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Chapter 6: Process Costing. Learning Objectives. Why are equivalent units of production used in process costing? How are equivalent units of production, unit costs, and inventory values determined using the weighted average (WA) method of process costing?

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chapter 6 process costing

Chapter 6:Process Costing

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide2

Learning Objectives

  • Why are equivalent units of production used in process costing?
  • How are equivalent units of production, unit costs, and inventory values determined using the weighted average (WA) method of process costing?
  • How are equivalent units of production, unit costs, and inventory values determined using the first-in, first-out (FIFO) method of process costing?
  • How are transferred-in costs and units accounted for in a multidepartment production setting?
  • How are equivalent units of production, unit costs, and inventory values determined using the standard costing method of process costing?
  • Why would a company use a hybrid costing system?
  • (Appendix 1) What alternative methods can be used to calculate equivalent units of production?
  • (Appendix 2) How are normal and abnormal spoilage losses treated in an EUP schedule?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

job order vs process costing
Job Order vs. Process Costing

Job Order

Small quantities of distinct products or services

Assign costs to job and then to units within the job

Process Costing

Large quantities of homogeneous products or services

Using an averaging technique, assign costs directly to units produced during the period

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

process costing
Process Costing
  • Averaging technique to assign costs to units produced

Unit Cost =Production Costs

Production Quantity

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

production costs
Production Costs
  • The Numerator—Production Costs
    • Accumulate costs by department
    • Accumulate costs by product
    • Direct material from material requisitions
    • Direct labor from time sheets and wage rates
    • Overhead
      • Actual
      • Predetermined application rates

Unit Cost =Production Costs

Production Quantity

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide6
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
slide7

Materials Requisition Form

Date ___________________

No. 341

Job No. _________________

Department _______________

Issued by _________________

Authorized by ___________

Inspected by _______________

Received by _____________

Item Part Unit of Quantity Quantity Unit Total

No. No. Descrip. Measure Required Issued Cost Cost

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide8

Employee Time Sheet

Employee Name _______________

Employee No. _______________

Department _______________

For week ending

_______

Start Stop Total

Type of Work Job No. Time Time Day Hours

Employee Signature Supervisor’s Signature

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

units produced
Units Produced
  • The Denominator—Units Produced
  • Complicated by work in process
    • Units started last period and completed this period
    • Units started this period and not completed
  • Convert partially completed units to equivalent whole units

Unit Cost =Production Costs

Production Quantity

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

equivalent units of production
Equivalent Units of Production

Approximation of the number of whole units of output that could have been produced from the actual effort expended

Includes units

Started last period and finished this period

Started and finished this period

Started this period and not finished

Assumes FIFO physical flow through the production department

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide11
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
two process costing methods
Two Process Costing Methods

Weighted Average (WA) Method

Combines

beginning work in process

current period production

First-in, First-Out (FIFO) Method

Separates

beginning work in process

current period production

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

process costing methods
Process Costing Methods

WA

Beginning WIP 100%

Started and finished 100%

Ending WIP % completed

FIFO

Beginning WIP % completed

Started and finished 100%

Ending WIP % completed

The Difference

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

process costing14
Process Costing

Direct material

Added at the beginning, during, and/or at the end of process

Direct labor

Added throughout the process

Overhead

Added throughout the process

Based on direct labor

Based on other, multiple cost drivers

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide15
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
process costing steps
Process Costing Steps

Units to account for

Units accounted for

Determine equivalent units

Costs to account for

Compute cost per equivalent unit

Assign costs to inventories

Units

Costs

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide17

Cost of Production Report

Name of Department

for the period ---

Production Data:

Units to account for

Units accounted for

EUP for each cost

Cost Data:

Costs to account for

Cost per EUP

Cost Assignment:

