Chapter 4

PowerPoint Authors:Jon A. Booker, Ph.D., CPA, CIACharles W. Caldwell, D.B.A., CMASusan Coomer Galbreath, Ph.D., CPA

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Chapter 4System Design:Process Costing

•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.

•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

4-2

• 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 accumulate 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.

• 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 accumulate 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

4-3

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.






Quick Check

4-4











Quick Check

4-5

Processing DepartmentsAny location in an organization where materials,

labor, or overhead are added to the product.

The activities performed in a processingThe activities performed in a processingdepartment are department are performed uniformlyperformed uniformly on all on all

units of production. Furthermore, the outputunits of production. Furthermore, the outputof a processing department must beof a processing department must be

homogeneoushomogeneous..

4-6

Learning Objective 1

Record the flowof materials, labor, and

overhead through aprocess costing system.

4-7

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold

Work inProcess

Direct Materials

Direct Materials

Direct LaborDirect Labor

ManufacturingOverhead


Flow of Materials, Labor, and Overhead Costs

4-8

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




JobsJobsJobsJobs

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

Direct Materials


4-9

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




ProcessingProcessingDepartmentDepartmentProcessingProcessingDepartmentDepartment

Costs are traced and Costs are traced and applied to departments applied to departments

in a process cost in a process cost system.system.

Costs are traced and Costs are traced and applied to departments applied to departments

in a process cost in a process cost system.system.

Direct Materials

Direct Materials


4-10

For purposes of this example, assume there are

two processing departments – Departments A and B.

We will use T-accounts and journal entries.

T-Account and Journal EntryViews of Process Cost Flows

4-11

Raw Materials

Work in Process Department B

Work in Process Department A

•DirectMaterials

•Direct Materials

•Direct Materials

The Flow of Raw Materials(in T-Account form)

4-12

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Raw Materials XXXXX

To record the use of direct material.

The Flow of Raw Materials(in journal entry form)

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Work in Process Department ASalaries and

Wages Payable

•Direct Materials

•Direct Materials

•Direct Labor

•Direct Labor •Direct

Labor

The Flow of Labor Costs(in T-Account form)

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Salaries and Wages Payable XXXXX

To record direct labor costs.

The Flow of Labor Costs(in journal entry form)

4-15


Work in Process Department A

Manufacturing Overhead

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•Direct Labor

•Direct Materials

•Direct Labor

•Direct Materials

•Actual Overhead

The Flow of Manufacturing Overhead Costs(in T-Account form)

4-16





Manufacturing Overhead XXXXX

To apply overhead to departments.

The Flow of Manufacturing Overhead Costs(in journal entry form)

4-17


Work in ProcessDepartment A

•Direct Materials

•Direct Labor

•AppliedOverhead

•Direct Materials

•Direct Labor

•AppliedOverhead

Transferred to Dept. B

•Transferred from Dept. A

Partially Completed Units Transferred(in T-Account form)

4-18





To record the transfer of goods from

Department A to Department B.

Partially Completed Units Transferred(in journal entry form)

4-19

Finished Goods Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead


•Cost of Goods

Manufactured

Transfer of Cost of Completed Units(in T-Account form)

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Finished Goods XXXXX


To record the completion of goods

and their transfer from Department B

to finished goods inventory.

Transfer of Cost of Completed Units (in journal entry form)

4-21

Finished Goods

Cost of Goods Sold


•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead


•Cost of GoodsSold

•Cost of GoodsSold

•Cost of Goods

Manufactured

Cost of Finished Goods Sold(in T-Account form)

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Cost of Goods Sold XXXXX

Finished Goods XXXXX

To record cost of goods sold.

Cost of Finished Goods Sold(in journal entry form)

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Equivalent Units of ProductionEquivalent units are the product of the numberof partially completed units and the percentage

of completion of those units.

Equivalent units are the product of the numberof partially completed units and the percentage

of 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.

We need to calculate equivalent units because a department usually has some partially completed

units in its beginning and ending inventory.

4-24

Two half completed products are equivalent to one completed product.

Two half completed products are equivalent to one completed product.

So, 10,000 units 70% completeare equivalent to 7,000 complete units.

So, 10,000 units 70% completeare equivalent to 7,000 complete units.

