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Process Costing
Chapter Four
•• Both
Both systems
systems assign material, labor and
overhead
overhead costs
costs to
to products
products and
and they
they provide
provide aa
mechanism
mechanism for
for computing
computing unit
unit product
product cost.
cost.
•• Both
Both systems
systems use the same manufacturing
accounts,
accounts, including
including Manufacturing
Manufacturing Overhead,
Overhead,
Raw
Raw Materials,
Materials, Work
Work in
in Process,
Process, and
and Finished
Finished
Goods.
Goods.
•• The
The flow
flow of
of costs
costs through
through the
the manufacturing
manufacturing
accounts
accounts is
is basically
basically the
the same
same in
in both
both systems.
systems.
•• Process
Process costing
costing is
is used
used when
when aa single
single product
product is is produced
produced onon
aa continuing
continuing basis
basis or
or for
for aa long
long period
period of of time.
time. Job-order
Job-order
costing
costing is
is used
used when
when manymany different
different jobs
jobs are
are worked
worked on on each
each
period.
period.
•• Process
Process costing
costing systems
systems accumulate
accumulate costs costs byby department.
department.
Job-order
Job-order costing
costing systems
systems accumulated
accumulated costs costs by
by individual
individual
jobs.
jobs.
•• Process
Process costing
costing systems
systems use use department
department production
production reports
reports to
to
accumulate
accumulate costs.
costs. Job-order
Job-order costing
costing systems
systems useuse job
job cost
cost
sheets
sheets to
to accumulate
accumulate costs.
costs.
•• Process
Process costing
costing systems
systems compute
compute unitunit costs
costs by
by department.
department.
Job-order
Job-order costing
costing systems
systems compute
compute unit
unit costs
costs by
by job.
job.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Quick Check
Direct
Direct
Materials
Materials
Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Comparing Job-Order
and Process Costing
Costs
Costs are
are traced
traced and
and
applied
applied to
to individual
individual
Direct
Direct jobs
jobs in
in aa job-order
job-order
Materials
Materials cost
cost system.
system.
Direct Finished
Finished
Direct Labor
Labor Jobs
Jobs Goods
Goods
Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Comparing Job-Order
and Process Costing
Costs
Costs areare traced
traced and
and
applied
applied toto departments
departments
Direct
Direct in
in aa process
process cost
cost
Materials
Materials system.
system.
Direct Processing
Processing Finished
Finished
Direct Labor
Labor Goods
Department
Department Goods
Manufacturing
Manufacturing Cost
Cost of
of
Overhead
Overhead Goods
Goods
Sold
Sold
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
T-Account and Journal Entry Views of Cost Flows
Work in Process
Raw Materials Department A
•Direct •Direct
Materials Materials
Work in Process
Department B
•Direct
Materials
Work in Process
Department A
Wages Payable
•Direct
•Direct Materials
Labor •Direct
Labor
Work in Process
Department B
•Direct
Materials
•Direct
Labor
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
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Process Costing
(In journal entry 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
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
+ = 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.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Quick Check
For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 13,500
13,500
d.
d. 15,000
15,000
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Quick Check
For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
10,000 units + (5,000 units × 0.30)
b.
b. 11,500
11,500 = 11,500 equivalent units
c.
c. 13,500
13,500
d.
d. 15,000
15,000
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
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.
Direct
Materials Direct
Direct labor
labor costs
costs
may
may bebe small
small
in
in comparison
comparison to
Dollar Amount
to
MOH
other
other product
product
costs
costs in
in process
process
Direct cost
Labor cost systems.
systems.
Direct
Materials Direct
Direct labor
labor costs
costs
Conversion
may
may bebe small
small
in
in comparison
comparison to
Dollar Amount
to
other
other product
product
costs
costs in
in process
process
cost
cost systems.
systems.
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Equivalent
Equivalent units
units of
of production
production always
always equals:
equals:
Units
Units completed
completed and and transferred
transferred
++ Equivalent
Equivalent units
units remaining
remaining inin work
work in
in process
process
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete
Conversion
Conversion 6,000 Units Started
Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete
Production Report
AA quantity
quantity schedule
schedule
showing
showing the
the flow
flow of
of units
units
Section 1 and
and the
the computation
computation ofof
equivalent
equivalent units.
units.
AA computation
computation of
of
Section 2 cost
cost per
per equivalent
equivalent unit.
unit.
Section 3
Production Report
Section 1
Section 2
Cost
Cost Reconciliation
Reconciliation
section
section shows
shows the
the
reconciliation
reconciliation of
of all
all cost
cost
Section 3 flows
flows into
into and
and out
out ofof the
the
department
department during
during the
the
period.
period.
