systems design: process costing - cabrillo collegembooth/acct1b/garrison 15e/week 5 chapter 4... ·...
TRANSCRIPT
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Systems Design: Process
CostingInstructor: Michael G. Booth
Chapter 4
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Detroit “The Beginning”
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Harvard Business Case
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Similarities Between Job-Order and Process Costing
• Both systems assign material, labor and overhead
costs to products and they provide a mechanism
for computing unit product costs.
• Both systems use the same manufacturing
accounts, including Manufacturing Overhead, Raw
Materials, Work in Process, and Finished Goods.
• The flow of costs through the manufacturing
accounts is basically the same in both systems.
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Differences Between Job-Order and Process Costing
• Process costing is used when a single product is produced
on a continuing basis or for a long period of time. Job-order
costing is used when many different jobs having different
production requirements are worked on each period.
• Process costing systems accumulate costs by department.
Job-order costing systems accumulated costs by individual
jobs.
• Process costing systems compute unit costs by department.
Job-order costing systems compute unit costs by job on the
job cost sheet.
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Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customerspecifications.
d. Purchased from vendors.
Quick Check
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Process costing is used for products
that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customerspecifications.
d. Purchased from vendors.
Quick Check
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Processing DepartmentsAny unit in an organization where materials, labor
or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one department
to another.
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Comparing Job-Order and
Process Costing
Finished
Goods
Cost of
Goods
Sold
Work in
Process
Direct
Materials
Direct Labor
Manufacturing
Overhead
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Comparing Job-Order and
Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Jobs
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
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Comparing Job-Order and
Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Processing
Department
Costs are traced and
applied to departments
in a process cost
system.
Direct
Materials
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WIP WIP
Cutting Assembly
Process Cost Flow (Classic
Glass; Demonstration Problem)
Product
costs
Materials
Labor
Overhead
Income
statement
Cost of
goods
sold
Finished
goods
inventory
Materials
Labor
Overhead
Transferred-
in costs
Materials
Labor
Overhead Cost of
goods
available
for sale
WIP WIP
Dept A Dept B
Product
costs
Materials
Labor
Overhead
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Process (product costing)
System Accumulates the costs incurred in a production process
Assigns costs to the organizations products
WIP
Finished Goods
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Product (process costing) Uses varies
Inventory valuation in financial accounting
Product costs are used to value inventory on the balance sheet
COGS is computed on Income Statement
Decision-facilitation
Planning, cost control, decision making (market penetration, pricing, product mix, quantity of units)
Product costs determine sales price:
Price determines relationships between firm and customer (distributors, direct customers, resellers)
i.e. Defense contractors operated on “Cost Plus contracts”
Product-costing systems are industry specific
Specific for companies producing large numbers of identical units
Averaged over the entire production run
Units must be very identical (very similar)
Accumulates all the production costs for large number of units and assigned as average “cost per unit”
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Product costing (process costing) Non-
manufacturing firms
Product costs have identical role as in manufacturing
Merchandising includes the costs of buying and transporting in
product costs
Inventory items valued at product costs
Balance sheet -> product costs include freight and handling
Income statement -> COGS
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Raw Materials
Process Cost Flows: The Flow
of Raw Materials
Work in ProcessDepartment B
Work in ProcessDepartment A
•DirectMaterials
•DirectMaterials
•DirectMaterials
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Process Cost Flows: The Flow
of Labor Costs
Work in ProcessDepartment B
Work in ProcessDepartment A
Salaries and
Wages Payable
•DirectMaterials
•DirectMaterials
•DirectLabor
•DirectLabor •Direct
Labor
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Process Cost Flows: The Flow of
Manufacturing Overhead Costs
Work in ProcessDepartment B
Work in ProcessDepartment A
Manufacturing Overhead
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•DirectLabor
•DirectMaterials
•Direct Labor
•DirectMaterials
•Actual
Overhead
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Process Cost Flows: Transfers from
WIP-Dept. A to WIP-Dept.
