prepared by debby bloom-hill cma, cfm. chapter 3 process costing
TRANSCRIPT
Prepared by Debby Bloom-Hill CMA, CFM
CHAPTER 3CHAPTER 3
Process CostingProcess Costing
Difference Between Job-Order and Process Costing Systems
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
Slide 3-3 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Difference Between Job-Order and Process Costing Systems
Difference Between Job-Order and Process Costing Systems
Process Costing Large quantities produced of
homogeneous 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
Slide 3-4 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Which of the following characteristics are associated with a process costing system?
a. Heterogeneous productsb. Homogeneous products
Answer: b Heterogeneous products are unique Homogeneous products are
identical Process costing is associated with
identical productsSlide 3-5 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
Which of the following characteristics are associated with a process costing system?
a. Continuous productionb. Discontinuous production
Answer: a Job order costing is associated with
discontinuous production Process costing is associated with
continuous productionSlide 3-6 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
Which of the following characteristics are associated with a process costing system?
a. Costs are traced to jobsb. Costs are traced to processing
departments
Answer: b Job order costing requires tracing costs
to jobs Process costing is associated with
tracing costs to departmentsSlide 3-7 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
An example of a business requiring a process costing system would be a(n):
a. Custom cabinet shopb. Antique furniture restorerc. Soap manufacturerd. Automobile repair shop
Answer: c A soap manufacturer produces many identical units
Slide 3-8 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Job-Order Costing SystemJob-Order Costing System
Slide 3-9 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Process Costing SystemProcess Costing System
Slide 3-10 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Cost Flows through Departments
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 throughout
the processSlide 3-11 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 jobsb. Specific customersc. Specific company administratorsd. Specific production departments
Answer: dSpecific production departments
Slide 3-12 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Cost Flows through Accounts
Cost Flows through Accounts
The product costs accumulated in process are the same as in job-order costing Direct materials Direct labor Manufacturing overhead
A processing department might have transferred in costs from another department
Each processing department accumulates product cost in a separate Work in Process accountSlide 3-13 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
Cost Flows through Accounts
Cost Flows through Accounts
Direct Material Suppose that $142,000 of direct
materials are used Journal entry:
Slide 3-14
(date) Work in Process, Mixing 142,000 Raw Materials 142,000
To record use of raw material
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Cost Flows through Accounts
Cost Flows through Accounts
Direct Labor Suppose that $62,200 of direct labor
costs are incurred Journal entry:
Slide 3-15
(date) Work in Process, Mixing 62,200 Wages Payable 62,200
To record direct labor cost
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Cost Flows through Accounts
Cost Flows through Accounts
Manufacturing Overhead A company may use either actual
overhead costs or a predetermined overhead rate to assign overhead to products Unless production and overhead costs are
constant from month to month, use of actual overhead may result in substantial fluctuations in the unit cost
For that reason most companies use a predetermined overhead rate
Slide 3-16 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Cost Flows through Accounts
Cost Flows through Accounts
Manufacturing Overhead Suppose manufacturing overhead is
applied at a rate of $3 per direct labor dollar
Journal entry:
Slide 3-17
(date) Work in Process, Mixing 186,600 Manufacturing Overhead 186,600
To record manufacturing overhead applied to Work in Process
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Cost Flows 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
Slide 3-18
(date) Work in Process, Packaging 360,000 Work in Process, Mixing 360,000
To record transfer of units
Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Flow of Costs Between Processing DepartmentsFlow of Costs Between
Processing Departments
Slide 3-19 Learning objective 1: Describe how products flow through departments and how costs flow through accounts
Calculating Unit CostCalculating Unit Cost
Equivalent Units Partially completed units are converted to
a comparable number of completed units, called equivalent units Multiply the number of units by the percent
complete to calculate the equivalent units 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.
Slide 3-20 Learning objective 2: Discuss the concept of an equivalent unit
Equivalent Units – Material and Conversion Costs
Equivalent Units – Material and Conversion Costs
Slide 3-21 Learning objective 2: Discuss the concept of an equivalent unit
Calculating Equivalent Units
Calculating Equivalent Units
Equivalent units are normally calculated for materials and conversion costs The equivalent units produced is the
sum of the units finished and the units in ending work in process Units finished are always 100%
complete in terms of materials and conversion costs
Multiply the number of units in ending work in process by the corresponding percent complete to calculate the equivalent unitsSlide 3-22 Learning objective 3: Calculate the cost per equivalent unit
At Rainier Chemical, conversion costs (labor and overhead) enter evenly throughout the production process. At the end of the year, 200 units in work in process are 80 percent complete. With respect to conversion costs, how many equivalent units are in work in process?
a. 200b. 160c. 360d. 280
Answer: b200 units * 80% complete = 160 equivalent units
Slide 3-23 Learning objective 3: Calculate the cost per 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
Slide 3-24
Units finished 2,500 X 100% 2,500 Ending Work in Process 300 X 85% 255 Equivalent Units - Materials 2,755
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
Slide 3-25
Units finished 2,500 X 100% 2,500 Ending Work in Process 300 X 50% 150
2,650 Equivalent Units - Conversion Costs
Learning objective 2: Discuss the concept of an equivalent unit
Calculating Unit CostCalculating Unit Cost Cost Per Equivalent Unit
The average unit cost in a process costing system is referred to as cost per equivalent unit
The numerator represents the total cost for which a processing department must account in each period
Divide by the units completed plus the equivalent units in ending Work in Process
Slide 3-26 Learning objective 3: Calculate the cost per equivalent unit
Calculating Cost per Equivalent Unit
Calculating Cost per Equivalent Unit
Consider cost per equivalent unit calculations for the mixing department Beginning Work in Process inventory:
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
Slide 3-27 Learning objective 3: Calculate the cost per equivalent unit
Cost per EU – Mixing Department
Cost per EU – Mixing Department
Slide 3-28 Learning objective 3: Calculate the cost per equivalent unit
At Rainier Chemical, labor cost in Work in Process at the start of April was $50,000 and $450,000 of labor was incurred during the month. 200 units are in WIP at the end of April and they are 80% complete with respect to labor. 840 units were completed during the month. What is the cost per equivalent unit for labor?
