process costing objectives — compare job order and process costing — talk about costs to account...
TRANSCRIPT
Process CostingObjectives
— Compare job order and process costing
— Talk about costs to account for
— Understand the concept of equivalent units
ProcessCosting
Job-OrderCosting
• Used for production of small, identical, low cost items.
• Mass produced, automated continuous production process.
• Costs cannot be directly traced to each unit of product.
Types of Product-Costing Systems
• Used for production of large, unique, high-cost items.
• Built to order rather than mass produced.
• Many costs can be directly traced to each job.
Direct Materials
Direct Materials
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
Job No. 1Job No. 1
Job No. 2Job No. 2
Job No. 3Job No. 3
Accumulating Costs - Job-Order Costing System
Cost of
Goods
Sold
Cost of
Goods
Sold
Finished
Goods
Finished
Goods
Process AProcess A
Process BProcess B
AssemblyAssembly
Assigning Costs - Process Costing
Cost of Goods Sold
Account
Cost of Goods Sold
Account
Finished Goods
Account
Finished Goods
Account
Direct Materials
Direct Materials
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
Work-in-Process
Commonalities: Job Order & Process
The same purpose - assign manu-facturing costs to Cost of Goods Sold, inventories, and products
Both systems use the same basic manufacturing accounts
The flow of costs through each system is similar
Differences – Job Order & Process
The flow of units in a process system is more or less continuous and units are indistinguishable from one anotherCosts are accumulated by department (activity) rather than by job. A firm is likely to have more than one Work-in-Process (subsidiary) inventory account.
Process Costing
DirectMaterial Direct-labor costs
are usually smallin comparison to
other productcosts in process
cost systems.(high level of automation)
Type of Product Cost
Do
llar
Am
oun
t
DirectLabor
ManufacturingOverhead
Process Costing
DirectMaterial
Conversion
Direct-labor costsare usually smallin comparison to
other productcosts in process
cost systems.(high level of automation)
So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.
Type of Product Cost
Do
llar
Am
oun
t
Process Costing - 5 Key Steps
Step 1 -- Summarize the flow of physical units -- where are the costs?
Step 2 -- Calculate output in terms of Equivalent Units
Step 3 -- Summarize total costs to account for which are the costs charged (debited) to WIP
Step 4 -- Calculate equivalent unit costs
Step 5 -- Apply/assign costs to units completed and to units in the ending WIP
Equivalent Units of Production –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 weighted-average method . .
Step 1 and Step 2 -- Equivalent Units
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.
Step 1 and Step 2: In Pictures
Two one-half completed products are equivalent to one completed product.
+ =
So, 10,000 units 80 percent completeare equivalent to ? complete units.
During the current period, Regina 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 Regina have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Equivalent Units Question 1
Calculating and Using Equivalent Units of Production
To calculate the cost perequivalent unit for the period:
Cost perequivalent
unit
=Costs for the period
Equivalent units for the period
Regina incurred $27,600 in production costs for the 11,500 equivalent units. What was Regina’s cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Equivalent Units Question 2
MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching.
MVP uses the weighted-average process costing method.
Material is added at the beginning of the Cutting Department, and conversion costs are incurred uniformly throughout the process.
A Process Costing Example
Work in process, March 1: 20,000 units Materials: 100% complete. $ 50,000Conversion: 10% complete. 7,200
Units started into production in March: 30,000 unitsUnits completed and transferred out in March: 40,000 units
Work in process, March 31: 10,000 unitsMaterials 100% complete.Conversion 50% complete.
Costs incurred during MarchMaterials cost $ 90,000Conversion cost 193,500
Cost
Production Report
(1) Analysis of Physical Flow of Units
PhysicalUnits
Work in process, March 1 20,000 Units started during March 30,000 Total units to account for 50,000
Units completed and transferred out during March 40,000 Work in process, March 31 10,000 Total units accounted for 50,000
Conversion Equivalent UnitsPhysical Percentage Direct
Units Complete Material Conversion
Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000
Total equivalent units 50,000 45,000
100% of 10,000 units, allmaterial added at beginning
(2) Calculation of Equivalent Units
Conversion Equivalent UnitsPhysical Percentage Direct
Units Complete Material Conversion
Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000
Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000
Total equivalent units 50,000 45,000
(2) Calculation of Equivalent Units (con’t)
50% of 10,000 units
Beginning inventory % is not used in weighted-average method.