Work in Process Department B
Work in ProcessDepartment A
•Direct
Materials
•Direct
Labor•Applied
Overhead
•Direct
Materials
•Direct
Labor•Applied
Overhead
Transferred
to Dept. B
•Transferred
from Dept. A
Department
A
Department
B
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Finished Goods
Process Cost Flows: Transfers from
WIP-Dept. B to Finished Goods
Work in ProcessDepartment B
•Cost of
Goods
Manufactured
•Direct
Materials
•Direct
Labor•Applied
Overhead•Transferred
from Dept. A
•Cost of
Goods
Manufactured
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Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from
Finished Goods to COGSWork in Process
Department B
•Cost of
Goods
Manufactured
•Direct
Materials
•Direct
Labor•Applied
Overhead•Transferred
from Dept. A
•Cost of
Goods
Sold
•Cost of
Goods
Sold
•Cost of
Goods
Manufactured
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Product costing (process costing)
In Class Exercise
Classic Glass, Inc. makes stained glass lamps. Production
process uses two departments: cutting department and
assembly department where they are put together.
Record the data in T-accounts.
Prepare a schedule of cost of goods manufactured and sold,
an income statement, a balance sheet, and a statement of
cash flows for the first year.
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WIP WIP
Cutting Assembly
Process Cost Flow (Classic Glass;
Demonstration Problem)
Product
costs
Materials
Labor
Overhead
Income
statement
Cost of
goods
sold
Finished
goods
inventory
Materials
Labor
Overhead
Transferred-
in costs
Materials
Labor
Overhead Cost of
goods
available
for sale
WIP WIP
Cutting Assembly
Product
costs
Materials
Labor
Overhead
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Job Process Cost System
(Classic Glass)
Cash WIP Cutting WIP Assembly Finished Goods Common Stock
(1) 70,000 (2) 22,000 (4) 6,200 (8) 26,900 (5) 16,000 (10)39,000 (10)39,000 (11)
34,000
(1) 70,000
(11) 56,000 (3) 600 (5) 14,000 (6) 9,600 Bal 5,000 Bal 70,000
(5) 32,000 (6) 8,400 (8) 26,900
(7) 13,700 Bal 1,700 (9) 8,500 Retained Earnings
(12)11,300 Bal 22,000 (cl) 12,520
Bal 46,400 Bal 12,520
Raw Materials Sales Revenue
(2) 22,000 (4) 6,200 (cl) 56,000 (11)56,000
(9) 8,500
Bal 7,300
Cost of Goods Sold
Production Supplies (11)34,000 (14) 1,820
(3) 600 (13) 480 (cl) 32,180
Bal 120
Manuf. Overhead
(6) Overhead Applied:
Cutting $0.60 x $14,000 = $ 8,400
Assembly $0.60 x $16,000 = 9,600
Total $18,000
G,S&A Expenses
(5) 2,000 (6) 18,000 (12)11,300 (cl) 11,300
(7) 13,700
(13) 480
(14) 1,820
Bal 0
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Classic Glass, Inc.
Cost of Goods Manufactured and Sold
For the First Year of Operation
Beginning Raw Materials Inventory $ 0
Purchases 22,000
Raw Materials Available 22,000
Ending Raw Materials Inventory (7,300)
Raw Materials Used 14,700
Direct Labor 30,000
Overhead1 16,180
Total Manufacturing Costs 60,880
Beginning Work in Process Inventory 0
Total Work in Process Inventory 60,880
Ending Work in Process Inventory2 (23,700)
Cost of Goods Manufactured 37,180
Beginning Finished Goods Inventory 0
Goods Available for 37,180
Ending Finished Goods Inventory (5,000)
Cost of Goods Sold $32,180
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Classic Glass, Inc.
Balance Sheet
At End of First Year of Operation
ASSETS
Cash $46,400
Production Supplies 120
Raw Materials Inventory 7,300
Work in Process Inventory 23,700
Finished Goods Inventory 5,000
Total Assets $82,520
EQUITY
Common Stock $70,000
Retained Earnings 12,520
Total Equity $82,520
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Classic Glass, Inc.
Statement of Cash Flows
For the First Year of Operation
OPERATING ACTIVITIES
Inflow from Revenue $56,000
Outflow for Inventory3
Outflow for G,S&A Expenses
Net Outflow from Operating Activities
INVESTING ACTIVITIES
FINANCING ACTIVITIES
Inflow from Issuing Stock
Net Change in Cash
Beginning Cash Balance
Ending Cash Balance
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Classic Glass, Inc.
