Managerial Accounting Chap 004 Power Point

Systems Design: Process Costing
Chapter 4
© 2010 The McGraw-Hill Companies, Inc.

Similarities Between Job-Order and Process
Costing
 Both systems assign material, labor and overhead costs

to products and they provide a mechanism for
computing unit product costs.
 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.
McGraw-Hill/Irwin Slide 2
Differences Between Job-Order and Process
Costing
 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 having
different production requirements 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.
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.
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.
Processing Departments
Any unit in an organization where materials, labor

or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one department
to another.
Learning Objective 1
Record the flow of

materials, labor, and
overhead through a
process costing system.
Comparing Job-Order and Process Costing
Direct
Materials
Direct Labor Work in Finished

Process Goods
Manufacturing Cost of
Overhead Goods
Sold
Costs are traced and
applied to individual
Direct jobs in a job-order
Materials cost system.
Direct Labor Finished

Jobs
Jobs Goods
Overhead Goods
Sold
Costs are traced and
applied to departments
Direct in a process cost
Materials system.
Direct Labor
Processing Finished
Department Goods
Overhead Goods
Sold
T-Account and Journal Entry Views 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.
Process Cost Flows: The Flow of Raw
Materials (in T-account form)
Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials
Work in Process
Department B
•Direct
Materials
Process Cost Flows: The Flow of Raw
Materials (in journal entry form)
GENERAL JOURNAL Page 4

Post.
Date Description 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.
Process Cost Flows: The Flow of Labor
Costs (in T-account form)
Salaries and Work in Process
Wages Payable Department A
•Direct
•Direct Materials
Labor •Direct
Labor
Work in Process
Department B
•Direct
Materials
•Direct
Labor
Process Costing: The Flow of Labor Costs
(in journal entry form)

Post.
Salaries and Wages Payable XXXXX
To record direct labor costs.
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (in T-account form)
Work in Process
Department A
Manufacturing •Direct
Overhead Materials
•Direct
•Actual •Overhead Labor
Overhead Applied to •Applied
Work in Overhead
Process
Work in Process
Department B
•Direct
Materials
•Direct
Labor
•Applied
Overhead
Process Cost Flows: The Flow of Manufacturing
Overhead Costs (in journal entry form)

Post.
Manufacturing Overhead XXXXX
To apply overhead to departments.
Process Cost Flows: Transfers from
WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process Work in Process

Department A Department B
•Direct Transferred •Direct
Materials to Dept. B Materials
•Direct •Direct
Labor Labor
•Applied •Applied
Overhead Overhead
•Transferred
from Dept. A
Department
Department Department
Department
A
A B
B
Process Cost Flows: Transfers from WIP-Dept.
A to WIP-Dept. B (in journal entry form)

Post.
To record the transfer of goods from
Department A to Department B.
B to Finished Goods (in T-account form)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of
Materials Goods Goods
•Direct Manufactured Manufactured
Labor
•Applied
Overhead
•Transferred
from Dept. A
B to Finished Goods (in journal entry form)

Post.
Finished Goods XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
Process Cost Flows: Transfers from Finished
Goods to COGS (in T-account form)
Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold
•Cost of
Goods
Sold
Process Cost Flows: Transfers from Finished
Goods to COGS (in journal entry form)

Post.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record the transfer of finished
goods inventory to cost of goods
sold.
Equivalent Units of Production
Equivalent units are the product of the number of
partially completed units and the percentage
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. 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.
Equivalent Units – The Basic Idea
Two half completed products are

equivalent to one complete product.
+ = 1
So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
Quick Check 
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
Quick Check 
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
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
Calculating Equivalent Units
Equivalent
Equivalent units
units can
can be
be calculated
calculated
two
two ways:
ways:

The
The First-In,
First-In, First-Out
First-Out Method
Method –– FIFO
FIFO is
is
covered
covered in
in the
the appendix
appendix to
to this
this chapter.
chapter.

The
The Weighted-Average
Weighted-Average Method
Method –– This
This method
method
will
will be
be covered
covered in
in the
the main
main portion
portion of
of the
the chapter.
chapter.
Compute the equivalent

units of production using
the weighted-average
method.
Equivalent Units of Production
Weighted-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.
Treatment of Direct Labor
Direct
Materials
Direct labor costs
may be small
Dollar Amount
Manufacturing in comparison to
Overhead
other product
Direct costs in process
Labor cost systems.
Type of Product Cost
Treatment of Direct Labor
Direct
Materials
Direct labor and
Conversion
manufacturing
Dollar Amount
Direct
Labor
overhead may be
combined into
Direct Manufacturing one classification
Labor Overhead of product
cost called
conversion costs.
Type of Product Cost
Weighted-Average – An Example
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
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 transferred
out of the Department in June 5,400 5,400
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 in

the Department during June 5,940
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.
900 units × 60% 540
900 units × 30% 270
the Department during June 5,940 5,670
Equivalent units of production always equals:
+ Equivalent units remaining in work in process
900 units × 60% 540
900 units × 30% 270
the Department during June 5,940 5,670
Materials 6,000 Units Started
Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete
5,400 Units Completed

