Cost 6 Process-costing

4-1

Chapter 4 Systems Design: Process Costing

Types of Costing Systems Used to Determine Product Costs Process Costing

Job-order Costing

F Many units of a single, homogeneous product flow evenly through a continuous production process. F One unit of product is indistinguishable from any other unit of product. F Each unit of product is assigned the same average cost. I Made R. Natawidnyana, Ak., CPMA

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Types of Costing Systems Used to Determine Product Costs Process Costing

Job-order Costing

Typical process cost applications: v

Petrochemical refinery

v

Paint manufacturer

v

Paper mill I Made R. Natawidnyana, Ak., CPMA

Differences Between JobOrder and Process Costing Job order costing l

Many jobs are worked during the period.

l

l

l

Process costing l

Costs are accumulated by individual jobs.

A single product is produced for a long period of time.

l

Job cost sheet is the key document.

Costs are accumulated by departments.

l

Unit cost computed by job.

Department production report is key document.

l

Unit costs are computed by department.

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4-3

Process Costing

Dollar Amount

Direct Materials

Conversion Direct Labor

Direct labor costs may be small in comparison to other product costs in process cost systems.

Type of Product Cost

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Process Costing

Dollar Amount

Direct Materials Conversion

Direct labor costs may be small in comparison to other product costs in process cost systems.

Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called conversion. I Made R. Natawidnyana, Ak., CPMA

4-4

Comparing Job-Order and Process Costing Direct Materials Direct Labor

Work in Process

Finished Goods

Manufacturing Overhead

Cost of Goods Sold I Made R. Natawidnyana, Ak., CPMA

Comparing Job-Order and Process Costing Costs are traced and applied to individual jobs in a job-order cost system.

Direct Materials Direct Labor

Manufacturing Overhead

Jobs

Finished Goods

Cost of Goods Sold I Made R. Natawidnyana, Ak., CPMA

4-5

Comparing Job-Order and Process Costing Direct Materials Direct Labor

Costs are traced and applied to departments in a process cost system. Finished Goods

Processing Department

Manufacturing Overhead

Cost of Goods Sold I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows Let’s look at cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials.

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4-6

Process Cost Flows Raw Materials •Purchases

•Direct Materials •Indirect Materials

Manufacturing Overhead Actual

Applied

•Other Overhead •Indirect Materials

Work in Process Department A •Direct Materials •Direct Labor

Work in Process Department B •Direct Materials

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Process Cost Flows Wages Payable •Direct Labor •Indirect Labor

Manufacturing Overhead Actual

•Other Overhead •Indirect Materials •Indirect Labor

Applied

Work in Process Department A •Direct Materials •Direct Labor

Work in Process Department B •Direct Materials •Direct Labor I Made R. Natawidnyana, Ak., CPMA

4-7

Process Cost Flows Work in Process Department A •Direct Materials •Direct Labor •Applied Overhead

Manufacturing Overhead Actual

Applied

•Other •Overhead Overhead Applied to •Indirect Work in Materials Process •Indirect Labor

Work in Process Department B •Direct Materials •Direct Labor •Applied Overhead I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows Next, transfer work from Department A to Department B.

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Process Cost Flows Work in Process Department A •Direct Transferred Materials to Dept. B •Direct Labor •Applied Overhead

Work in Process Department B •Direct Materials •Direct Labor •Applied Overhead •Transferred from Dept. A

I Made R. Natawidnyana, Ak., CPMA

Process Cost Flows Now let’s complete the goods in Department B and sell them.

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4-9

Process Cost Flows Work in Process Department B

Finished Goods

•Direct •Cost of •Cost of •Cost of Materials Goods Goods Goods •Direct Sold Manufactured Manufactured Labor •Applied Overhead •Transferred Cost of Goods Sold from Dept. A •Cost of Goods Sold I Made R. Natawidnyana, Ak., CPMA

Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

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Equivalent Units of Production Two half completed products are equivalent to one completed product.

