Similarities Between JobOrder and Process Costing Both systems assign material labor and overhead costs to products and they provide a mechanism for computing unit product costs Both systems use the same manufacturing accounts including Manufacturing Overhead Raw Materials Work in Process a ID: 800415
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Slide1
Slide2Process Costing
Chapter 9
Slide3Similarities Between Job-Order and Process Costing
Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product costs.
Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
The flow of costs through the manufacturing accounts is basically the same in both systems.
Slide4Differences Between Job-Order and Process Costing
Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs having different production requirements are worked on each period.
Process costing systems accumulate costs by department or process. Job-order costing systems accumulated costs by individual jobs.
Process costing systems compute unit costs by department or process. Job-order costing systems compute unit costs by job on the job cost sheet.
Slide5Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check
Slide6Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check
Slide7Processing Departments
Any unit in an organization where materials, labor or overhead are added to the product.
The activities performed in a processing
department are
performed uniformly
on all
units of production. Furthermore, the output of
a processing department must be
homogeneous
.
Products in a process costing environment
typically flow in a sequence from one department
to another.
Slide8Learning Objective 1
Record the flow of materials, labor, and overhead through a process costing system.
Slide9Comparing Job-Order and Process Costing
Finished
Goods
Cost of
Goods
Sold
Work in
Process
Direct Materials
Direct Labor
Manufacturing Overhead
Slide10Comparing Job-Order and Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing Overhead
Jobs
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct Materials
Slide11Comparing Job-Order and Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing Overhead
Processing
Department
Costs are traced and applied to departments in a process cost system.
Direct Materials
Slide12T-Account and Journal Entry Views of Process Cost Flows
For purposes of this example, assume there are two processing departments
–
Departments
A
and
B
.
We will use T-accounts and journal entries.
Slide13Raw Materials
Process Cost Flows: The Flow of Raw Materials (in T-account form)
Work in Process
Department B
Work in Process
Department A
Direct
Materials
Direct
Materials
Direct
Materials
Slide14Process Cost Flows: The Flow of Raw Materials (in journal entry form)
Slide15Process Cost Flows: The Flow of Labor Costs (in T-account form)
Work in Process
Department B
Work in Process
Department A
Salaries and Wages Payable
Direct
Materials
Direct
Materials
Direct
Labor
Direct
Labor
Direct Labor
Slide16Process Costing: The Flow of Labor Costs (in journal entry form)
Slide17Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)
Work in Process
Department B
Work in Process
Department A
Manufacturing Overhead
Overhead
Applied to Work in
Process
Applied
Overhead
Applied
Overhead
Direct
Labor
Direct
Materials
Direct Labor
Direct
Materials
Actual Overhead
Slide18Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form)
Slide19Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process Department
B
Work in Process
Department
A
Direct
Materials
Direct
Labor
Applied
Overhead
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
to Dept. B
Transferred
from Dept. A
Department
A
Department
B
Slide20Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form)
Slide21Finished Goods
Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)
Work in Process
Department B
Cost of
Goods Manufactured
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Cost of
Goods
Manufactured
Slide22Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form)
Slide23Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form)
Work in Process
Department B
Cost of
Goods Manufactured
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Cost of
Goods
Sold
Cost of
Goods
Sold
Cost of
Goods
Manufactured
Slide24Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form)
Slide25Equivalent Units of Production
Equivalent units are the product of the number of partially completed units and the percentage completion of those units.
We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory. These partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to that output.
Slide26Equivalent Units – The Basic Idea
Two half completed products are
equivalent to
one complete product.
So, 10,000 units 70% complete
are
equivalent to
7,000 complete units.
+
=
1
Slide27For 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
Quick Check
Slide28For 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 × 0.30)
= 11,500 equivalent units
Quick Check
Slide29Calculating Equivalent Units
Equivalent units can be calculated
two ways:
The First-In, First-Out Method –
FIFO is
covered in the appendix to this chapter.
The Weighted-Average Method –
This method
will be covered in the main portion of the chapter.
Slide30Learning Objective 2
Compute the equivalent units of production using the weighted-average method.
Slide31Equivalent Units of Production
Weighted-Average Method
The weighted-average method . . .