540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production
Conversion 6,000 Units Started
Beginning Ending
5,400 Units Completed

900 × 30%
270 Equivalent Units
of production
Compute the cost per

equivalent unit using the
weighted-average method.
Compute and Apply Costs
Beginning Work in Process Inventory: 400 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units
Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130
Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete
The formula for computing the cost per
equivalent unit is:
Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit Equivalent units of production
Here is a schedule with the cost and equivalent
unit information.
Total
Cost 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
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
Total
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
Cost per equivalent unit = $21.00 + $15.00 = $36.00

Assign costs to units using

the weighted-average
method.
Applying Costs
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Applying Costs
Assembly Department
Applying Costs
Assembly Department
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Computing the Cost of Units Transferred Out
Assembly Department
Units completed and transferred out:
Units transferred 5,400 5,400
Assembly Department
Assembly Department
Cost of units transferred out $ 113,400 $ 81,000 $ 194,400
Prepare a cost
reconciliation report.
Reconciling Costs
Assembly Department
Cost Reconciliation
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
Reconciling Costs
Assembly Department
Cost Reconciliation
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
Operation Costing
Operation cost is a hybrid of job-order and

process costing because it possesses attributes
of both approaches
Operation
Operation costing
costing is
is
commonly
commonly used
used when
when
batches
batches of
of many
many different
different
products
products pass
pass through
through the
the
same
same processing
processing
department.
department.
FIFO Method
Appendix 4A

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
The computation
computation of
of equivalent
equivalent units.
units.
2.
2. The
The way
way in
in which
which the
the costs
costs of
of beginning
beginning
inventory
inventory are
are treated.
treated.
Compute the equivalent

units of production using
the FIFO method.
Equivalent Units – FIFO Method
Let’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
Step 1:
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
Step 2:
2 Determine units started and completed during
the period.
Materials: 300 units × (100% - 40%) 180
Units started and completed during June 5,100 5,100
Step 3:
3 Add the equivalent units in ending Work in
Process Inventory.
Materials: 300 units × (100% - 40%) 180
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
FIFO Example
Materials 6,000 Units Started
Beginning Ending
300 × 60%
5,100 Units Completed 900 × 60%
of production
FIFO Example
Conversion 6,000 Units Started
Beginning Ending
300 × 80%
5,100 Units Completed 900 × 30%
of production
Equivalent Units: Weighted-Average vs.
FIFO
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.
Equivalent units - weighted-average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units × 40% 120
300 units × 20% 60
Equivalent units - FIFO method 5,820 5,610
Compute the cost per

equivalent unit using the
FIFO method.
Cost per Equivalent Unit - FIFO
Let’s revisit the Smith Company Assembly Department
for the month of June to prepare our production report.
Beginning work in process: 400 units
Materials: 40% complete $ 6,119

Conversion: 20% complete $ 3,920
Production started during June 6,000 units

Production completed during June 5,400 units
Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130
Ending work in process 900 units

Materials: 60% complete
Conversion: 30% complete
The formula for computing the cost per equivalent
unit under FIFO method is:
Total
Cost added in June $ 199,751 $ 118,621 $ 81,130

$118,600 ÷ 5,820 $81,130 ÷ 5,610
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
Assign costs to units using

the FIFO method.
Applying Costs - FIFO
Step 1:
1 Record the equivalent units of production in ending Work
in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
900
900 units
units ×× 60%
60% 900
900 units
units ×× 30%
30%
Step 2:
2 Record the cost per equivalent unit.
Assembly Department
Step 3:
3 Compute the cost of ending Work in Process Inventory.
Assembly Department
540
540 ×× $20.3816
$20.3816 270
270 ×× 14.4617
14.4617
Cost of Units Transferred Out
Step 1:
1 Record the cost in beginning Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Step 2:
2 Compute the cost to complete the units in beginning
Work in Process Inventory.
Assembly Department
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost to complete beginning WIP $ 3,668 $ 3,471 7,139
Step 3:
3 Compute the cost of units started and completed this
period.
Assembly Department
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost of units started and completed $ 103,946 $ 73,755 177,701
Step 4:
4 Compute the total cost of units transferred out.
Assembly Department
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,879
Prepare a cost
reconciliation report
using the FIFO method.
Reconciling Costs
Assembly Department
Cost Reconciliation for June
Reconciling Costs
Assembly Department
Cost Reconciliation for June
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
A Comparison of Costing Methods
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.
Service Department Allocations
Appendix 4B

Operating Departments
An operating department carries out

the central purpose of the organization
The
The Surgery Geography A
Department Department Production
at Mount at the Department
Sinai University of at
Hospital. Washington. Mitsubishi.
Service Departments
Service departments do not directly

engage in operating activities.
The The Human

Accounting Resources
at Macy’s. at Walgreens.
Interdepartmental Services
Service Operating
Costs of the service
department become
overhead costs to
the operating
department
Allocation Approaches
Reciprocal Services
Service Service
Department 1 Department 2
When service
departments provide
services to each
other we call them
reciprocal services.
Allocate service
department costs to
operating departments
using the direct method.
Direct Method
Service Operating
(Cafeteria) (Machining)
Service Operating
(Custodial) (Assembly)
Direct Method – An Example
Service Department Allocation Base

