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Systems Design:Process Costing
Chapter
4
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© McGraw-Hill Ryerson Limited., 2001
LEARNING OBJECTIVES
1. Prepare journal entries to record the flow ofmaterials, labour and overhead through aprocess costing system.
2. Compute the equivalent units of production fora period by the weighted-average method.
3. Prepare a quantity schedule for a period bythe weighted-average method.
4. Compute the costs per equivalent unit for aperiod by the weighted-average method.
5. Prepare a cost reconciliation for a period bythe weighted-average method.
After studying this chapter, you should be able to:
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Types of Costing Systems Used toDetermine Product Costs
Job-orderCosting
ProcessCosting
✦ Many units of a single, homogeneous product flow evenly through a continuous production process.
✦ One unit of product is indistinguishable from any other unit of product.
✦ Each unit of product is assigned the same average cost.
✦ Many units of a single, homogeneous product flow evenly through a continuous production process.
✦ One unit of product is indistinguishable from any other unit of product.
✦ Each unit of product is assigned the same average cost.
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Types of Costing Systems Used toDetermine Product Costs
ProcessCosting
Job-orderCosting
Typical process cost applications:
! Petrochemical refinery
! Paint manufacturer
! Paper mill
Typical process cost applications:
! Petrochemical refinery
! Paint manufacturer
! Paper mill
Job-orderCosting
ProcessCosting
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Job order costing! Many jobs are worked
during the period.
! Costs are accumulatedby individual jobs.
! Job cost sheet is thekey document.
! Unit cost computed byjob.
Job order costing! Many jobs are worked
during the period.
! Costs are accumulatedby individual jobs.
! Job cost sheet is thekey document.
! Unit cost computed byjob.
Process costing! A single product is
produced for a longperiod of time.
! Costs are accumulatedby departments.
! Department productionreport is key document.
! Unit costs are computedby department.
Process costing! A single product is
produced for a longperiod of time.
! Costs are accumulatedby departments.
! Department productionreport is key document.
! Unit costs are computedby department.
Differences Between Job-Order andProcess Costing
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Process CostingDirect
Materials Direct labour costsmay be small
in comparison toother product
costs in processcost systems.
Direct labour costsmay be small
in comparison toother product
costs in processcost systems.
Type of Product Cost
Do
llar
Am
ou
nt
DirectLabour
ManufacturingOverhead
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Process CostingDirect
Materials
Type of Product Cost
Do
llar
Am
ou
nt Conversion
So, direct labour and manufacturing overhead are oftencombined into one product cost called conversion.
So, direct labour and manufacturing overhead are oftencombined into one product cost called conversion.
Direct labour costsmay be small
in comparison toother product
costs in processcost systems.
Direct labour costsmay be small
in comparison toother product
costs in processcost systems.
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Comparing Job-Order and ProcessCosting
DirectMaterials
DirectMaterials
FinishedGoods
FinishedGoods
Cost ofGoodsSold
Cost ofGoodsSold
Direct LabourDirect Labour
ManufacturingOverhead
ManufacturingOverhead
Work inProcess
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Comparing Job-Order and ProcessCosting
FinishedGoods
FinishedGoods
Cost ofGoodsSold
Cost ofGoodsSold
Direct LabourDirect Labour
ManufacturingOverhead
ManufacturingOverhead
JobsJobs
Costs are traced andapplied to individualjobs in a job-order
cost system.
Costs are traced andapplied to individualjobs in a job-order
cost system.Direct
Materials
DirectMaterials
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Comparing Job-Order and ProcessCosting
FinishedGoods
FinishedGoods
Cost ofGoodsSold
Cost ofGoodsSold
Direct LabourDirect Labour
ManufacturingOverhead
ManufacturingOverhead
ProcessingDepartmentProcessingDepartment
Costs are traced andapplied to departments
in a process costsystem.
Costs are traced andapplied to departments
in a process costsystem.
DirectMaterials
DirectMaterials
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Process Cost Flows
Let’s look at cost flows in aprocess cost system withDepartments A and B. We
will use T-accounts and startwith materials.