Statement of Cash Flows
For the First Year of Operation
OPERATING ACTIVITIES
Inflow from Revenue $56,000
Outflow for Inventory3 (68,300)
Outflow for G,S&A Expenses
Net Outflow from Operating Activities
INVESTING ACTIVITIES
FINANCING ACTIVITIES
Inflow from Issuing Stock
Net Change in Cash
Beginning Cash Balance
Ending Cash Balance
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Classic Glass, Inc.
Statement of Cash Flows
For the First Year of Operation
OPERATING ACTIVITIES
Inflow from Revenue $56,000
Outflow for Inventory3 (68,300)
Outflow for G,S&A Expenses (11,300)
Net Outflow from Operating Activities (23,600)
INVESTING ACTIVITIES
FINANCING ACTIVITIES
Inflow from Issuing Stock
Net Change in Cash
Beginning Cash Balance
Ending Cash Balance
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Classic Glass, Inc.
Statement of Cash Flows
For the First Year of Operation
OPERATING ACTIVITIES
Inflow from Revenue $56,000
Outflow for Inventory3 (68,300)
Outflow for G,S&A Expenses (11,300)
Net Outflow from Operating Activities (23,600)
INVESTING ACTIVITIES 0
FINANCING ACTIVITIES
Inflow from Issuing Stock
Net Change in Cash
Beginning Cash Balance
Ending Cash Balance
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Classic Glass, Inc.
Statement of Cash Flows
For the First Year of Operation
OPERATING ACTIVITIES
Inflow from Revenue $56,000
Outflow for Inventory3 (68,300)
Outflow for G,S&A Expenses (11,300)
Net Outflow from Operating Activities (23,600)
INVESTING ACTIVITIES 0
FINANCING ACTIVITIES
Inflow from Issuing Stock 70,000
Net Change in Cash 46,400
Beginning Cash Balance
Ending Cash Balance
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Classic Glass, Inc.
Statement of Cash Flows
For the First Year of Operation
OPERATING ACTIVITIES
Inflow from Revenue $56,000
Outflow for Inventory3 (68,300)
Outflow for G,S&A Expenses (11,300)
Net Outflow from Operating Activities (23,600)
INVESTING ACTIVITIES 0
FINANCING ACTIVITIES
Inflow from Issuing Stock 70,000
Net Change in Cash 46,400
Beginning Cash Balance 0
Ending Cash Balance $46,400
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Job Process Cost System
(Classic Glass)
Cash WIP Cutting WIP Assembly Finished Goods Common Stock
(1) 70,000 (2) 22,000 (4) 6,200 (8) 26,900 (5) 16,000 (10)39,000 (10)39,000 (11)
34,000
(1) 70,000
(11) 56,000 (3) 600 (5) 14,000 (6) 9,600 Bal 5,000 Bal 70,000
(5) 32,000 (6) 8,400 (8) 26,900
(7) 13,700 Bal 1,700 (9) 8,500 Retained Earnings
(12)11,300 Bal 22,000 (cl) 12,520
Bal 46,400 Bal 12,520
Raw Materials Sales Revenue
(2) 22,000 (4) 6,200 (cl) 56,000 (11)56,000
(9) 8,500
Bal 7,300
Cost of Goods Sold
Production Supplies (11)34,000 (14) 1,820
(3) 600 (13) 480 (cl) 32,180
Bal 120
Manuf. Overhead
(6) Overhead Applied:
Cutting $0.60 x $14,000 = $ 8,400
Assembly $0.60 x $16,000 = 9,600
Total $18,000
G,S&A Expenses
(5) 2,000 (6) 18,000 (12)11,300 (cl) 11,300
(7) 13,700
(13) 480
(14) 1,820
Bal 0
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Classic Glass, Inc.
Cost of Goods Manufactured and Sold
For the First Year of Operation
Beginning Raw Materials Inventory $ 0
Purchases
Raw Materials Available
Ending Raw Materials Inventory ( )
Raw Materials Used
Direct Labor
Overhead1
Total Manufacturing Costs
Beginning Work in Process Inventory 0
Total Work in Process Inventory
Ending Work in Process Inventory2 ( )
Cost of Goods Manufactured
Beginning Finished Goods Inventory 0
Goods Available for
Ending Finished Goods Inventory ( )
Cost of Goods Sold $32,180
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Equivalent Units
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Equivalent Units of ProductionEquivalent units are the product of the number of
partially completed units and the percentage completion of those units.
