chapter 7 process costing. 7-2 learning objectives 1. explain the concept and purpose of equivalent...
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Chapter 7Chapter 7
Process Process CostingCosting
7-2
Learning ObjectivesLearning Objectives1. Explain the concept and purpose of equivalent units.2. Assign costs to products using a five-step process.3.Assign costs to products using weighted-
average costing.
4. Prepare and analyze a production cost report.5.Assign costs to products using first-in, first-
out (FIFO) costing.
6.Analyze the accounting choice between FIFO and weighted-average costing.
7. Know when to use process or job costing.
8.Compare and contrast operation costing with job costing and process costing.
7-3Job versus Process Job versus Process CostingCosting
Direct Materials, Direct Labor, and Factory Overhead
Job 121
Job 122
Job 123
Finished Goods
Cost of Goods Sold
Direct Materials, Direct Labor, and Factory Overhead
Process A
Process B
Process C
Finished Goods
Cost of Goods Sold
Job Costing
Process Costing
7-4
Equivalent Units Equivalent Units 1. Explain the concept and purpose of equivalent units.
When manufacturing a product using a continuous process we assume all units have the same costs.
Some units are not completed
Equivalent units
Problem:
Answer:
7-5Equivalent Units Equivalent Units ContinuedContinued
Number of units that could have been completed with the given costs.
Equivalent Units (EqU)
Number of units in process
EqU=x Percentage of completion
=.5
+1
2 x .5 1=
.5
7-6Equivalent Units Equivalent Units ContinuedContinued
Jerilee has a big weekend planned. She works Friday night, plans to go to the football game Saturday, and wants to go to the fair on Sunday. She determines she will have ten hours to study.
She can do all of her Accounting, all of her Spanish, or some Accounting and some Spanish.
Jerilee has 10 hours of Accounting and 10 hours of Spanish.
Problem:
Answer:
7-7Equivalent Units Equivalent Units ContinuedContinuedShe can do her Accounting
Accounting 10
x 100%
= 10
Spanish 0 x 0 = 0
10 One class finished
She can do her Spanish
Accounting 0 x 0 = 0
Spanish 10
x 100%
= 10
10One class finished
7-8Equivalent Units Equivalent Units ContinuedContinuedShe can do half of each
Accounting 10
x 50% = 5
Spanish 10
x 50% = 5
10
Equivalent to one class finished
Or a combination
Accounting 10
x 60% = 6
Spanish 10
x 40% = 4
10
Equivalent to one class finished
7-9Product Costing in a Process Product Costing in a Process IndustryIndustry
2. Assign costs to products using a five-step process.
Five steps to Costing a Product
1. Measure the physical flow of resources.2. Compute the equivalent units of production.3. Identify the product costs for which to account.4. Compute the costs per equivalent unit.5. Assign product cost to batches of work.
7-10Assumptions about Costs in Assumptions about Costs in WIPWIP
Current Period Beginning Balance
Current Period Prior Period
How do we account for beginning balance and current period activities and costs?
We combine beginning balance and current period activities and costs.
Unit costs are a
weighted average
One possibility:
weighted average
7-11
We separate prior period and current period activities and trace the beginning balance and current period costs to the respective units.
Assumptions about Costs in WIP Assumptions about Costs in WIP ContinuedContinued
Prior Period Current Period
Another possibility:
We assume units from last period are completed and transferred out first.
First-in, First-out (FIFO)
Prior Period Current Period then
FIFO
7-12Process Costing: an Process Costing: an ExampleExample
Bart’s Beverages Blending Department
Units Materials Costs
Conversion Costs
WIP October 1 1,000a $1,113 $194
October activity 5,000 22,487 14,056
Total 6,000 $23,600 $14,250
5,500Transferred out
WIP October 31 500b
Total 6,000
a 25% complete with respect to materials and 10% with respect to conversion costs.b 80% complete with respect to materials and 40% with respect to conversion costs.
7-13Process Costing: Weighted Process Costing: Weighted AverageAverage
1. Measure the physical flow of resources.2. Compute the equivalent units of production.3. Identify the product costs for which to account.4. Compute the costs per equivalent unit.5. Assign product cost to batches of work.
