Chapter 4
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Chapter 4. Systems Design: Process Costing. Job-order Costing. Process Costing. 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.

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Chapter 4

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Chapter 4

Chapter 4

Systems Design:

Process Costing


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.

Types of Costing Systems Usedto Determine Product Costs


Types of costing systems used to determine product costs1

Types of Costing Systems Usedto Determine Product Costs

Job-orderCosting

ProcessCosting

  • Typical process cost applications:

    • Petrochemical refinery

    • Paint manufacturer

    • Paper mill


Differences between job order and process costing

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 the key document.

Unit costs are computed by department.

Differences Between Job-Orderand Process Costing


Sequential processing departments

Basic raw materials

Processing costs

Processing costs

Processing Department 2

Processing costs

Processing Department 3

Finished Goods

Sequential Processing Departments

Start

Processing Department 1

Partially completed goods

Partially completed goods

Completed goods


Parallel processing departments

Basic raw materials

Processing costs

Processing costs

Processing Department 2

Processing Department A

Processing costs

Processing Department 3

Finished Goods

Parallel Processing Departments

Start

Processing Department 1

Partially completed goods

Partially completed goods

Completed goods


Flow of materials labor and overhead costs

Direct Material

FinishedGoods

Direct Labor

ManufacturingOverhead

Cost of GoodsSold

Flow of Materials, Laborand Overhead Costs

Processing

Department


Flow of materials labor and overhead costs1

Direct Material

Direct Material

Flow of Materials, Laborand Overhead Costs

Work in ProcessMixingDepartment

Raw Materials

DirectMaterial

Purchases

IndirectMaterial

Manufacturing Overhead

Work in ProcessFinishingDepartment

Actual

Applied

OtherOverhead

IndirectMaterial


Flow of materials labor and overhead costs2

Direct Labor

Direct Labor

Flow of Materials, Laborand Overhead Costs

Work in ProcessMixingDepartment

Wages Payable

Direct Material

Direct Labor

IndirectLabor

Manufacturing Overhead

Work in ProcessFinishing Department

Actual

Applied

Direct Material

OtherOverhead

IndirectMaterial

IndirectLabor


Flow of materials labor and overhead costs3

AppliedOverhead

AppliedOverhead

Flow of Materials, Laborand Overhead Costs

Work in ProcessMixing Department

Wages Payable

Direct Material

Direct Labor

Direct Labor

IndirectLabor

Manufacturing Overhead

Work in ProcessFinishing Department

Actual

Applied

Direct Material

OtherOverhead

OverheadApplied to Work inProcess

Direct Labor

Indirect Material

IndirectLabor


Flow of materials labor and overhead costs4

Flow of Materials, Laborand Overhead Costs

Now, let’s transfer the partially completed goods fromthe Mixing Departmenttothe Finishing Department.


Flow of materials labor and overhead costs5

Transferred to Finishing

Transferred from Mixing

Flow of Materials, Laborand Overhead Costs

Work in ProcessFinishingDepartment

Work in ProcessMixingDepartment

Direct Material

Direct Material

Direct Labor

Direct Labor

AppliedOverhead

AppliedOverhead


Flow of materials labor and overhead costs6

Flow of Materials, Laborand Overhead Costs

The goods have been completed in the Finishing Department and will be transferred to Finished Goods Inventory when they are ready to be sold.


Flow of materials labor and overhead costs7

Cost of Goods Manufactured

Cost of GoodsManufactured

Cost of GoodsSold

Cost of GoodsSold

Flow of Materials, Laborand Overhead Costs

Work in ProcessFinishingDepartment

Finished Goods

Direct Material

Direct Labor

AppliedOverhead

Transferred from Dept. A

Cost of Goods Sold


Materials labor and overhead cost entries

Materials, Labor, and OverheadCost Entries


Flow of materials labor and overhead costs8

Flow of Materials, Labor andOverhead Costs


Flow of materials labor and overhead costs9

Flow of Materials, Labor andOverhead Costs


Flow of materials labor and overhead costs10

Flow of Materials, Labor andOverhead Costs


Flow of materials labor and overhead costs11

Flow of Materials, Labor andOverhead Costs


Flow of materials labor and overhead costs12

Flow of Materials, Labor andOverhead Costs


Equivalent units of production

+

=

Equivalent Units of Production

Equivalent units are partially complete and are part of work in process inventory. It is the concept of expressing partially completed products as a smaller number of fully completed units.

Two one-half completed products are equivalent to one completed product. So, 10,000 units 70% complete are equivalent to 7,000 completed units.


Quick check

Quick Check 

For the current period, Matrix 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 Matrix have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000


Quick check1

Quick Check 

For the current period, Matrix 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 Matrix 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


Equivalent units of production1

Cost perequivalent unit

Costs for the periodEquivalent units of productionfor the period

=

Equivalent Units of Production

To calculate the cost perequivalent unit for the period:


Chapter 4

Quick Check 

Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s cost per equivalent unit for the period?

a.$1.84

b.$2.40

c.$2.76

d.$2.90


Chapter 4

Quick Check 

Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Matrix’s 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


Weighted average method

Weighted Average Method

Using the weighted-average method, equivalentunits will always be calculated as follows:


Weighted average method1

Weighted Average Method

Matrix, Inc. reported the following activity in Mixing Department for the month of June:


Weighted average method2

Weighted Average Method

Equivalent units are calculated as follows:


Weighted average method3

Weighted Average Method

Equivalent units are calculated as follows:


Weighted average method4

Weighted Average Method

Equivalent units are calculated as follows:


Weighted average method5

Weighted Average Method

Equivalent units of production always equals:

Units completed and transferred

+ Equivalent units remaining in work in process

Equivalent units are calculated as follows:


Weighted average method6

Weighted Average Method

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


Weighted average method7

Weighted Average Method

Conversion

6,000 Units Started

EndingWork in Process900 Units30% Complete

BeginningWork in Process300 Units40% Complete

5,100 Units Startedand Completed

5,400 Units Completed

900 × 30%

270 Equivalent Units

5,670 Equivalent units of production


Production report

  • Quantity schedule with computation of equivalent units.

  • A computation of cost per equivalent unit.

  • A reconciliation of cost flows for the period.

Production Report

Production Report

Section 1

Section 2

Section 3


Production report example

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 cost procedure.

  • Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.


Production report example1

Production Report Example

Cost

Work in process, May 1: 200 units

Materials:55% complete. $ 9,600

Conversion:30% complete. 5,575

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$ 368,600

Conversion cost 350,900

Work in process, May 31: 400 units

Materials 40% complete.

Conversion 25% complete.


Production report example2

Production Report Example

Section: Quantity Schedule with Equivalent Units


Production report example3

Production Report Example

Section: Quantity Schedule with Equivalent Units


Production report example4

Production Report Example

Section: Compute cost per equivalent unit


Production report example5

$378,200 ÷ 4,960 units = $76.25

Production Report Example

Section: Compute cost per equivalent unit


Production report example6

Production Report Example

Section: Compute cost per equivalent unit

$356,475 ÷ 4,900 units = $72.75


Production report example7

Production Report Example

Section : Cost Reconciliation


Production report example8

4,800 units @ $149.00

Production Report Example

Section : Cost Reconciliation


Production report example9

All costs accounted for

Production Report Example

Section : Cost Reconciliation

160 units @ $76.25

100 units @ $72.75


End of chapter 4

End of Chapter 4


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