Process Costing and Hybrid Product- Costing Systems

1. 4 Chapter Four Process Costing and Hybrid Product-Costing Systems

2. ProcessCosting Job-orderCosting ProcessCosting • 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. Comparison of Job-Order Costing and Process Costing

3. ProcessCosting Job-orderCosting ProcessCosting • Typical process cost applications: • Petrochemical refinery • Paint manufacturer • Paper mill Comparison of Job-Order Costing and Process Costing

4. 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. Comparison of Job-Order Costing and Process Costing

5. Process Cost Flows Let’s examine the cost flows in a process cost system with Departments A and B. We will use T-accounts and start with materials.

6. Process Cost Flows Work in Process Department A Raw Materials • DirectMaterial • Direct Material • Purchases • Indirect Material Factory Overhead • OtherOverhead • Indirect Material

7. Process Cost Flows Next let’s add labor and manufacturing overhead to the process cost flows. Are you with me?

8. Overhead • OverheadApplied to Work inProcess Process Cost Flows Work in Process Department A Salaries andWages Payable • Direct Material • Direct Labor • Direct Labor • IndirectLabor Factory Overhead • Other Overhead • Indirect Material • IndirectLabor

9. Process Cost Flows Next let’s transfer work from Department A to Department B. Are you ready?

10. Process Cost Flows Work in Process Department A • Direct Material • Transferred to Dept. B • Direct Labor • Overhead Work in Process Department B • Transferred from Dept. A

11. Process Cost Flows Next let’s add material, labor, and manufacturing overhead to Department B. Are you with me?

12. Process Cost Flows Work in Process Department A Raw Materials • DirectMaterial • Direct Material • Purchases • Transferred to Dept. B • Direct Labor • Overhead Work in Process Department B • Transferred from Dept. A Salaries andWages Payable • Direct Material • Direct Labor • Direct Labor

13. Process Cost Flows Work in Process Department A • Direct Material • Transferred to Dept. B • Direct Labor • Overhead Factory Overhead • OverheadApplied to Work inProcess • Other Overhead Work in Process Department B • Indirect Material • Transferred from Dept. A • IndirectLabor • Direct Material • Direct Labor • Overhead

14. Process Cost Flows Now let’s complete the goods in Department B and sell them. Still with me?

15. Process Cost Flows Work in Process Department B Finished Goods • Transferred from Dept. A • Cost of Goods Mfd. • Cost of GoodsMfd. • Cost of GoodsSold • Direct Material • Direct Labor • Overhead Cost of Goods Sold • Cost of GoodsSold

16. Process Costing DirectMaterial Direct-labor costsare usually smallin comparison toother product costs in processcost systems.(high level of automation) ManufacturingOverhead Dollar Amount DirectLabor Type of Product Cost

17. Process Costing DirectMaterial Direct-labor costsare usually smallin comparison toother product costs in processcost systems.(high level of automation) Conversion Dollar Amount Type of Product Cost So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.

18. Differences Between Job-Order and Process Costing The work-in-process account consists of individual jobs in ajob-order cost system. Direct Material FinishedGoods Direct Labor Jobs ManufacturingOverhead Cost of GoodsSold

19. Differences Between Job-Order and Process Costing The work-in-process account consists of individual products in a process cost system. Direct Material Direct Labor& Overhead(Conversion) FinishedGoods Products Cost of GoodsSold When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.

20. Equivalent Units: A Key Concept • Costs are accumulated for aperiod of timefor products in work-in-process inventory. • Products in work-in-process inventory at the beginning and end of the period are onlypartially complete. • Equivalent unitsis a concept expressing these partially completed products as a smaller number of fully completed products.

21. + = l Equivalent Units Example Two one-half completed products are equivalent to one completed product. So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

22. 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

23. 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 10,000 units + (5,000 units × .30) = 11,500 equivalent units

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

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

26. $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit Equivalent Units Question 2 If Jones incurred $27,600 inproduction costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

27. Analysis of physical flowof units. • Calculationof equivalent units. ProductionReport • Computationof unit costs. • Analysis of total costs. Departmental Production Report

28. The FIFO method is a morecomplex method and israrely used in practice. Equivalent Units of Production –Weighted-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.

29. Production Report Example At this point, we need to look at an example to illustrate the departmental production report.

30. 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, let’s prepare a production report for the Cutting Department.

31. Production Report Example Cost Work in process, March 1: 20,000 units Materials: 100% complete. $ 50,000 Conversion: 10% complete. 7,200 Units started into production in March: 30,000 units Units completed and transferred out in March: 40,000 units Work in process, March 31: 10,000 units Materials 100% complete. Conversion 50% complete. Costs incurred during March Materials cost $ 90,000 Conversion cost 193,500

32. Production Report Example • Analysis of Physical Flow of Units

33. 50% of 10,000 units Beginning inventory % is not used in weighted-average method. Production Report Example • Calculation of Equivalent Units

34. Production Report Example • Calculation of Equivalent Units 100% of 10,000 units, allmaterial added at beginning

35. $140,000 ÷ 50,000 equivalent units $2.80 + $4.46 $200,700 ÷ 45,000 equivalent units Production Report Example • Computation of unit costs

36. All costs accounted for Production Report Example • Analysis of total costs

37. Material Costs Chargedto batches as injob-order costing. Conversion costsassigned to batchesas in process costing. Operation Costing Operation costing employs some aspectsof both job-order and process costing. Job-order Operation Costing Process Costing (Products produced in batches) Costing

38. Process CostingTypical Accounting Entries Let’s look at the accounting journal entries for a process cost system. We’ll omit the numbers so that we can focus on accounts.

39. Process CostingTypical Accounting Entries

40. Process CostingTypical Accounting Entries

41. Process CostingTypical Accounting Entries

42. Process CostingTypical Accounting Entries

43. Process CostingTypical Accounting Entries

44. Process CostingTypical Accounting Entries

45. End of Chapter 4 I’m ready to processsome leisure time.