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Systems Design: Process Costing

Chapter 4. Systems Design: Process Costing. LEARNING OBJECTIVES. After studying this chapter, you should be able to:. 1. Record the flow of materials, labour and overhead through a process costing system. 2. Compute the equivalent units of production using the weighted-average method.

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Systems Design: Process Costing

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  1. Chapter4 Systems Design:Process Costing

  2. LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Record the flow of materials, labour and overhead through a process costing system. 2. Compute the equivalent units of production using the weighted-average method. 3. Prepare a quantity schedule using the weighted-average method. 4. Compute the costs per equivalent unit using the weighted-average method. 5. Prepare a cost reconciliation using the weighted-average method.

  3. LEARNING OBJECTIVES After studying this chapter, you should be able to: 6. (Appendix 4A) Explain and compute the equivalent units of production using the FIFO method. 7. (Appendix 4A) Prepare a quantity schedule using the FIFO method. 8. (Appendix 4A) Compute the costs per equivalent unit using the FIFO method. 9. (Appendix 4A) Prepare a cost reconciliation using the FIFO method.

  4. Types of Costing Systems Used to Determine Product Costs Job-orderCosting ProcessCosting • Many units of a single, homogeneous product flow evenly through a continuous production process. • One unit of product is indistinguishable from any other unit of product. • Each unit of product is assigned the same average cost.

  5. Types of Costing Systems Used to Determine Product Costs ProcessCosting Job-orderCosting Job-orderCosting ProcessCosting • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill

  6. Job-order costing Many jobs are worked during the period. Costs are accumulated by individual jobs. Job cost sheet is the key document. Unit cost computed by job. Process costing A single product is produced for a long period of time. Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department. Differences Between Job-Order and Process Costing

  7. Process Costing DirectMaterials Direct labour costsmay be smallin comparison toother product costs in processcost systems. ManufacturingOverhead Dollar Amount DirectLabour Type of Product Cost

  8. Process Costing DirectMaterials Direct labour costsmay be smallin comparison toother product costs in processcost systems. Conversion Dollar Amount Type of Product Cost So, direct labour and manufacturing overhead are oftencombined into one product cost called conversion cost.

  9. Comparing Job-Order and Process Costing Direct Materials FinishedGoods Work inProcess Direct Labour ManufacturingOverhead Cost of GoodsSold

  10. Comparing Job-Order and Process Costing Costs are traced andapplied to individualjobs in a job-ordercosting system. Direct Materials FinishedGoods Jobs Direct Labour ManufacturingOverhead Cost of GoodsSold

  11. Comparing Job-Order and Process Costing Costs are traced and applied to departments in a process costing system. Direct Materials FinishedGoods Processing Department Direct Labour ManufacturingOverhead Cost of GoodsSold

  12. Process Cost Flows Let’s look at cost flows in a process costing system with Departments A and B. We will use T-accounts and start withmaterials.

  13. Process Cost Flows Work in Process Department A Raw Materials • DirectMaterials • DirectMaterials • Purchases • Indirect Materials Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • Indirect Materials

  14. Process Cost Flows Work in Process Department A Wages Payable • Direct Materials • Direct Labour • Direct Labour • IndirectLabour Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • Direct Labour • IndirectMaterials • IndirectLabour

  15. Process Cost Flows Work in Process Department A Wages Payable • Direct Materials • Direct Labour • Direct Labour • IndirectLabour • AppliedOverhead Work in Process Department B Manufacturing Overhead Actual Applied • Direct Materials • OtherOverhead • OverheadApplied to Work inProcess • Direct Labour • IndirectMaterials • AppliedOverhead • IndirectLabour

  16. Process Cost Flows Next, transfer work from Department A to Department B.

  17. Process Cost Flows Work in Process Department B Work in ProcessDepartment A • Direct Materials Transferred to Dept. B • Direct Materials • Direct Labour • Direct Labour • AppliedOverhead • AppliedOverhead • Transferred from Dept. A

  18. Process Cost Flows Now let’s complete the goods in Department B and sell them.

  19. Process Cost Flows Work in Process Department B Finished Goods • Direct Materials • Cost of Goods Manufactured • Cost of GoodsManufactured • Cost of GoodsSold • Direct Labour • AppliedOverhead • Transferred from Dept. A Cost of Goods Sold • Cost of GoodsSold

  20. Process CostingAccounting Entries Let’s look at the journal entries for a process costing system. We’ll omit the numbers so that we can focus on concepts.