+

=

1

So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. I Made R. Natawidnyana, Ak., CPMA

Calculating and Using Equivalent Units of Production To calculate the cost per equivalent unit for the period: Cost per equivalent unit

=

Costs for the period Equivalent units of production for the period

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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. l Blends together units and costs from prior period and current period. l

Let’s see how this works! I Made R. Natawidnyana, Ak., CPMA

Weighted Average Example Smith Company reported the following activity in Department A for the month of June: Percent Completed Units Work in process, June 1

300

Units started into production in June

6,000

Units completed and transferred out of Department A during June

5,400

Work in process, June 30

900

Materials Conversion 40%

20%

60%

30%

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4-12

Weighted Average Example Equivalent units are calculated as follows: Materials Units completed and transferred out of Department A in June

Conversion

5,400

5,400

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Weighted Average Example Equivalent units are calculated as follows: Materials Units completed and transferred out of Department A in June

5,400

Conversion 5,400

Work in process, June 30: 900 units × 60% Equivalent units of Production in Department A during June

540

5,940 I Made R. Natawidnyana, Ak., CPMA

4-13

Weighted Average Example Equivalent units are calculated as follows: Materials Units completed and transferred out of Department A in June

Conversion

5,400

5,400

Work in process, June 30: 900 units × 60%

540

900 units × 30% Equivalent units of Production in Department A during June

270 5,940

5,670

I Made R. Natawidnyana, Ak., CPMA

Weighted Average Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Materials Units completed and transferred out of Department A in June

5,400

Conversion 5,400

Work in process, June 30: 900 units × 60%

540

900 units × 30% Equivalent units of Production in Department A during June

270 5,940

5,670

I Made R. Natawidnyana, Ak., CPMA

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Weighted Average Example Materials Beginning Work in Process 300 Units 40% Complete

6,000 Units Started

5,100 Units Started and Completed

5,400 Units Completed 540 Equivalent Units 5,940 Equivalent units of production

Ending Work in Process 900 Units 60% Complete

900 × 60%

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Weighted Average Example Conversion Beginning Work in Process 300 Units 20% Complete

6,000 Units Started

5,100 Units Started and Completed

5,400 Units Completed 270 Equivalent Units 5,670 Equivalent units of production

Ending Work in Process 900 Units 30% Complete

900 × 30%

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4-15

Production Report Shows the flow of units and costs through work in process

Provides cost information for financial statements

Production Report Becomes the job cost sheet in process costing

Helps managers control their departments I Made R. Natawidnyana, Ak., CPMA

Production Report Production Report

Section 1 Section 2

ŒA quantity schedule showing the flow of units and the computation of equivalent units. •A computation of cost per equivalent unit.

Section 3 I Made R. Natawidnyana, Ak., CPMA

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Production Report Production Report

Section 1 Section 2 Section 3

Ž A reconciliation of cost flows for the period, including: vTotal cost for units completed and transferred from the processing department. vTotal cost for partially completed units remaining in work in process. I Made R. Natawidnyana, Ak., CPMA

Production Report Example Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. Double Diamond uses the weighted average cost procedure. Using the following information for the month of May, let’s prepare a production report for Shaping and Milling. I Made R. Natawidnyana, Ak., CPMA

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Production Report Example Work in process, May 1: 200 units Materials: 55% complete. Conversion: 30% complete.

$

Production started during May: Production completed during May: Costs added to production in May Materials cost Conversion cost

9,600 5,575 5,000 units 4,800 units

$ 368,600 350,900

Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete. I Made R. Natawidnyana, Ak., CPMA

Production Report Example Section 1: Quantity Schedule with Equivalent Units Units to be accounted for: Work in process, May 1 Started into production Total units

200 5,000 5,200 Equivalent units Materials Conversion

Units accounted for as follows: Completed and transferred Work in process, May 31

4,800 400

4,800

4,800

I Made R. Natawidnyana, Ak., CPMA

4-18

Production Report Example Section 1: Quantity Schedule with Equivalent Units Units to be accounted for: Work in process, May 1 Started into production Total units

200 5,000 5,200 Equivalent units Materials Conversion

Units accounted for as follows: Completed and transferred Work in process, May 31 Materials 40% complete

4,800 400

4,800

4,800

160 5,200

4,960 I Made R. Natawidnyana, Ak., CPMA

Production Report Example Section 1: Quantity Schedule with Equivalent Units Units to be accounted for: Work in process, May 1 Started into production Total units

200 5,000 5,200 Equivalent units Materials Conversion

Units accounted for as follows: Completed and transferred Work in process, May 31 Materials 40% complete Conversion 25% complete

4,800 400

4,800

4,800

160 5,200

4,960

100 4,900

I Made R. Natawidnyana, Ak., CPMA

4-19

Production Report Example Section 2: Compute cost per equivalent unit Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost

$

15,175

Materials

Conversion

$

$

9,600

5,575

719,500

368,600

350,900

$ 734,675

$ 378,200

$ 356,475

4,960

4,900

Equivalent units Cost per equivalent unit

I Made R. Natawidnyana, Ak., CPMA

Production Report Example Section 2: Compute cost per equivalent unit Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost

