost Report

Reconciliation of Units

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Learning objective 5: Describe a production cost report

Production Cost Report

Reconciliation of Costs

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Learning objective 5: Describe a production cost report

Basic Steps in Process Costing

Step 1: Account for the number of physical units Step 2: Calculate the cost per equivalent unit for materials, labor, and overhead Step 3: Assign cost to items completed and items in ending Work in Process Step 4: Account for the amount of product cost

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Learning objective 5: Describe a production cost report

Dealing with Transferred-In Cost

Packaging Department summary:
Beginning Work in Process 15,000 gallons 50% through packaging operation Costs in WIP: materials $10,500, labor $4,500, $9,000 overhead, $92,250 transferred in Units transferred in 60,000 gallons with $360,000 transferred in cost Costs added: Materials $49,500, labor $27,900, $55,800 overhead
Ending Work in Process 5,000 gallons 40% through packaging operation
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Production Cost Report Packaging Department

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Learning objective 5: Describe a production cost report

Production Cost Report Packaging Department

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Learning objective 5: Describe a production cost report

Production Cost Report Packaging Department

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Learning objective 5: Describe a production cost report

Process Costing and Incremental Analysis

A company has no beginning or ending Work in Process Assume materials and labor variable, manufacturing overhead fixed Cost summary:

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Learning objective 5: Describe a production cost report

Process Costing and Incremental Analysis

Decreasing price to $2.90 will increase demand to 275,000 units $2.90 is less than equivalent cost per unit Incremental analysis: profit will increase

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Learning objective 5: Describe a production cost report

You Get What You Measure

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