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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 04
Process Costing
4-2
Processing DepartmentsAny unit 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 output ofunits of production. Furthermore, the output ofa processing department must be a processing department must be homogeneoushomogeneous. .
Products in a process costing environment Products in a process costing environment typically flow in a sequence from one departmenttypically flow in a sequence from one department
to another.to another.
4-3
Comparing Job-Order and Process Costing
FinishedFinishedGoodsGoods
FinishedFinishedGoodsGoods
Cost of Cost of GoodsGoodsSoldSold
Cost of Cost of GoodsGoodsSoldSold
Direct LaborDirect Labor
Manufacturing Overhead
Manufacturing Overhead
ProcessingProcessingDepartmentDepartmentProcessingProcessingDepartmentDepartment
Costs are traced and applied to departments
in a process cost system.
Costs are traced and applied to departments
in a process cost system.
Direct Materials
Direct Materials
4-4
Raw Materials
Process Cost Flows: The Flow of Raw Materials (in T-account form)
Work in Process Department B
Work in Process Department A
•DirectMaterials
•Direct Materials
•Direct Materials
4-5
Process Cost Flows: The Flow of Labor Costs (in T-account form)
Work in Process Department B
Work in Process Department A
Salaries and Wages Payable
•Direct Materials
•Direct Materials
•Direct Labor
•Direct Labor •Direct
Labor
4-6
Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)
Work in Process Department B
Work in Process Department A
Manufacturing Overhead
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•Direct Labor
•Direct Materials
•Direct Labor
•Direct Materials
•Actual Overhead
4-7
Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process Department B
Work in ProcessDepartment A
•Direct Materials
•Direct Labor
•AppliedOverhead
•Direct Materials
•Direct Labor
•AppliedOverhead
Transferred to Dept. B
•Transferred from Dept. A
DepartmentDepartmentAA
DepartmentDepartmentAA
DepartmentDepartmentBB
DepartmentDepartmentBB
4-8
Finished Goods
Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)
Work in Process Department B
•Cost of Goods
Manufactured
•Direct Materials
•Direct Labor
•AppliedOverhead
•Transferred from Dept. A
•Cost of Goods
Manufactured
4-9
Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form)
Work in Process Department B
•Cost of Goods
Manufactured
•Direct Materials
•Direct Labor
•AppliedOverhead
•Transferred from Dept. A
•Cost of GoodsSold
•Cost of GoodsSold
•Cost of Goods
Manufactured
4-10
Equivalent Units of Production
Equivalent units are the product of the number of partially completed
units and the percentage completion
of those units.
These partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to
that output.
4-11
Equivalent Units – The Basic IdeaTwo half-completed products are Two half-completed products are
equivalent toequivalent to one complete product. one complete product.Two half-completed products are Two half-completed products are
equivalent toequivalent to one complete product. one complete product.
So, 10,000 units 70% completeSo, 10,000 units 70% completeare are equivalent toequivalent to 7,000 complete units. 7,000 complete units.
So, 10,000 units 70% completeSo, 10,000 units 70% completeare are equivalent toequivalent to 7,000 complete units. 7,000 complete units.
+ = 1
4-12
Equivalent Units of ProductionWeighted-Average Method
The weighted-average method . . .
1. Makes no distinction between work done in prior or current periods.
2. Blends together units and costs from prior and current periods.
3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.
The weighted-average method . . .
1. Makes no distinction between work done in prior or current periods.
2. Blends together units and costs from prior and current periods.
3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.
4-13
Treatment of Direct Labor
Type of Product Cost
Do
llar
Am
ou
nt Conversion
Direct labor and manufacturing
overhead may be combined into
one classification of product
cost called conversion costs.
Direct labor and manufacturing
overhead may be combined into
one classification of product
cost called conversion costs.
DirectMaterials
DirectLabor
DirectLabor
ManufacturingOverhead
4-14
Compute and Apply Costs
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
+
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Appendix 4A
Process Costing Using the FIFO Method
4-16
FIFO vs. Weighted-Average Method
The FIFO method (generally considered more accurate than 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.
4-17
Cost per Equivalent Unit - FIFO
The formula for computing the cost per equivalent unit under FIFO method is:
4-18
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 When considering cost control, FIFO is superior to weighted-average because it superior to weighted-average because it
does not mix costs of the current period with does not mix costs of the current period with costs of the prior period.costs of the prior period.
When considering cost control, FIFO is When considering cost control, FIFO is superior to weighted-average because it superior to weighted-average because it
does not mix costs of the current period with does not mix costs of the current period with costs of the prior period.costs of the prior period.
4-19
End of Chapter 04