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Process Costing and Hybrid Product-Costing Systems

Learn about process costing and its applications in industries such as petrochemical refineries, paint manufacturing, and paper mills. Understand the concept of equivalent units and how to calculate production costs.

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Process Costing and Hybrid Product-Costing Systems

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  1. Chapter 4 Process Costing and Hybrid Product-Costing Systems

  2. Learning Objective1

  3. ProcessCosting Job-orderCosting ProcessCosting • Used for production of small, identical, low cost items. • Mass produced in automated continuous production process. • Costs cannot be directly traced to each unit of product. Comparison of Job-Order Costing and Process Costing

  4. ProcessCosting Job-orderCosting ProcessCosting • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill Comparison of Job-Order Costing and Process Costing

  5. Job-order costing Costs accumulated by the job. Work in process has a job-cost sheet for each job. Many unique, high cost jobs. Jobs built to customer order. Process costing Costs accumulated by department or process. Work in process has a production report for each batch of products. A few identical, low cost products. Units continuously produced for inventory in automated process. Comparison of Job-Order Costing and Process Costing

  6. Differences Between Job-Order and Process Costing The work-in-process account consists of individual jobs in ajob-order cost system. Direct Material FinishedGoods Direct Labor Jobs ManufacturingOverhead Cost of GoodsSold

  7. Differences Between Job-Order and Process Costing The work-in-process account consists of individual products in a process cost system. Direct Material Direct Labor& Overhead(Conversion) FinishedGoods Products Cost of GoodsSold When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.

  8. Learning Objective2

  9. Process Cost Flows

  10. Process Cost Flows

  11. Learning Objective3

  12. Equivalent Units: A Key Concept • 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.

  13. + = l Equivalent Units Example Two one-half completed products areequivalentto one completed product. So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

  14. Equivalent Units Question 1 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

  15. Equivalent Units Question 1 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 × .30) = 11,500 equivalent units

  16. Equivalent Units Question 2 If Jones incurred $27,600 inproduction costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

  17. $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit Equivalent Units Question 2 If Jones incurred $27,600 inproduction costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

  18. Calculating and Using Equivalent Units of Production To calculate the direct materials and conversion costs per equivalent unit for the period: Materials cost perequivalent unit Materials cost for the periodMaterials equivalent units for the period = Conversion cost perequivalent unit Conversion cost for the periodConversion equivalent units for the period =

  19. Analysis of physical flowof units. • Calculationof equivalent units. ProductionReport • Computationof unit costs. • Analysis of total costs. Departmental Production Report

  20. The FIFO method is a morecomplex method and israrely used in practice. Equivalent Units of Production –Weighted-Average Method The 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.

  21. Production Report Example • MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. • MVP uses the weighted-average cost procedure. • Material is added at the beginning of the Cutting Department, and conversion is incurred uniformly throughout the process. • Using the following information for the month of March, let’s prepare a production report for the Cutting Department.

  22. Production Report Example Work in process, March 1: 20,000 units Cost Materials: 100% complete. $ 50,000 Conversion: 10% complete. 7,200 Units started into production in March: 30,000 units Units completed and transferred out in March: 40,000 units Work in process, March 31: 10,000 units Materials 100% complete. Conversion 50% complete. Costs incurred during March Materials cost 90,000 Conversion costs: Direct labor $ 86,000 Applied manufacturing overhead 107,500 Total conversion costs 193,500 Total costs to account for $ 340,700

  23. Production Report Example • Analysis of Physical Flow of Units

  24. 50% of 10,000 units Beginning inventory % is not used in weighted-average method. Production Report Example • Calculation of Equivalent Units

  25. Production Report Example • Calculation of Equivalent Units 100% of 10,000 units, allmaterial added at beginning

  26. Learning Objective4

  27. $140,000 ÷ 50,000 equivalent units $2.80 + $4.46 $200,700 ÷ 45,000 equivalent units Production Report Example • Computation of unit costs

  28. Learning Objective5

  29. Production Report Example • Analysis of total costs

  30. Production Report Example • Analysis of total costs

  31. All costs accounted for Production Report Example • Analysis of total costs

  32. Learning Objective6

  33. Actual Costing vs. Normal Costing Actual costs of manufacturing overhead are entered in Work-in-Process Inventory Manufacturing overhead is applied to Work-in-Process Inventory using a predetermined overhead rate

  34. Calculationof equivalent units. • Computationof unit costs. • Analysis of total costs. Departmental Production Report • Analysis of physical flowof units.

  35. Learning Objective7

  36. Operation Costing Operation costing employs some aspectsof both job-order and process costing. Job-orderOperation Costing Process Costing (Products produced in batches)Costing

  37. Material Costs chargedto batches as injob-order costing. Conversion costsassigned to batchesas in process costing. Operation Costing Operation costing employs some aspectsof both job-order and process costing. Job-orderOperation CostingProcess Costing (Products produced in batches)Costing

  38. End of Chapter 4 I’m ready to processsome leisure time.

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