Transferred Out

Ending Work in Process Inventory

* Numbers correlate to the process costing steps in the previous slide

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

step 1 units to account for
Step 1—Units to Account For

Beginning WIP 5,000

Started 200,700

Units to account for 205,700

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide19

must

be

equal

Step 2—Units Accounted For

Beginning WIP 5,000

Started 200,700

Units to account for 205,700

Finished and transferred 203,000

Ending WIP 2,700

Units accounted for 205,700

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide20

Step 3—Compute Equivalent Units

DMConversion

Beginning WIP inventory 5,000 5,000

Started and completed 198,000 198,000

Ending WIP inventory 2,700 2,160*Equivalent units 205,700 205,160

* ending units * % complete

2,700 * 80% = 2,160

WA Method

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide21

Step 4—Costs to Account For

DM Conversion Total

Beginning WIP $ 5,943 $ 16,758 $ 22,701

Current costs 321,120660,270 981,390

To account for $327,063 $677,028 $1,004,091

WA Method

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide22

Step 5—Cost per Equivalent Unit

DM Conversion Total

Beginning WIP $ 5,943 $ 16,758 $ 22,701

Current costs 321,120660,270 981,390

To account for $327,063 $677,028 $1,004,091

Divide by EUP 205,700 205,160

Cost per EUP $1.59 + $3.30 = $4.89

WA Method

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide23

Step 6—Assign Costs to Inventories

Transferred (203,000 * $4.89) $992,670

Ending WIP Inventory

Direct Materials

(2,700 * $1.59) $4,293

Conversion Costs

(2,700 * 80% * $3.30) 7,128 11,421

Cost accounted for $1,004,091*

*must agree with costs to account for

Transferred

Out

Ending

WIP

WA Method

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

process costing fifo
Process Costing—FIFO

Emphasizes current period costs and production

Steps 1, 2, and 4 are the same

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide25

Step 3—Compute Equivalent Units

DM Conversion

Beginning WIP/completed 0 3,000*

Started and completed 198,000 198,000

Ending WIP Inventory 2,700 2,160Equivalent units 200,700 203,160

* beginning units * % complete in current period

5,000 * 60% = 3,000

FIFO Method

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide26

Step 5—Cost per Equivalent Unit

DM Conversion Total

Current costs $321,120 $660,270 $981,390

Divide by EUP 200,700 203,160

Cost per EUP $1.60 + $3.25 = $4.85

* Recall that Step 4 is the same as used for the WA method

FIFO Method

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide27

Step 6—Assign Costs to Inventories

Transferred

Beginning WIP Inventory $22,701

Cost to complete

Conversion (3,000 * $3.25) 9,750 $ 32,451

Started and completed

(198,000 * $4.85) 960,300

Total cost transferred $992,751

Ending inventory

Direct Materials

(2,700 * $1.60) $4,320

Conversion Costs

(2,7000 * 80% * $3.25) 7,020 11,340

Cost accounted for $1,004,091*

*must agree with costs to account for

Transferred

Out

Ending

WIP

FIFO Method

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

process costing comparison
Process Costing Comparison

WA

EUP DM 205,700

EUP Conversion 205,160

Cost per unit DM $1.59

Cost per unit Conv. 3.30

Total $4.89

Transferred Out $992,670

Ending WIP 11,421

Total $1,004,091

FIFO

EUP DM 200,700

EUP Conversion 203,160

Cost per unit DM $1.60

Cost per unit Conv. 3.25

Total $4.85

Transferred Out $992,751

Ending WIP 11,340

Total $1,004,091

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

process costing29
Process Costing

The purpose of the six steps

Assign a value to ending work in process

Assign a value to items transferred out

Prepare this journal entry

Finished Goods

Work in Process

or

Transferred-In Cost (successor department)

Work in Process (current department)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide30

Multidepartment Processing

Process 1

Wait

Materials

Transferred-In

Cost

Process 2

Wait

Process 3

Finished

Product

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

process costing with standard costs
Process Costing with Standard Costs
  • Simplify costing process
  • Eliminate periodic cost recomputations
  • Same as FIFO computations
    • Emphasize current period costs and production
  • Inventories are stated at standard cost
  • Variances are calculated for material, labor, and overhead
  • Assigns a “normal” production cost to the equivalent units of output each period
  • Allows managers to quickly recognize and investigate significant deviations from expected production costs
  • Allows benchmarking with other firms

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

hybrid costing systems
Hybrid Costing Systems

Characteristics of job order and process costing systems

Various product lines

Different direct material—job order costing

Different direct labor—job order costing

Same process—process costing

Hybrid costing used for furniture, clothing, jam

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

appendix 1 alternative cost computation
Appendix 1—Alternative Cost Computation
  • There are two alternative methods to calculate WAand FIFO EUP
  • Use alternative methods
    • To confirm standard computation
    • As a simplified computation

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

appendix 1 traditional cost computation
Appendix 1—TraditionalCost Computation

Conversion Costs WA FIFO

Beginning WIP inventory 5,000 3,000

Started and completed 198,000 198,000

Ending WIP inventory 2,160 2,160

Equivalent units 205,160 203,160

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

appendix 1 alternative cost computation 1
Units transferred out (whole units)

Plus:Ending work in process (equivalent units)

WA EUP

Less:Beginning work in process (equivalent units)

FIFO EUP

Appendix 1— Alternative Cost Computation 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide36
Conversion Costs

Candles transferred 203,000

Ending WIP EUP 2,160

WA EUP 205,160

Beginning WIP EUP (2,000)

FIFO EUP 203,160

Appendix 1— Alternative Cost Computation 1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide37
Total units to account for

Less: EUP to be completed next period

WA EUP

Less : EUP completed in prior period

FIFO EUP

Appendix 1— Alternative Cost Computation 2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide38

Appendix 1— Alternative Cost Computation 2

Conversion Costs

Total units to account for 205,700

EUP to be completed next period (540)

WA EUP 205,160

EUP completed in prior period (2,000)

FIFO EUP 203,160

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

appendix 2 spoilage
Appendix 2—Spoilage

Continuous loss—Loss occurs fairly uniformly through the process

Discrete loss—Loss occurs at a specific point and is detectable only when a quality check is performed

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

appendix 2 spoilage40
Appendix 2—Spoilage
  • Normal shrinkage and continuous losses
    • Assign costs only to units that have passed the inspection point
  • Use Method of Neglect
    • Excludes spoiled units in the equivalent units schedule
    • Spreads cost of lost units proportionately over the good units transferred and those remaining in WIP inventory
  • Abnormal losses
    • Period expense
    • Accounted for on an equivalent unit basis

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

slide41

Appendix 2—Spoilage

Normal

Spoilage

Abnormal

Spoilage

Loss in all ending inventory and transferred-out units on an EUP basis

Continuous

Loss

Period expense

in EUP

Loss in all units past inspection point in ending inventory and transferred out on an EUP basis

Discrete

Loss

Period expense

in EUP

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

questions
Questions

What is an EUP?

What is the difference between the WA and FIFO methods of calculating equivalent units?

Why would a company use a hybrid costing system?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

potential ethical issues
Potential Ethical Issues

Over- or underestimating completion % for ending WIP inventory to distort results

Using outdated standard costs

Ignoring the assignment of significant direct costs to specific jobs

Treating abnormal spoilage as normal spoilage

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.