+ = 1

Equivalent Units – The Basic Idea

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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


a. 10,000

b. 11,500

c. 13,500

d. 15,000

Quick Check

4-26


a. 10,000

b. 11,500

c. 13,500

d. 15,000


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

4-27

Calculating Equivalent Units

Equivalent units can be calculated two Equivalent units can be calculated two ways:ways:

The First-In, First-Out Method – The First-In, First-Out Method – FIFOFIFO is covered in the appendix available on the web. is covered in the appendix available on the web.

The Weighted-Average Method – The Weighted-Average Method – ThisThis method will be covered in the main portion of method will be covered in the main portion of the chapter. the chapter.

Equivalent units can be calculated two Equivalent units can be calculated two ways:ways:

The First-In, First-Out Method – The First-In, First-Out Method – FIFOFIFO is covered in the appendix available on the web. is covered in the appendix available on the web.

The Weighted-Average Method – The Weighted-Average Method – ThisThis method will be covered in the main portion of method will be covered in the main portion of the chapter. the chapter.

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Compute the equivalentunits of production using theweighted-average method.

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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 weighted-average method . . .

• Makes no distinction between work done in prior or current periods.

• Blends together units and costs from prior and current periods.

Characteristics of the Weighted Average Method

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.

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


4-30

Direct labor costsmay be small

in comparison toother product

costs in processcosting systems.




DirectMaterials

Type of Product Cost

Do

llar

Am

ou

nt

DirectLabor

Conversion

Treatment of Direct Labor

4-31

Type of Product Cost

Do

llar

Am

ou

nt Conversion

Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may becombined into one product cost called combined into one product cost called conversionconversion..Direct labor and manufacturing overhead may beDirect labor and manufacturing overhead may be

combined into one product cost called combined into one product cost called conversionconversion..

DirectMaterials

Treatment of Direct LaborDirect labor costs

may be smallin comparison to

other productcosts in processcosting systems.




4-32

Smith Company reported the following activity in the Assembly Department 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


Weighted-Average – An Example

4-33

The 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 transferredout of the Department in June 5,400 5,400


4-34

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.



Work in Process, June 30:

900 units × 60% 540

Equivalent units of Production inthe Department during June 5,940


4-35




900 units × 60% 540

900 units × 30% 270

Equivalent units of Production inthe 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.


4-36




900 units × 60% 540

900 units × 30% 270

Equivalent units of Production inthe Department during June 5,940 5,670

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


4-37

EndingWork in Process

900 Units60% Complete

6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed

MaterialsMaterials

5,400 Units Completed 540 Equivalent Units 900 × 60%

5,940 Equivalent units of production

BeginningWork in Process



4-38

6,000 Units Started

5,400 Units Completed 270 Equivalent Units 900 × 30%






ConversionConversion



4-39


Compute the cost per equivalent unit using the weighted-average

method.

4-40

Beginning Work in Process Inventory: 400 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

Compute and Apply Costs

4-41

The formula for computing the cost per equivalent unit is:

Cost perequivalent

unit

=

Cost of beginningWork in Process

inventory Cost added during

the period

Equivalent units of production

+


4-42

Here is a schedule with the cost and equivalent unit information.

TotalCost 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


4-43


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$


Cost per equivalent unit 21.00$ 15.00$

Here is a schedule with the cost and equivalent unit information.

$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00$85,050 ÷ 5,670 units = $15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00Cost per equivalent unit = $21.00 + $15.00 = $36.00


4-44


Assign costs to units using the weighted-average method.

4-45

Applying Costs

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out

4-46

Applying Costs

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$


4-47

Applying Costs

Materials Conversion TotalEnding 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$


4-48

Computing the Cost of Units Transferred Out

Materials Conversion TotalEnding 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


4-49


Materials Conversion TotalEnding 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$


4-50


Materials Conversion TotalEnding 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$


4-51


Prepare a costreconciliation report.

4-52

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 DepartmentCost Reconciliation

4-53

Reconciling Costs


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 DepartmentCost Reconciliation

4-54

PowerPoint Authors:Jon A. Booker, Ph.D., CPA, CIACharles W. Caldwell, D.B.A., CMASusan Coomer Galbreath, Ph.D., CPA

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Appendix 4AFIFO Method

4-55

FIFO vs. Weighted-Average Method

The FIFO method (generally considered more accurate that the weighted-average

method) differs from the weighted-average method in two ways:

1.1. The computation of equivalent units.The computation of equivalent units.

2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated.inventory are treated.