a. $225b. $481c. $536d. $500
Answer: dTotal labor cost = $50,000 + $450,000 = $500,000Equivalent units = 840 units + 200 units * 80% = 1,000 unitsCost per equivalent unit = $500,000 / 1,000 = $500
Slide 3-29 Learning objective 3: Calculate the cost per equivalent unit
Costs Transferred OutCosts 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
Slide 3-30 Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department
Ending Work in ProcessEnding Work in Process
Slide 3-31 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
Summary of Cost Activity –Mixing Department
Slide 3-32 Learning objective 4: Calculate the cost of goods completed and the ending Work in Process balance in a processing department
Production Cost ReportProduction Cost Report
Slide 3-33 Learning objective 5: Describe a production cost report
An end of the month report for a process costing system Provides a reconciliation of units Provides a reconciliation of costs Provides the details of the cost per
equivalent unit calculations The reconciliations help ensure
that mistakes are not made in calculations
Production Cost ReportProduction Cost Report
Slide 3-34
Reconciliation of Units
Learning objective 5: Describe a production cost report
Production Cost ReportProduction Cost Report
Slide 3-35
Reconciliation of Costs
Learning objective 5: Describe a production cost report
Basic Steps in Process Costing
Basic Steps in Process Costing
Step 1: Reconcile the physical number of units. The number of units at the start of the period plus the number of units started during the period should equal the number of units completed plus the number of units in ending Work in Process
Slide 3-36 Learning objective 5: Describe a production cost report
Basic Steps in Process Costing
Basic Steps in Process Costing
Step 2: Calculate the cost per equivalent unit for material, labor, and overhead. Remember that cost (numerator in the calculation) includes both beginning cost and cost incurred during the period. The number of equivalent units (denominator) includes the number of units completed and the number of equivalent units in ending Work in Process
Cost per equivalent unit =(cost in beginning WIP + costs added)(units completed + EU of ending WIP)
Slide 3-37 Learning objective 5: Describe a production cost report
Basic Steps in Process Costing
Basic Steps in Process Costing
Step 3: Assign cost to items completed and items in ending Work in Process. The cost of items completed is simply the product of the total cost per equivalent unit and the number of units completed. The cost of items in Work in Process is the sum of the products of equivalent units in process and cost per equivalent unit for material, labor, and overhead
Slide 3-38 Learning objective 5: Describe a production cost report
Basic Steps in Process Costing
Basic Steps in Process Costing
Step 4: Account for the amount of product cost. The cost of beginning inventory plus the cost incurred during the period should equal the amount of cost assigned to completed items plus the amount of cost assigned to items in ending Work in Process
Slide 3-39 Learning objective 5: Describe a production cost report
Dealing with Transferred-In Cost
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
Slide 3-40 Learning objective 5: Describe a production cost report
Production Cost Report –Packaging Department
Production Cost Report –Packaging Department
Slide 3-41 Learning objective 5: Describe a production cost report
Production Cost Report –Packaging Department
Production Cost Report –Packaging Department
Slide 3-42 Learning objective 5: Describe a production cost report
Production Cost Report –Packaging Department
Production Cost Report –Packaging Department
Slide 3-43 Learning objective 5: Describe a production cost report
The packaging department at Rainier Chemical had no beginning Work in Process at the start of April. During April, the department received $300,000 of transferred-in cost. During April, the department completed 600 units and 200 were in Work in Process.
With respect to transferred-in cost, the 200 units in Work in Process are:
a. Equivalent to 200 completed unitsb. Equivalent to 0 completed unitsc. Equivalent to 100 completed unitsd. Identical to the equivalent units for conversion
costs
Answer: aSince processing was completed in another department, units transferred in are 100% complete for all categories
Slide 3-44 Learning objective 3: Calculate the cost per equivalent unit
Process Costing and Incremental AnalysisProcess Costing and Incremental Analysis
Slide 3-45
Whenever we make a decision, we need to perform incremental analysis We need to determine the change in
revenue and the change is cost, assuming a particular alternative is selected If the net change is positive, the
decision alternative is “good” since it will have a positive impact on firm profit
If the net change is negative, the decision alternative is “bad” in that it will have a negative impact on firm profit
Learning objective 5: Describe a production cost report
Process Costing and Incremental AnalysisProcess Costing and Incremental Analysis
Slide 3-46
When using process costing information to make a decision, we have to be careful to recognize that the cost per unit is the average of fixed and variable costs It does not measure the change in cost
associated from producing an additional unit
Generally, total fixed costs do not change when one additional unit is produced
Learning objective 5: Describe a production cost report
Process Costing and Incremental AnalysisProcess Costing and Incremental Analysis
Slide 3-47
A company has no beginning or ending Work in Process
Variable costs are materials and labor Fixed cost is manufacturing overhead Cost summary:
Learning objective 5: Describe a production cost report
Process Costing and Incremental AnalysisProcess Costing and Incremental Analysis
Slide 3-48
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
Learning objective 5: Describe a production cost report
You Get What You MeasureYou Get What You Measure
Slide 3-49
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