Chapter 4

Process Costing and Hybrid ProductCosting Systems

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective 1

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Comparison of Job-Order Costing Joband Process Costing

Process Process Costing Costing Job-order Costing

Used for production of small, identical, low cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.
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Comparison of Job-Order Costing Joband Process Costing

Process Process Costing Costing Job-order Costing

Typical process cost applications:  Petrochemical refinery  Paint manufacturer  Paper mill
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Comparison of Job-Order Costing Joband Process Costing

Job-order costing
Costs accumulated by the job. Work in process has a job-cost sheet for each job. Many unique, high cost jobs. Jobs built to customer order.

Process costing
Costs accumulated by department or process. Work in process has a production report for each batch of products. A few identical, low cost products. Units continuously produced for inventory in automated process.
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Differences Between Job-Order Joband Process Costing

Direct Material The work-in-process account consists of individual jobs in a job-order cost system.

Direct Labor

Jobs

Finished Goods

Manufacturing Overhead

Cost of Goods Sold

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Differences Between Job-Order Joband Process Costing

Direct Material The work-in-process account consists of individual products in a process cost system. Finished Goods

Direct Labor & Overhead (Conversion)

Products

When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.

Cost of Goods Sold

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Learning Objective 2

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Process Cost Flows

Work-in-Process Inventory Direct material Direct labor Applied manufacturing overhead One Production Department Finished Goods Inventory Cost of goods sold during current period Cost of Goods Sold

Cost of goods completed and transferred to finished goods

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Process Cost Flows

Two Sequential Production Departments Work-in-Process Inventory Work-in-Process Inventory Production Department A Production Department B Cost of goods completed Direct material in department A and Direct labor Cost of goods completed Applied manufacturing transferred to and transferred to overhead department B finished goods Direct material Direct labor Applied manufacturing overhead

Finished Goods Inventory Cost of goods sold during current period

Cost of Goods Sold

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Learning Objective 3

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Equivalent Units: A Key Concept

Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

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Equivalent Units Example

Two one-half completed products are equivalent to one completed product.

So, 10,000 units 70 percent complete are equivalent to 7,000 complete units.
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Equivalent Units Question 1

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
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Equivalent Units Question 1

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 .30) b. 11,500 = 11,500 equivalent units c. 13,500 d. 15,000
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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 for the period

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Equivalent Units Question 2

If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Joness cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90
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Equivalent Units Question 2

If Jones incurred $27,600 in production costs for the 11,500 equivalent units. What was Joness cost per equivalent unit for the period? a. $1.84 b. $2.40 $27,600 11,500 equivalent units c. $2.76 = $2.40 per equivalent unit d. $2.90
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Calculating and Using Equivalent Units of Production

To calculate the direct materials and conversion costs per equivalent unit for the period:
Materials cost per equivalent unit Materials cost per equivalent unit Materials cost for the period Materials equivalent units for the period Materials cost for the period Materials equivalent units for the period
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Departmental Production Report

Analysis of physical flow of units. Calculation of equivalent units.

Production Report

Computation of unit costs.

Analysis of total costs.

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Equivalent Units of Production WeightedWeighted-Average Method

The weighted-average method . . .
Makes no distinction between work done in the prior period and work done in the current period. Blends together units and costs from the prior period and the current period.

The FIFO method is a more complex method and is rarely used in practice.
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Production Report Example

MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. MVP uses the weighted-average cost procedure. Material is added at the beginning of the Cutting Department, and conversion is incurred uniformly throughout the process. Using the following information for the month of March, lets prepare a production report for the Cutting Department.

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Production Report Example

Work in process, March 1: 20,000 units Materials: 100% complete. Conversion: 10% complete. Units started into production in March: Units completed and transferred out in March: Work in process, March 31: Materials 100% complete. Conversion 50% complete. Costs incurred during March Materials cost Conversion costs: Direct labor Applied manufacturing overhead Total conversion costs Total costs to account for Cost $ 50,000 7,200 30,000 units 40,000 units 10,000 units

90,000 $ 86,000 107,500 193,500 $ 340,700

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Production Report Example

Analysis of Physical Flow of Units
Physical Units Work in process, March 1 Units started during March Total units to account for Units completed and transferred out during March Work in process, March 31 Total units accounted for 20,000 30,000 50,000 40,000 10,000 50,000

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Production Report Example

Calculation of Equivalent Units
Physical Units Work in process, March 1 Units started during March Total units to account for Units completed and transferred Work in process, March 31 Total units accounted for Total equivalent units 20,000 30,000 50,000 40,000 10,000 50,000 Conversion Percentage Complete 10% Equivalent Units Direct Material Conversion

50% of 10,000 units

100% 50% 40,000 10,000 50,000 40,000 5,000 45,000

Beginning inventory % is not used in weighted-average method.