$

15,175

Materials

Conversion

$

$

5,575

719,500

368,600

350,900

$ 734,675

$ 378,200

$ 356,475

4,960

4,900

Equivalent units Cost per equivalent unit

9,600

$

76.25

$378,200 ÷ 4,960 units = $76.25 I Made R. Natawidnyana, Ak., CPMA

4-20

Production Report Example Section 2: Compute cost per equivalent unit Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shipping and Milling Department Total cost

$

15,175

Materials

Conversion

$

$

9,600

5,575

719,500

368,600

350,900

$ 734,675

$ 378,200

$ 356,475

Equivalent units

4,960

Cost per equivalent unit $ 76.25 Total cost per equivalent unit = $76.25 + $72.75 = $149.00

4,900 $

72.75

$356,475 ÷ 4,900 units = $72.75 I Made R. Natawidnyana, Ak., CPMA

Production Report Example Section 3: Cost Reconciliation Total Cost Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion

Equivalent Units Materials Conversion 4,800

4,800

160 100

Total work in process, May 31 Total cost accounted for

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4-21

Production Report Example Section 3: Cost Reconciliation

4,800 units @ $149.00 Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion

Total Cost $ 715,200

Equivalent Units Materials Conversion 4,800

4,800

160 100

Total work in process, May 31 Total cost accounted for

I Made R. Natawidnyana, Ak., CPMA

Production Report Example Section 3: Cost Reconciliation

160 units @ $76.25 Cost accounted for as follows: Transferred out during May Work in process, May 31: Materials Conversion Total work in process, May 31 Total cost accounted for

Total Cost

Equivalent Units Materials Conversion

100 units @ $72.75

$ 715,200

4,800

12,200 7,275

160

19,475 $ 734,675

4,800

100

All costs accounted for

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4-22

Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Costing

Operation Costing (Products produced in batches)

Material Costs Charged to batches as in job-order costing.

Process Costing

Conversion costs assigned to batches as in process costing. I Made R. Natawidnyana, Ak., CPMA

Do You Want to See Journal Entries? I’m going to end this chapter and process some leisure time, unless you want to see some journal entries.

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4-23

Process Costing Typical Accounting Entries

Let’s look at the accounting journal entries for a process cost system. We’ll omit the numbers so that we can focus on concepts. I Made R. Natawidnyana, Ak., CPMA

Process Costing Typical Accounting Entries GENERAL JOURNAL Da te

Description Raw Ma te ria ls Accounts Pa yable

Post. Re f.

Page 4 Debit

Credit

XXXXX XXXXX

To record the purchase of material.

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4-24

Process Costing Typical Accounting Entries GENERAL JOURNAL Da te

Description

Post. Re f.

Raw Ma te ria ls

Page 4 Debit

Credit

XXXXX

Accounts Pa yable

XXXXX

To record the purchase of material. W ork in Process - De partment A

XXXXX

W ork in Process - De partment B

XXXXX

Ra w Mate rials

XXXXX

To record the use of direct material.

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Process Costing Typical Accounting Entries GENERAL JOURNAL Da te

Description

Post. Re f.

Page 4 Debit

W ork in Process - De partment A

XXXXX

W ork in Process - De partment B

XXXXX

Sa la rie s a nd Wa ges Pa yable

Credit

XXXXX

To record direct labor costs.

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4-25

Process Costing Typical Accounting Entries GENERAL JOURNAL Da te

Description

Post. Re f.

Page 4 Debit

W ork in Process - De partment A

XXXXX

W ork in Process - De partment B

XXXXX

Ma nufa cturing Overhe a d

Credit

XXXXX

To apply overhead to departments.

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Process Costing Typical Accounting Entries GENERAL JOURNAL Da te

Description W ork in Process - De partment B W ork in Proce ss - De pa rtme nt A

Post. Re f.

Page 4 Debit

Credit

XXXXX XXXXX

To record the transfer of goods from Department A to Department B.

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4-26

Process Costing Typical Accounting Entries GENERAL JOURNAL Da te

Description

Post. Re f.

Finished Goods

Page 4 Debit

Credit

XXXXX

W ork in Proce ss - De pa rtme nt B

XXXXX

To record the completion of goods and their transfer from Department B to finished goods inventory.

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Process Costing Typical Accounting Entries GENERAL JOURNAL Da te

Description Accounts Re ceivable

Post. Re f.

Page 4 Debit

Credit

XXXXX

Sa le s

XXXXX

To record sales on account. Cost of Goods Sold Finishe d Goods

XXXXX XXXXX

To record cost of goods sold.

I Made R. Natawidnyana, Ak., CPMA

4-27

End of Chapter 4

I Made R. Natawidnyana, Ak., CPMA