1.1. The computation of equivalent units.The computation of equivalent units.

2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated.inventory are treated.

4-56


Compute the equivalent units of production using

the FIFO method.

4-57

Equivalent Units – FIFO MethodLet’s revisit the Smith Company example. Here is information

concerning the Assembly Department for the month of June.

Percent Completed

Units Materials Conversion


Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June


4-58

Equivalent Units – FIFO Method

Step 1: Determine equivalent units needed to complete beginning Work in Process inventory.


To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180

Conversion: 300 units × (100% - 20%) 240

4-59


Step 2: Determine units started and completed during the period.




Units started and completed during June 5,100 5,100

4-60


Step 3: Add the equivalent units in ending Work in Process inventory.




Units started and completed during June 5,100 5,100

Ending Work in Process:

Materials: 900 units × 60% complete 540 Conversion: 900 units × 30% complete 270

Equivalent units of production 5,820 5,610

4-61





6,000 Units Started


FIFO Example

MaterialsMaterialsMaterialsMaterials

5,100 Units Completed 540 Equivalent Units

900 × 60%


180 Equivalent Units300 × 60%

4-62





6,000 Units Started


FIFO Example

ConversionConversionConversionConversion

5,100 Units Completed 270 Equivalent Units

900 × 30%


240 Equivalent Units300 × 80%

4-63

Equivalent Units: Weighted-Average vs. FIFO

Materials ConversionEquivalent units - weighted-average method 5,940 5,670Less equivalent units in beginning inventory: 300 units × 40% 120 300 units × 20% 60 Equivalent units - FIFO method 5,820 5,610

As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of

production under the FIFO method.

As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of

production under the FIFO method.

4-64


Compute the cost per equivalent unit using the FIFO method.

4-65

Beginning Work in Process: 400 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 June:Materials cost $ 118,621Conversion cost $ 81,130

Ending Work in Process: 900 unitsMaterials: 60% completeConversion: 30% complete

Cost per Equivalent Unit - FIFOLet’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.

4-66

Cost per Equivalent Unit - FIFO

The formula for computing the cost per equivalent unit under FIFO method is:

Cost perequivalent

unit

=Cost added during the period

Equivalent units of production

4-67

Cost per Equivalent Unit - FIFO


Cost added in June 199,751$ 118,621$ 81,130$


Cost per equivalent unit 20.3816$ 14.4617$

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

$118,600 ÷ 5,820$118,600 ÷ 5,820 $81,130 ÷ 5,610$81,130 ÷ 5,610

4-68


Assign costs to unitsusing the FIFO method.

4-69

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270

Assembly DepartmentCost of Ending WIP Inventory

Applying Costs - FIFO

Step 1: Record the equivalent units of production in ending Work in Process inventory.

900 units × 60%900 units × 60% 900 units × 30%900 units × 30%

4-70


Step 2: Record the cost per equivalent unit.

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$


4-71

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$ Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$



Step 3: Compute the cost of ending Work in Process inventory.

540 × $20.3816540 × $20.3816 270 × 14.4617270 × 14.4617

4-72

Cost of Units Transferred OutStep 1: Record the cost in beginning Work in Process inventory.

Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$

Assembly DepartmentCost of Units Transferred Out in June

4-73

Cost of Units Transferred OutStep 2: Compute the cost to complete the units in beginning


Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,668$ 3,471$ 7,139


4-74

Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this

period.

Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,668$ 3,471$ 7,139 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701


4-75

Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.

Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,668$ 3,471$ 7,139 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,879$


4-76


Prepare a costreconciliation report

using the FIFO method.

4-77

Reconciling Costs


Assembly DepartmentCost Reconciliation for June

4-78

Reconciling Costs


Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911$ Cost of units transferred out 194,879 Total cost accounted for 209,790$

Assembly DepartmentCost Reconciliation for June

4-79

A Comparison of Costing MethodsIn a lean production environment, FIFO and

weighted-average methods yield similar unit costs.

In a lean production environment, FIFO and weighted-average methods yield similar

unit costs.

When considering cost control, FIFO is superior to weighted-average because it

does not mix costs of the current period with costs of the prior period.

When considering cost control, FIFO is superior to weighted-average because it

does not mix costs of the current period with costs of the prior period.

4-80

End of Chapter 4

4-81

Documents

Chapter 4