Cafeteria Number of employees
Custodial Square feet occupied
How much of the Cafeteria and Custodial costs

should be allocated to each operating department
using the direct method of cost allocation?
Allocation base: Number of employees

30
$360,000 × = $216,000
20 + 30

25,000
$90,000 × = $30,000
25,000 + 50,000
Allocation base: Square feet occupied


To allocate service
department costs to
operating departments
using the step-down
method.
Step-Down Method
Service Operating
Once a service (Cafeteria) (Machining)
department’s costs
are allocated,
other service
department costs
are not allocated
back to it.
Service Operating
Step-Down Method
There are three key points to understand regarding
the step-down method:
 In both the direct and step-down methods, any
amount of the allocation base attributable to the
service department whose cost is being allocated is
always ignored.
 Any amount of the allocation base that is
attributable to a service department whose cost has
already been allocated is ignored.
 Each service department assigns its own costs to
operating departments plus the costs that have
been allocated to it from other service departments .
Step-Down Method – An Example
We will use the same data used

in the direct method example.
Service Department Allocation Base

Cafeteria Number of employees
Custodial Square feet occupied
Allocate
Allocate Cafeteria
Cafeteria costs
costs first
first since
since
itit provides
provides more
more service
service than
than Custodial.
Custodial.

10
$360,000 × = $60,000
10 + 20 + 30

20
$360,000 × = $120,000
10 + 20 + 30

30
$360,000 × = $180,000
10 + 20 + 30

New total = $90,000 original Custodial cost

plus $60,000 allocated from the Cafeteria.

25,000
$150,000 × = $50,000
25,000 + 50,000

50,000
$150,000 × = $100,000
25,000 + 50,000

Reciprocal Method
Service Operating
Interdepartmental (Cafeteria) (Machining)
services are given
full recognition
rather than partial
recognition as with
the step method. Service Operating
Because of its mathematical complexity,

the reciprocal method is rarely used.

Quick Check Data
for Direct and Step-Down Methods
The direct method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business Administration computer services (BACS):
Number of personal computers
Quick Check 
How much cost will be allocated from

Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000

Quick Check 
How much cost will be allocated from

Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
20
$180,000 × = $36,000
20 + 80
Quick Check 
How much total cost will be allocated from

ADMIN and BACS combined to the
Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500

Quick Check 

a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500

Quick Check Data
The step method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):

Number of employees
Business administration computer services (BACS):

Number of personal computers
Quick Check 

a. $35,250
b. $49,072
c. $18,000
d. $26,333

Quick Check 

ADMIN and BACS combined to the Accounting
Department?
a. $35,250
b. $49,072
c. $18,000
d. $26,333

Managerial Accounting Chap 004 Power Point

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Managerial Accounting Chap 004 Power Point

Загружено:

Авторское право:

Доступные форматы

Systems Design: Process Costing

© 2010 The McGraw-Hill Companies, Inc.

 Both systems assign material, labor and overhead costs

Process costing is used for products

Process costing is used for products

Any unit in an organization where materials, labor

Record the flow of

Direct Labor Work in Finished

Direct Labor Finished

For purposes of this example, assume

GENERAL JOURNAL Page 4

GENERAL JOURNAL Page 4

GENERAL JOURNAL Page 4

Work in Process Work in Process

GENERAL JOURNAL Page 4

GENERAL JOURNAL Page 4

GENERAL JOURNAL Page 4

We need to calculate equivalent units because a

Two half completed products are

For the current period, Jones started 15,000

For the current period, Jones started 15,000

Compute the equivalent

The weighted-average method . . .

Type of Product Cost

Smith Company reported the following activity in

Units started into production in June 6,000

Units completed and transferred out 5,400

Work in process, June 30 900 60% 30%

Equivalent units of Production in

5,400 Units Completed

5,400 Units Completed

Compute the cost per

Costs added to production in June

Ending Work in Process Inventory: 900 units

Equivalent units 5,940 5,670

Equivalent units 5,940 5,670

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

Assign costs to units using

Cost accounted for as follows:

Operation cost is a hybrid of job-order and

© 2010 The McGraw-Hill Companies, Inc.

The FIFO method (generally considered more

Compute the equivalent

Units started into production in June 6,000

Units completed and transferred out 5,400

Work in process, June 30 900 60% 30%

As shown below, the equivalent units in beginning inventory are

Compute the cost per

Materials: 40% complete $ 6,119

Production started during June 6,000 units

Costs added to production in June

Ending work in process 900 units

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

$118,600 ÷ 5,820 $81,130 ÷ 5,610

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

Assign costs to units using

Cost accounted for as follows:

© 2010 The McGraw-Hill Companies, Inc.

An operating department carries out

Service departments do not directly

The The Human

Service Department Allocation Base

How much of the Cafeteria and Custodial costs