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Raw Materials•Purchases •Direct
Materials
•OtherOverhead
ManufacturingOverhead
•Direct Materials
Process Cost Flows
Work in Process Department B
Work in Process Department A
•Indirect Materials
•IndirectMaterials
Actual Applied
•DirectMaterials
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Wages Payable•Direct
Materials
•Direct Materials
Process Cost Flows
Work in Process Department B
Work in Process Department A
•Direct Labour •Direct
Labour
•Direct Labour
•IndirectLabour
•OtherOverhead
ManufacturingOverhead
•IndirectMaterials
Actual Applied
•IndirectLabour
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Wages Payable•Direct
Materials
•Direct Materials
Process Cost Flows
Work in Process Department B
Work in Process Department A
•Direct Labour •Direct
Labour
•Direct Labour
•IndirectLabour
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•OtherOverhead
ManufacturingOverhead
Actual Applied
•IndirectMaterials•IndirectLabour
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Process Cost Flows
Next, transfer work fromDepartment A toDepartment B.
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Process Cost Flows
Work in ProcessDepartment B
Work in ProcessDepartment A
•Direct Materials
•Direct Labour•Applied
Overhead
•Direct Materials
•Direct Labour•Applied
Overhead
Transferred to Dept. B
•Transferred from Dept. A
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Process Cost Flows
Now let’s complete thegoods in Department B and
sell them.
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Finished Goods
Cost of Goods Sold
Process Cost Flows
Work in Process Department B
•Cost of Goods
Manufactured
•Cost of Goods
Manufactured
•Direct Materials
•Direct Labour•Applied
Overhead•Transferred from Dept. A
•Cost of Goods
Sold
•Cost of Goods
Sold
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Equivalent Units of Production
Equivalent units are partially completepartially completeand are part of work in processinventory. Partially completed
products are expressed in terms of asmaller number of fully completed
units.
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Equivalent Units of Production
+ =
Two half completed products areequivalent to one completed product.
So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.
So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.
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For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process 30 percent complete.How many equivalent units of production didJones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process 30 percent complete.How many equivalent units of production didJones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Equivalent Units
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For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process 30 percent complete.How many equivalent units of production didJones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process 30 percent complete.How many equivalent units of production didJones 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
Equivalent Units
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Calculating and Using EquivalentUnits of Production
To calculate the cost perequivalent unit for the period:
Cost perequivalent
unit=
Costs for the periodEquivalent units of production
for the period
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Now assume that Jones incurred$27,600 in production costs for the11,500 equivalent units of production.What was Jones’ cost per equivalentunit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that Jones incurred$27,600 in production costs for the11,500 equivalent units of production.What was Jones’ cost per equivalentunit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Equivalent Units
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Now assume that Jones incurred$27,600 in production costs for the11,500 equivalent units of production.What was Jones’ cost per equivalentunit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that Jones incurred$27,600 in production costs for the11,500 equivalent units of production.What was Jones’ cost per equivalentunit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Equivalent Units
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Equivalent Units of Production –Weighted Average Method
The Weighted Average method . . .!Makes no distinction between work done in prior
and current period.
!Blends together units and costs from priorperiod and current period.
Let’s see how this works!
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Weighted Average Example
Smith Company reported the following activityin Department A for the month of June:
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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Equivalent units are calculated as follows:
Weighted Average Example
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
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Equivalent units are calculated as follows:
Weighted Average Example
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
Equivalent units of Production in Department A during June 5,940
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Equivalent units are calculated as follows:
Weighted Average Example
Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in Department A during June 5,940 5,670
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Materials Conversion
Units completed and transferred out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in Department A during June 5,940 5,670
Equivalent units are calculated as follows:Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Weighted Average 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 Example
MaterialsMaterials
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 Units 900 × 30%
5,670 Equivalent units of production
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
Weighted Average Example
ConversionConversion
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Production Report
ProductionReport
Shows the flowof units and coststhrough work inprocess
Becomes thejob cost sheetin processcosting
Helps managerscontrol theirdepartments
Provides costinformation for
financial statements
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Production Report
"A computation ofcost per equivalent unit."A computation of
cost per equivalent unit.