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Production Report Example

Calculation of Equivalent Units
Physical Units Work in process, March 1 Units started during March Total units to account for Units completed and transferred Work in process, March 31 Total units accounted for Total equivalent units 20,000 30,000 50,000 40,000 10,000 50,000 Conversion Percentage Complete 10% Equivalent Units Direct Material Conversion

100% of 10,000 units, all material added at beginning

100% 50% 40,000 10,000 50,000 40,000 5,000 45,000

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Learning Objective 4

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Production Report Example

Computation of unit costs
Direct Material Work in Process, March 1 Costs incurred during March Total costs to account for Equivalent units Cost per equivalent unit $ 50,000 90,000 $ 140,000 50,000 $ 2.80 Conversion $ 7,200 193,500 $ 200,700 $ 45,000 4.46 Total $ 57,200 283,500 $ 340,700 $ 7.26

$140,000 50,000 equivalent units $200,700 45,000 equivalent units

$2.80 + $4.46

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Learning Objective 5

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Production Report Example

Analysis of total costs
Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Convserion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for $ 290,400

$ 28,000 22,300 50,300 $ 340,700

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Production Report Example

Analysis of total costs
Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Convserion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for $ 290,400

$ 28,000 22,300 50,300 $ 340,700

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Production Report Example

Analysis of total costs
Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Convserion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for $ 290,400

$ 28,000 22,300 50,300 $ 340,700

All costs accounted for

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Learning Objective 6

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

MVP SPORTS EQUIPMENT COMPANY Production Report: Cutting Department Percentage of Completion Equivalent Units Physical with Respect to Direct Units Conversion Material Conversion Work in process, March 1 Units started during March Total units to account for Units completed and transferred Work in process, March 31 Total units accounted for Total equivalent units 20,000 30,000 50,000 40,000 10,000 50,000 10%

100% 50%

40,000 10,000 50,000

40,000 5,000 45,000

Direct Material Work in Process, March 1 Costs incurred during March Total costs to account for Equivalent units Cost per equivalent unit $ 50,000 90,000 $ 140,000 50,000 2.80

Conversion $ 7,200 193,500 $ 200,700 45,000 4.46

Total $ 57,200 283,500 $ 340,700

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Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Conversion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for

$ 290,400

28,000

22,300 50,300 $ 340,700

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Actual Costing

vs.

Normal Costing
Manufacturing overhead is applied to Work-inProcess Inventory using a predetermined overhead rate

Actual costs of manufacturing overhead are entered in Work-inProcess Inventory

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Departmental Production Report

Analysis of physical flow of units. Calculation of equivalent units. Computation of unit costs. Analysis of total costs.

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Learning Objective 7

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Operation Costing
Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Process Costing

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Operation Costing
Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Process Costing

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

Conversion costs assigned to batches as in process costing.

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Learning Objective 8 (appendix)

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Sequential Production Departments

Work-in-Process Inventory: Cutting Department Direct material Cost of goods completed and Conversion: transferred out Direct labor Manufacturing overhead Work-in-Process Inventory: Stitching Department Transferredin costs Direct material Conversion: Direct labor Manufacturing overhead

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Sequential Production Departments

Work in process, March 1: 10,000 units Transferred in: 100% complete. Materials: none Conversion: 20% complete. Units transferred in during March: Units completed and transferred out in March: Work in process, March 31: Transferred in: Materials: Conversion: 40,000 units 30,000 units 20,000 units 100% complete. none 90% complete. Cost $ 61,000 -07,600

Exh. 4-4

Costs incurred during March Transferred in Materials cost Conversion costs: Direct labor Applied manufacturing overhead Total conversion costs Total costs to account for

290,400 7,500 $115,000 115,000 230,000 $ 596,500

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Sequential Production Departments

Analysis of Physical Flow of Units
Physical Units Work in process, March 1 Units transferred in during March Total units to account for 10,000 40,000 50,000

Units completed and transferred out during March Work in process, March 31 Total units accounted for

30,000 20,000 50,000

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Sequential Production Departments

Calculation of Equivalent Units
Conversion Physical Percentage Transferred Direct Units Completion In Material Work in process, March 1 Units transferred in during March Total units to account for 10,000 40,000 50,000 20%
90% of 20,000 units

Conversion

Units completed and transferred out during March 30,000 Work in process, March 31 20,000 Total units accounted for 50,000 Total equivalent units

90%

30,000 20,000 50,000

30,000 -030,000

30,000 18,000 48,000

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Production Report Example

Computation of unit costs
Transferred In Work in Process, March 1 Costs incurred during March Total costs to account for Equivalent units Cost per equivalent unit $ 61,000 290,400 $ 351,400 50,000 $ 7.028 $351,400 50,000 Direct Material -0$ 7,500 $ 7,500 30,000 $ 0.25 $7,500 30,000 Conversion $ $ 7,600 230,000 237,600 48,000 4.95 Total $ 68,600 527,900 $ 596,500

$ 12.228 $ 7.028 + $.25 + $4.95

$237,600 48,000

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Production Report Example

Analysis of total costs
Cost of goods completed and transferred out of Stitching Dept. during March 30,000 units x $12.228 per equivalent unit $ 366,840 Costs remaining in work-in-process in Stitching Dept. on March 31 Direct Material: 20,000 equivalent units x $7.028 per equivalent unit $ 140,560 Convserion: 18,000 equivalent units x $4.95 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for
All costs accounted for

89,100 229,660 $ 596,500

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End of Chapter 4
Im ready to process some leisure time.

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