Understanding Process Costing in Systems Design

1. Chapter 4 Systems Design: Process Costing

2. Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost. 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. Similarities Between Job-Orderand Process Costing

3. 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 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. Differences Between Job-Orderand Process Costing

4. Quick Check  Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors.

5. Quick Check  Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors.

6. Processing Departments Any location in an organization where materials, labor or overhead are added to the product. The activities performed in a processingdepartment are performed uniformly on allunits of production. Furthermore, the output ofa processing department must behomogeneous.

7. Learning Objective 1 Record the flowof materials, labor, andoverhead through aprocess costing system.

8. FinishedGoods Work inProcess Cost of GoodsSold Flow of Materials, Labor and Overhead Costs Direct Materials Direct Labor ManufacturingOverhead

9. Flow of Materials, Labor and Overhead Costs Costs are traced andapplied to individualjobs in a job-ordercost system. Direct Materials FinishedGoods Jobs Direct Labor ManufacturingOverhead Cost of GoodsSold

10. Flow of Materials, Labor and Overhead Costs Costs are traced and applied to departments in a process cost system. Direct Materials FinishedGoods Processing Department Direct Labor ManufacturingOverhead Cost of GoodsSold

11. T-Account and Journal EntryViews of Process Cost Flows For purposes of this example, assume there are two processing departments – Departments A and B. We will use T-accounts and journal entries.

12. Direct Materials • DirectMaterials • Direct Materials Process Cost Flows(in T-Account form) Work in Process Department A Raw Materials Work in Process Department B

13. Process Cost Flows(in journal entry form)

14. Direct Labor • Direct Labor • Direct Labor Process Cost Flows(in T-Account form) Work in Process Department A Salaries and Wages Payable • Direct Materials Work in Process Department B • Direct Materials

15. Process Cost Flows(in journal entry form)

16. Process Cost Flows(in T-Account form) Work in Process Department A • Direct Materials Manufacturing Overhead • Direct Labor • Actual Overhead • OverheadApplied to Work inProcess • AppliedOverhead Work in Process Department B • Direct Materials • Direct Labor • AppliedOverhead

17. Process Cost Flows(in journal entry form)

18. Transferred to Dept. B • Transferred from Dept. A Process Cost Flows(in T-Account form) Work in Process Department B Work in ProcessDepartment A • Direct Materials • Direct Materials • Direct Labor • Direct Labor • AppliedOverhead • AppliedOverhead

19. Process Cost Flows(in journal entry form)

20. Cost of GoodsManufactured Process Cost Flows(in T-Account form) Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Direct Labor • AppliedOverhead • Transferred from Dept. A

21. Process Cost Flows(in journal entry form)

22. Process Cost Flows(in T-Account form) Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Cost of GoodsManufactured • Cost of GoodsSold • Direct Labor • AppliedOverhead • Transferred from Dept. A Cost of Goods Sold • Cost of GoodsSold

23. Process Cost Flows(in journal entry form)

24. Equivalent Units of Production Equivalent units are the product of the numberof partially completed units and the percentageof 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.

25. + = 1 Equivalent Units – The Basic Idea Two half completed products are equivalent to one completed product. So, 10,000 units 70% completeare equivalent to 7,000 complete units.

26. Quick Check  For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process that are 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

27. Quick Check  For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process that are 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

28. Calculating Equivalent Units Equivalent units can be calculated two ways: The First-In, First-Out Method – FIFO is covered in the appendix to this chapter. The Weighted-Average Method – This method will be covered in the main portion of the chapter.

29. Learning Objective 2 Compute the equivalent units of production using theweighted-average method.

30. Characteristics of the Weighted Average Method • The weighted-average method . . . • Makes no distinction between work done in prior or current periods. • Blends together units and costs from prior and current periods. The equivalent units of production for a department are the number of units transferred to the next department (or finished goods) plus the equivalent units in the department’s ending work in process inventory.

31. Treatment of Direct Labor DirectMaterials Direct labor costsmay be smallin comparison toother product costs in processcosting systems. Conversion Dollar Amount DirectLabor Type of Product Cost

32. Treatment of Direct Labor DirectMaterials Direct labor costsmay be smallin comparison toother product costs in processcosting systems. Conversion Dollar Amount Type of Product Cost Direct labor and manufacturing overhead may becombined into one product cost called conversion.

33. Weighted-Average Example Double Diamond Skis reported the following activity in Shaping and Milling Department for the month of May:

34. Weighted-Average Example The first step in calculating the equivalent unitsis to identify the units completed and transferredout of the Department in May (4,800 units).

35. Weighted-Average Example The second step is to identify the equivalent units of production in ending work in process with respect to materials for the month (160 units) and add this to the 4,800 units from step one.

36. Weighted-Average Example The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month (100 units) and add this tothe 4,800 units from step one.

37. Weighted-Average Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process

38. Weighted-Average Example Materials 5,000 Units Started EndingWork in Process400 Units40% Complete BeginningWork in Process200 Units55% Complete 4,800 Units Startedand Completed 4,800 Units Completed 400 × 40% 160 Equivalent Units 4,960 Equivalent units of production

39. Weighted-Average Example Conversion 5,000 Units Started EndingWork in Process400 Units25% Complete BeginningWork in Process200 Units30% Complete 4,800 Units Startedand Completed 4,800 Units Completed 400 × 25% 100 Equivalent Units 4,900 Equivalent units of production

40. Learning Objective 3 Compute the costs perequivalent unit using theweighted-average method.

41. Computing Cost Per Equivalent Unit The following table includes some additional facts for DoubleDiamond Skis’ Shaping and Milling Department for May. Beginning work in process: 200 units Materials: 55% complete $ 9,600 Conversion: 30% complete 5,575 Production started during May 5,000 units Production completed during May 4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Ending work in process 400 units Materials: 40% complete Conversion: 25% complete

42. Cost of beginningwork in processinventory + Cost added during the period Cost perequivalent unit = Equivalent units of production Compute and Apply Costs The formula for computing thecost per equivalent unit is :

43. Compute and Apply Costs Here is a schedule with the costand equivalent unit information.

44. $356,475 ÷ 4,900 units = $72.75 $378,200 ÷ 4,960 units = $76.25 Compute and Apply Costs Here is a schedule with the costand equivalent unit information.

45. Learning Objective 4 Assign costs to units using the weighted-average method.

46. Computing the Cost of EndingWork in Process Inventory Step 1:Record the equivalent units of production in ending work in process inventory.

47. Computing the Cost of EndingWork in Process Inventory Step 2: Record the cost per equivalent unit.

48. Computing the Cost of EndingWork in Process Inventory Step 3: Compute the cost of ending work in process inventory.

49. Computing the Cost ofUnits Transferred Out Step 1: Record the units transferred out to the next department.

50. Computing the Cost ofUnits Transferred Out Step 2: Record the cost per equivalent unit.