(3) Computation of total costs to account for
DirectMaterial Conversion Total
Work in Process, March 1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$
(4) Computation of unit costs
DirectMaterial Conversion Total
Work in Process, March1 50,000$ 7,200$ 57,200$ Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$
Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$
$140,000 ÷ 50,000 equivalent units
$200,700 ÷ 45,000 equivalent units
$2.80 + $4.46
(5) Analysis of total costs
Cost of goods completed and transferred during March 40,000 units × $7.26 per equivalent unit 290,400$
Cost of goods completed and transferred during March 40,000 units × $7.26 per equivalent unit 290,400$
Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units × $2.80 per equivalent unit 28,000$
Conversion: 5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work in process 50,300
Total costs accounted for 340,700$All costs
accounted for
(5) Analysis of total costs
Equivalent Units Practice
The following data are from Energy Resource’s Amarillo Plant:
WIP, November 1 2,000,000 gallons
DM 100% complete
CC 25% complete
Units started during November 950,000 gallons
WIP, November 30 240,000 gallons
DM 100% complete
CC 80% complete
Calculate the equivalent unit amounts necessary to determine per unit costs.
Process Costing
Equivalent Units Physical
Units % comp w/r/t CC
Direct Materials
Conversion Costs
Beginning WIP Total units started Units to account for Comp & Transferred Out
Ending WIP Units to account for
Process Costing
Equivalent Units Physical
Units % comp w/r/t CC
Direct Materials
Conversion Costs
Beginning WIP Total units started Units to account for Comp & Transferred Out
Ending WIP Units to account for
Process Costing Practice
Centura completed and transferred 900,000 units to finished goods during 1999. WIP as of December 31, 1999, had 300,000 units that were 50% complete w/r/t CC and 100% w/r/t DM. Finished goods inventory consisted of 200,000 units. Materials are added at the beginning of production and overhead is applied at a rate of 60% of direct labor costs. There was no finished goods inventory on January 1, 1999. Their inventory cost records provide the following information:
Units Materials Labor
WI P 1/ 1/ 1999 (80% complete w/ r/ t CC) 200,000 $200,000 $315,000
Units started in production 1,000,000
Direct materials cost $1,300,000
Direct labor cost $1,995,000
Costs
Process Costing
Equivalent Units Physical
Units % comp w/r/t CC
Direct Materials
Conversion Costs
Beginning WIP Total units started Units to account for Comp & Transferred Out
Ending WIP Units to account for
Process Costing in Subsequent Production Departments
An added complication in process costing system is that production often takes place in more than one department.
In the previous example, only costs and units in the MVP’s Cutting Department were taken into consideration.
Now let’s work with the Cutting and Stitching Department.
Subsequent Departments
Work In Process Inventory:
Stitching Department
Work In Process Inventory:
Cutting Department
Directmaterial
Conversion:Direct laborManufacturingoverhead
Cost of goodscompleted andtransferredout
Transferred-in costs
Directmaterial
Conversion:Direct laborManufacturingoverhead
Cost of goodscompleted andtransferredout
MVP Sports - Additional FactsIn Stitching, DM are added at the end of production process.
40,000 units from Cutting are transferred in to Stitching during March
10,000 units are in Stitching’s Beginning WIP (March 1)
30,000 units are transferred to Finished Goods in March
With respect to Stitching’s Ending WIP (March 31)
Transferred In: 100% complete
Direct Material: None
Conversion: 90% complete
Transferred-In Costs
The costs assigned to the units completed in each department and transferred to the next department’s work in process inventory account.