We need to calculate equivalent units because a
department usually has some partially completed units
in its beginning and ending inventory. These partially
completed units complicate the determination of a
department’s output for a given period and the unit cost
that should be assigned to that output.
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Equivalent Units – The Basic
IdeaTwo half completed products are
equivalent to one complete product.
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
+ = 1
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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
Quick Check
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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 × 0.30)
= 11,500 equivalent units
Quick Check
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Calculating Equivalent Units
Equivalent units can be calculated
two ways:
•The Weighted-Average Method
•The First-In, First-Out Method (Includes units to be
completed beginning inventory, completed units, equivalent ending
inventory)
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.
Equivalent units of
production using the
weighted-average
method
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Equivalent Units of ProductionWeighted-Average Method
The weighted-average method . . .
1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and
current periods.
3. Determines equivalent units of production for a
department by adding together the number of
units transferred out plus the equivalent units in
ending Work in Process Inventory.
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Treatment of Direct Labor
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
DirectMaterials
Type of Product Cost
Do
llar
Am
ou
nt
DirectLabor
ManufacturingOverhead
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Treatment of Direct Labor
Type of Product Cost
Do
llar
Am
ou
nt Conversion
Direct labor and
manufacturing
overhead may be
combined into
one classification
of product
cost called
conversion costs.
DirectMaterials
DirectLabor
DirectLabor
ManufacturingOverhead
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Weighted-Average – An
Example
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in process, June 30 900 60% 30%
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Weighted-Average – An ExampleThe first step in calculating the equivalent units is
to identify the units completed and transferred out of Assembly Department in June (5,400
units)
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
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Weighted-Average – An Example
The second step is to identify the equivalent units of
production in ending work in process with respect to
materials for the month (540 units) and adding this to the
5,400 units from step one.
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
Equivalent units of Production in
the Department during June 5,940
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Weighted-Average – An
Example
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
The third step is to identify the equivalent units of production in
ending work in process with respect to conversion for the month
(270 units) and adding this to the 5,400 units from step one.
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Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Weighted-Average – An Example
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BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Weighted-Average – An
ExampleMaterials
5,400 Units Completed
540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
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6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
270 Equivalent Units900 × 30%
5,670 Equivalent units
of production
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
Weighted-Average – An
ExampleConversion
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Compute the cost per
equivalent unit using the
weighted-average method.
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Compute and Apply CostsBeginning Work in Process Inventory: 300 units
Materials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete
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Compute and Apply CostsThe formula for computing the cost per
equivalent unit is:
Cost per
equivalent
unit=
Cost of beginning
Work in Process
Inventory Cost added during
the period
Equivalent units of production
+
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Here is a schedule with the cost and equivalent
unit information.
Compute and Apply Costs
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 10,039$ 6,119$ 3,920$
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
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Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 10,039$ 6,119$ 3,920$
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
Cost per equivalent unit 21.00$ 15.00$
Compute and Apply CostsHere is a schedule with the cost and equivalent
unit information.
$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
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ASSIGN COSTS TO UNITS
USING THE WEIGHTED-
AVERAGE METHOD.
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of Units
Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of Units
Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit 21.00$ 15.00$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of Units
Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit 21.00$ 15.00$
Cost of units transferred out 113,400$ 81,000$ 194,400$
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
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PREPARE A COST
RECONCILIATION
REPORT.
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751
Total cost to be accounted for 209,790$
Assembly Department
Cost Reconciliation
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751
Total cost to be accounted for 209,790$
Cost accounted for as follows:
Cost of ending Work in Process Inventory 15,390$
Cost of units transferred out 194,400
Total cost accounted for 209,790$
Assembly Department
Cost Reconciliation
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In class Practice Chapter 4
•Break into teams of 2-4 people
•Complete one practice problem and stop
•We will review as a class each problem
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Assignments:
See web: http//cabrillo.edu/~mbooth
This will be updated weekly
Note: Use McGrawHill Connect manager to submit assignments