Makes no distinction between work done in prior or current periods.
Blends together units and costs from prior and current periods.
Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in
ending
Work in Process Inventory.
Slide32Treatment of Direct Labor
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct
Materials
Type of Product Cost
Dollar Amount
Direct
Labor
Manufacturing
Overhead
Slide33Treatment of Direct Labor
Type of Product Cost
Dollar Amount
Con
version
Direct labor and manufacturing overhead may be combined into one classification of product cost called
conversion costs
.
Direct
Materials
Direct
Labor
Direct
Labor
Manufacturing
Overhead
Slide34Weighted-Average – An Example
Smith Company reported the following activity in the Assembly Department for the month of June:
Slide35The first step in calculating the equivalent units is to identify the units completed and transferred out of Assembly Department in June (5,400 units)
Weighted-Average – An Example
Slide36The second step is to identify the
equivalent units
of production in
ending work in process
with respect to
materials for the month (540 units) and adding this to the 5,400 units from step one.Weighted-Average – An Example
Slide37Weighted-Average – An Example
The third step is to identify the
equivalent units
of production in
ending work in process
with respect to
conversion
for the month (270 units) and adding this to the 5,400 units from step one.
Slide38Equivalent units of production
always
equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Weighted-Average – An Example
Slide39Beginning
Work in Process
300 Units
40% Complete
Ending
Work in Process
900 Units
60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Started
and Completed
Weighted-Average – An Example
Materials
5,400 Units Completed
540 Equivalent Units
900 × 60%
5,940 Equivalent units
of production
Slide406,000 Units Started
5,400 Units Completed
5,100 Units Started
and Completed
270 Equivalent Units
900 × 30%
5,670 Equivalent units
of production
Beginning
Work in Process
300 Units
20%
Complete
Ending
Work in Process
900 Units
30%
Complete
Weighted-Average – An Example
Conversion
Slide41Learning Objective 3
Compute the cost per equivalent unit using the weighted-average method.
Slide42Beginning Work in Process Inventory: 400 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units
Costs added to production in June
Materials cost $ 118,621
Conversion cost $ 81,130 Ending Work in Process Inventory: 900 units Materials: 60% complete Conversion: 30% completeCompute and Apply Costs
Slide43Compute and Apply Costs
The formula for computing the cost per equivalent unit is:
Cost per
equivalent
unit
=
Cost of beginning
Work in Process
Inventory
Cost added during the period
Equivalent units of production
+
Slide44Here is a schedule with the cost and equivalent unit information.
Compute and Apply Costs
Slide45Compute and Apply Costs
Here is a schedule with the cost and equivalent unit information.
$124,740 ÷ 5,940 units = $21.00
$85,050 ÷ 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
Slide46Learning Objective 4
Assign costs to units using the weighted-average method.
Slide47Applying Costs
Slide48Applying Costs
Slide49Applying Costs
Slide50Computing the Cost of Units Transferred Out
Slide51Computing the Cost of Units Transferred Out
Slide52Computing the Cost of Units Transferred Out
Slide53Learning Objective 5
Prepare a cost reconciliation report.
Slide54Reconciling Costs
Slide55Reconciling Costs
Slide56Operation Costing
Operation cost is a hybrid of job-order and process costing because it possesses attributes of both approaches
Operation costing is commonly used when batches of many different products pass through the same processing department.
Slide57Supplementary Notes for the Weighted Average Method
Slide58To Summarize the Physical Flow of Units
For the weighted average calculation, the percentages of completion related to BWIP with respect to material and conversion are not used.
Slide59Compute the equivalent Units of Production
For the weighted average calculation, the Inputs information is not required for the remaining calculation.
Slide60Summarize the Total Cost Incurred in the Period
Slide61Compute the Cost per Equivalent Unit
Slide62Calculate The Values Of Completed Goods And Ending WIP Inventories
Slide63Check Cost Reconciliation
Slide64FIFO Method
Appendix 9A
Slide65FIFO vs. Weighted-Average Method
The FIFO method (generally considered more accurate than the weighted-average method) differs from the weighted-average method in two ways:
The computation of equivalent units.
The way in which the costs of beginning inventory are treated.