  21. Process CostingAccounting Entries

  22. Process CostingAccounting Entries

  23. Process CostingAccounting Entries

  24. Process CostingAccounting Entries

  25. Process CostingAccounting Entries

  26. Process CostingAccounting Entries

  27. Process CostingAccounting Entries

  28. Equivalent Units of Production Equivalent unitsare partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

  29. Equivalent Units of Production Two half completed products areequivalentto one completed product. + = So, 10,000 units, 70% completeare equivalent to 7,000 complete units.

  30. Equivalent Units For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process, 30% 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

  31. Equivalent Units For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30% 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 10,000 units + (5,000 units × 0.30) = 11,500 equivalent units

  32. Using Equivalent Units of Production To calculate the cost perequivalent unit for the period: Cost perequivalent unit Costs for the periodEquivalent units of productionfor the period =

  33. Equivalent Units Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

  34. Equivalent Units Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit

  35. Equivalent Units of Production –Weighted-Average Method The Weighted-Average method . . . • Makes no distinction between work done in prior and current period. • Blends together units and costs from prior period and current period. Let’s see how this works!

  36. Weighted-Average Method Example Smith Company reported the following activity in Department A for the month of June:

  37. Weighted-Average Method Example Equivalent units are calculated as follows:

  38. Weighted-Average Method Example Equivalent units are calculated as follows:

  39. Weighted-Average Method Example Equivalent units are calculated as follows:

  40. Weighted-Average Method Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Equivalent units are calculated as follows:

  41. Weighted-Average Method Example Materials 6,000 Units Started EndingWork in Process900 Units60% Complete BeginningWork in Process300 Units40% Complete 5,100 Units Startedand Completed 5,400 Units Completed 5,400 Units Completed 900 × 60% 540 Equivalent Units 5,940 Equivalent units of production

  42. Weighted-Average Method Example Conversion 6,000 Units Started EndingWork in Process900 Units30%Complete BeginningWork in Process300 Units20%Complete 5,100 Units Startedand Completed 5,400 Units Completed 900 × 30% 270 Equivalent Units 5,670 Equivalent units of production

  43. ProductionReport Production Report Shows the flowof units and coststhrough work inprocess Provides costinformation forfinancial statements Becomes thejob cost sheetin processcosting Helps managerscontrol theirdepartments

  44. Production Report Section 1 Section 2 Section 3 Production Report • A quantity schedule showing the flow of units and the computation of equivalent units. • A computation ofcost per equivalent unit.

  45. Production Report Section 1 Section 2 Section 3 Production Report • A reconciliation of cost flows for the period, including: • Total cost for units completed and transferred from the processing department. • Total cost for partially completed units remaining in work in process.

  46. Production Report Example • Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department. • Double Diamond uses the Weighted-Average costing method. • Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.

  47. Production Report Example Cost Work in process, May 1: 200 units Materials: 50% complete. $ 3,000 Conversion: 30% complete. 1,000 Units started into production in May: 5,000 Units completed and transferred out in May: 4,800 Costs added to production in May Materials cost $ 74,000 Conversion cost 70,000 Work in process, May 31: 400 units Materials 40% complete. Conversion 25% complete.

  48. Production Report Example Section 1: Quantity Schedule with Equivalent Units

  49. Production Report Example Section 1: Quantity Schedule with Equivalent Units

  50. Production Report Example Section 1: Quantity Schedule with Equivalent Units

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