Use the five step process.
Weighted Average
L.O. 3 Assign costs to products using weighted-average costing.
7-14Step 1: Measure the physical flow of Step 1: Measure the physical flow of
resources.resources.
BB +Units Started
=Units Transferred Out
EB+
1,000a
+ 5,000
6,000
Total gallons to account for
= 5,500
+ 500b
6,000
Total gallons accounted for
a 25% complete with respect to materials and 10% with respect to conversion costs.b 80% complete with respect to materials and 40% with respect to conversion costs.
7-15
Step 2: Compute the equivalent units of Step 2: Compute the equivalent units of production.production.
5,500Transferred out 5,500 5,500
Work in process, October 31
500 400a 200b
Equivalent units
5,900 5,700
Physical Units Material
sConversion
Equivalent Units
a 500 units x 80%b 500 units x 40%
7-16
Step 3: Identify costs for which to Step 3: Identify costs for which to account.account.
Total Costs
Materials Costs
Conversion Costs
WIP October 1 $1,307 $1,113 $194
October costs 36,543 22,487 14,056
Total $37,850
$23,600 $14,250
7-17
Step 4: Compute the costs per Step 4: Compute the costs per equivalent unit.equivalent unit.
Total Materials
Conversion
$1,307 $1,113 $194WIP, October 1
22,487 14,05636,543October costs
$4.00 $2.50Cost per EqU
$37,850
$23,600 $14,250Total costs (Step 3)
5,900 5,700Total EqU (Step 2)
7-18
Step 5: Assign product cost to batches Step 5: Assign product cost to batches of work.of work.
Total Materials
ConversionTransferred out
WIP, October 31
$4.00 $2.50Cost per EqU (Step 4)
5,500 5,500EqU (Step 2)
$4.00 $2.50Cost per EqU (Step 4)
400 200EqU (Step 2)
$35,750
$22,000 $13,750Costs transferred out
2,100Costs WIP, October 31
$1,600 $500
$37,850
Total cost assigned
$23,600 $14,250
7-19The Production Cost The Production Cost ReportReport L.O. 4 Prepare and analyze a production cost
report.
A report that summarizes production and costs for a period
Used by managers to monitor production and cost flows
Production cost report
Why?
7-20
Month Ending October 31
The Production Cost ReportThe Production Cost ReportBlending Department
Materials
Conversion
PhysicalUnits to be accounted for
Units accounted for
WIP beginning inventory 1,000
Completed and transferred out
5,500 5,500 5,500
WIP ending inventory 500 400a 200b
Total units to account for 6,000 5,900 5,700
Total units to account for 6,000
Units Equivalent Units
a 500 units x 80%
b 500 units x 40%
Units started in this period
5,000
Weighted Average
7-21
The Production Cost Report The Production Cost Report ContinuedContinued
Costs to be accounted for
Costs assigned to units transferred out
35,750 22,000e 13,750f
Costs assigned to WIP ending inventory
2,100 1,600g 500h
Total costs accounted for $37,850 $23,600 $14,250
WIP beginning inventory $1,307 1,113 194
Total costs to be accounted for
$37,850 $23,600 $14,250
Current period costs 22,487 14,05636,543
Materials ConversionTotalCosts to be accounted for
Costs per equivalent unit $4.00c $2.50d
c $23,600/5,900 units d $14,250/5,700 units
e $4.00 x 5,500 units f $2.50 x 5,500 units
g $4.00 x 400 units h $2.50 x 200 units
7-22
Assigning Costs using FIFOAssigning Costs using FIFOL.O. 5 Assign costs to products using first-in, first-out (FIFO) costing.
Use the same five step process.1. Measure the physical flow of resources.2. Compute the equivalent units of production.3. Identify the product costs for which to account.4. Compute the costs per equivalent unit.5. Assign product cost to batches of work.
FIFO
7-23Step 1: Measure the physical flow of Step 1: Measure the physical flow of
resources.resources.