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Production Report Example
Assume
Assume that
that Double
Double Diamond
Diamond Skis Skis uses
uses the
the
weighted-average
weighted-average method
method of of process
process costing
costing to
to
determine
determine unit
unit costs
costs in
in itit Shaping
Shaping and
and Milling
Milling
Department.
Department.
Work
Work in
in process,
process, May
May 1:
1: 200
200 units
units
Materials:
Materials: 55%
55% complete
complete $$ 9,600
9,600
Conversion:
Conversion: 30%
30% complete
complete 5,575
5,575
Production
Production started
started during
during May
May 5,000
5,000 units
units
Production
Production completed
completed during
during May
May 4,800
4,800 units
units
Costs
Costs added
added to
to production
production in
in May
May
Materials
Materials cost
cost $$ 368,600
368,600
Conversion
Conversion cost
cost 350,900
350,900
Work
Work in
in process,
process, May
May 31
31 400
400 units
units
Materials:
Materials: 40%
40% complete
complete
Conversion:
Conversion: 25%
25% complete
complete
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
5,200 4,960
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475
Operation
Operation costing
costing is
is aa hybrid
hybrid of
of job-order
job-order
and
and process
process costing
costing because
because itit
possesses
possesses attributes
attributes of
of both
both approaches.
approaches.
Material
MaterialCosts
Costscharged
charged Conversion
Conversioncosts
costs
to
tobatches
batchesas
asin
in assigned
assignedtotobatches
batches
job-order
job-ordercosting.
costing. as
asin
inprocess
processcosting.
costing.
Appendix 4A
Step 1:
1 Determine the number of units completed and
transferred out of Department A in June.
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Step 3:
3 Subtract the equivalent units in beginning work in process
inventory (120 units for materials and 60 units for conversion) from the
sum of the units completed and transferred out and the equivalent
units in ending work in process inventory.
Materials Conversion
Equivalent units or Production in
Department A during June 5,940 5,670
Equivalent units in beginning inventory
300 units × 40% 120
300 units × 20% 60
Equivalent units of Production in
Department A during June 5,820 5,610
Beginning Ending
Work in Process 5,400 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete
Material
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 540
Equivalent units in beginning WIP inventory (120)
Equivalent units of production 5,820
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
Equivalent Units – FIFO Method
Conversion
Conversion 6,000 Units Started
Beginning Ending
Work in Process 5,400 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete
Conversion
Units completed and transferred out 5,400
Equivalent units in ending WIP inventory 270
Equivalent units in beginning WIP inventory (60)
Equivalent units of production 5,610
Materials Conversion
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
Materials:
Materials: 55%
55% complete
complete $$ 9,600
9,600
Conversion:
Conversion: 30%
30% complete
complete 5,575
5,575
$15,
$15, 175
175
Production
Production started
started during
during May
May 5,000
5,000 units
units
Production
Production completed
completed during
during May
May 4,800
4,800 units
units
Costs
Costs added
added to
to production
production in
in May
May
Materials
Materials cost
cost $$ 368,600
368,600
Conversion
Conversion cost
cost 350,900
350,900
Work
Work in
in process,
process, May
May 31
31 400
400 units
units
Materials:
Materials: 40%
40% complete
complete
Conversion:
Conversion: 25%
25% complete
complete
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Step 1:
1 Prepare the quantity schedule and compute
equivalent units.
Step 2:
2 Calculate the equivalent units of material and conversion
that were transferred from beginning work in process to the next
department.
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows: Materials Conversion
Beginning inventory:
Materials 200 units × 45% 90
Conversion 200 units × 70% 140
Units started and completed 4,600 4,600
Ending inventory:
Materials 400 units × 40% 160
Conversion 400 units × 25% 100
Total equivalent units 4,850 4,840
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
The Production Report - FIFO Method
Step 3:
3 Determine the number of units started and
completed during the period.
Step 4:
4 Calculate the equivalent units of material and
conversion that are in ending work in process inventory.
Step 5:
5 Calculate the total equivalent units for
materials and conversion.
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 368,600 $ 350,900
Step 1:
1 Calculate the total cost from beginning
inventory transferred to the next department.
Total Equivalent Units
Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165
Step 2:
2 Calculate the cost of units started and
completed during the period.
4,600 units × $148.50
Total Equivalent Units
Cost Materials Conversion
Work in process, May 1: $ 15,175
Materials (90 × $76.00) 6,840 90
Conversion (140 × $72.50) 10,150 140
Total 32,165
Step 3:
3 Calculate the costs in ending working in process
inventory and the sum of the cost accounted for.