Section 1
Section 2
Section 3
Production Report#A quantity schedule
showing the flow of unitsand the computation of
equivalent units.
#A quantity scheduleshowing the flow of unitsand the computation of
equivalent units.
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Production Report
Section 1
Section 2
Section 3
Production Report$ A reconciliation of cost flows for the period, including:
❖ Total cost for units completed and transferred from the processing department.
❖ Total cost for partially completed units remaining in work in process.
$ A reconciliation of cost flows for the period, including:
❖ Total cost for units completed and transferred from the processing department.
❖ Total cost for partially completed units remaining in work in process.
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% Double Diamond Skis uses process costing todetermine unit costs in its Shaping and MillingDepartment.
% Double Diamond uses the Weighted Averagecost procedure.
% Using the following information for the month ofMay, let’s prepare a production report forShaping and Milling.
Production Report Example
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Work in process, May 1: 200 unitsMaterials: 50% complete. $ 3,000Conversion: 30% complete. 1,000
Units started into production in May: 5,000Units completed and transferred out in May: 4,800
Costs added to production in MayMaterials cost $ 74,000Conversion cost 70,000
Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.
Cost
Production Report Example
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Section 1: Quantity Schedule with Equivalent Units
Production Report Example
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800
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Production Report Example
Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160
5,200 4,960
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Production Report Example
Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100
5,200 4,960 4,900
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Section 2: Compute cost per equivalent unit
Production Report Example`
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 4,000$ 3,000$ 1,000$ Costs added in the Shipping and Milling Department 144,000 74,000 70,000
Total cost 148,000$ 77,000$ 71,000$
Equivalent units 4,960 4,900
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Production Report Example
Section 2: Compute cost per equivalent unit
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 4,000$ 3,000$ 1,000$ Costs added in the Shipping and Milling Department 144,000 74,000 70,000
Total cost 148,000$ 77,000$ 71,000$
Equivalent units 4,960 4,900
Cost per equivalent unit 15.524$
$77,000 ÷ 4,960 units = $15.524 (rounded)
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TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 4,000$ 3,000$ 1,000$ Costs added in the Shipping and Milling Department 144,000 74,000 70,000
Total cost 148,000$ 77,000$ 71,000$
Equivalent units 4,960 4,900
Cost per equivalent unit 15.524$ 14.490$ Total cost per equivalent unit = $15.524 + $14.490 = $30.014
Production Report Example
$71,000 ÷ 4,900 units = $14.490 (rounded)
Section 2: Compute cost per equivalent unit
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Section 3: Cost Reconciliation
Production Report Example
Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100
Total work in process, May 31
Total cost accounted for
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Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100
Total work in process, May 31
Total cost accounted for
4,800 units @ $30.014
Production Report Example
Section 3: Cost Reconciliation
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Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materia ls 2,484 160 Conversion 100
Total work in process, May 31
Total cost accounted for
160 units @ $15.524
Production Report Example
Section 3: Cost Reconciliation
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Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materia ls 2,484 160 Conversion 1,449 100
Total work in process, May 31 3,933
Total cost accounted for 148,000$
100 units @ $14.490
Production Report Example
Section 3: Cost Reconciliation
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Operation Costing
Operation costing employs some aspectsof both job-order and process costing.
Conversion costsassigned to batches
as in process costing.
Conversion costsassigned to batches
as in process costing.
Material Costs Chargedto batches as in
job-order costing.
Material Costs Chargedto batches as in
job-order costing.
Job-orderCosting
ProcessCosting
Operation Costing(Products produced in batches)
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Process CostingTypical Accounting Entries
Let’s look at the accountingjournal entries for a processcost system. We’ll omit the
numbers so that we can focuson concepts.
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Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
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Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
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Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
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Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
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Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
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Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
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Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date DescriptionPost. Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.
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End of Chapter 4