BB +Units Started
=Units Transferred Out
EB+
1,000a
+ 5,000
6,000
Total gallons to account for
= 5,500
+ 500b
6,000
Total gallons accounted for
a 25% complete with respect to materials and 10% with respect to conversion costs.b 80% complete with respect to materials and 40% with respect to conversion costs.
Exactly the same as weighted average.
7-24
Step 2: Compute the equivalent units of Step 2: Compute the equivalent units of production.production.
5,500Transferred out
WIP October 31 500 400c 200d
Equivalent units 5,650 5,600
Physical Units
Materials
Conversion
Equivalent Units
From WIP October 1
1,000 750a 900b
Units started and completed in October 4,500 4,500 4,500
c 500 units x 80% d 500 units x 40%
a 1,000 units x 75%
b 1,000 units x 90%
7-25
Step 3: Identify costs for which to Step 3: Identify costs for which to account.account.
Total Costs
Materials Costs
Conversion Costs
WIP October 1 $1,307 $1,113 $194
October costs 36,543 22,487 14,056
Total $37,850
$23,600 $14,250
Exactly the same as weighted average.
7-26
Step 4: Compute the costs per Step 4: Compute the costs per equivalent unit.equivalent unit.
Total Materials
Conversion
$22,487 $14,056$36,543
October costs
$3.98 $2.51Cost per equivalent unit
5,650 5,600Equivalent units (Step 2)
Note: Include only current period costs and activities.
7-27
Step 5: Assign product cost to batches Step 5: Assign product cost to batches of work.of work.
Total Materials
Conversion
Transferred outUnits in WIP October 1
$1,307 $1,113 $194
Complete beginning WIP
Prior period costs
EU (Step 2) [A] 750 900
$3.98 $2.51Cost per EU (Step 4) [B]
Cost to complete beginning WIP [A x B]
5,244 2,985 2,259
Units started and completed in October
4,500 4,500 4,500
$3.98 $2.51Cost per EU [B]
Cost of units started, completed and transferred out [B x C]
29,205 17,910 11,295
$22,008 $13,748Total cost of units transferred out
$35,756
Number of units [C]
7-28
Step 5: Assign product cost to batches of work Step 5: Assign product cost to batches of work continuedcontinued
Total Materials
Conversion
Transferred out*
WIP, October 31
$3.98 $2.51Cost per EU (Step 4)
400 200EU (Step 2)
2,094Costs WIP, October 31
$1,592 $502
$37,850Total cost assigned
$23,600 $14,250
* From previous page
$22,008* $13,748*$35,756*
7-29
Comparison of FIFO and Weighted Comparison of FIFO and Weighted AverageAverage
L.O. 6 Analyze the accounting choice between FIFO and weighted-average costing.
Separates prior period and current period activities and traces the prior period and current period costs to the respective units.
FIFO
Does not separate prior period and current period activities and costs.
Weighted Average
7-30
Comparison of FIFO and Weighted Average Comparison of FIFO and Weighted Average ContinuedContinued
Bart’s Beverages Blending Department
FIFOWeighted Average
Costs to account for $37,850
Cost of goods transferred out
$35,756
2,094Costs WIP, October 31
$37,850Costs accounted for
$35,750
2,100
$37,850
Cost per EU
Materials
Conversion
$3.98
$2.51
$4.00
$2.50
7-31
L.O. 7 Know when to use process or job costing.
Choosing between Job and Process Choosing between Job and Process CostingCosting
Job Costing
Process Costing
An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.
An accounting system used when identical units are produced through a series of uniform production steps.
Custom Homes
Movies
Services
Cornflakes
Beverages
Paint
7-32
Operation CostingOperation Costing
Job Costing Process Costing
An accounting system that traces costs to individual units or to specific jobs, contracts, or batches of goods.
An accounting system used when identical units are produced through a series of uniform production steps.
Operation Costing
A hybrid costing system often used in manufacturing goods that have some common characteristics plus some individual characteristics.
Automobiles
Computers
Clothing
L.O. 8 Compare and contrast operation costing with job costing and process costing.
7-33
Chapter 7
Finalmente!
Finally!