Slide66Learning Objective 6
Compute the equivalent units of production using the FIFO method.
Slide67Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Here is information concerning the Assembly Department for the month of June.
Slide68Equivalent Units – FIFO Method
Step 1
: Determine equivalent units needed to
complete
beginning Work in Process Inventory.
Slide69Equivalent Units – FIFO Method
Step 2
: Determine units
started and completed
during the period.
Slide70Equivalent Units – FIFO Method
Step 3
: Add the equivalent units in ending Work in Process Inventory.
Slide71Beginning
Work in Process
300 Units
40% Complete
Ending
Work in Process
900 Units
60% Complete
6,000 Units Started
5,100 Units Started
and Completed
FIFO Example
Materials
5,100 Units Completed
540 Equivalent Units
900 × 60%
5,820 Equivalent units
of production
180 Equivalent Units
300 × 60%
Slide72Beginning
Work in Process
300 Units
20% Complete
Ending
Work in Process
900 Units
30% Complete
6,000 Units Started
5,100 Units Started
and Completed
FIFO Example
Conversion
5,100 Units Completed
270 Equivalent Units
900 × 30%
5,610 Equivalent units
of production
240 Equivalent Units
300 × 80%
Slide73Equivalent Units: Weighted-Average vs. FIFO
As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of production under the FIFO method.
Slide74Learning Objective 7
Compute the cost per equivalent unit using the FIFO method.
Slide75Beginning work in process: 400 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units
Costs added to production in June
Materials cost $ 118,621
Conversion cost $ 81,130 Ending work in process 900 units
Materials: 60% complete
Conversion: 30% complete
Cost per Equivalent Unit - FIFO
Let’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.
Slide76Cost per Equivalent Unit - FIFO
The formula for computing the cost per equivalent unit under FIFO method is:
Cost per
equivalent
unit
=
Cost added during the period
Equivalent units of production
Slide77Cost per Equivalent Unit - FIFO
Total cost per equivalent unit = $20.3816 + $14.4617 =
$34.8433
$118,600 ÷ 5,820
$81,130 ÷ 5,610
Slide78Learning Objective 8
Assign costs to units using the FIFO method.
Slide79Applying Costs - FIFO
Step 1
: Record the equivalent units of production in
ending
Work in Process Inventory.
900 units × 60%
900 units × 30%
Slide80Applying Costs - FIFO
Step 2
: Record the cost per equivalent unit.
Slide81Applying Costs - FIFO
Step 3
: Compute the cost of ending Work in Process Inventory.
540 × $20.3816
270 × 14.4617
Slide82Cost of Units Transferred Out
Step 1
: Record the cost in
beginning
Work in Process Inventory.
Slide83Cost of Units Transferred Out
Step 2
: Compute the
cost to complete
the units in beginning
Work in Process Inventory.
Slide84Cost of Units Transferred Out
Step 3
: Compute the cost of units
started and completed
this period.
Slide85Cost of Units Transferred Out
Step 4
: Compute the total cost of
units transferred out
.
Slide86Learning Objective 9
Prepare a cost reconciliation report using the FIFO method
.
Slide87Reconciling Costs
Slide88Reconciling Costs
Slide89A Comparison of Costing Methods
In a lean production environment, FIFO and weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is superior to weighted-average because it does not mix costs of the current period with costs of the prior period.
Slide90Supplementary Notes for the FIFO Method
Slide91Physical Flow of Units: FIFO
Completed – BWIP
= 5400 – 300
= 5100
Slide92Compute the Equivalent Units of Production
Slide93Summarize The Total Cost Incurred For The Period and Compute the Cost Per Equivalent Unit
Slide94Calculate the Values of Completed Goods and Ending WIP inventories
Slide95Check Cost Reconciliation
BWIP
$ 6,119
$ 3,920
$10,039
Total Cost Accountable For
Total Inventory Value
Slide96Weighted Average vs FIFO
Slide97Summary of Weighted Average vs FIFO
Slide98Losses in Process Costing
Appendix 9B
Slide99Production Losses
Losses in production can be classified into:
Expected – Normal Losses
In packaged/canned manufacturing – parts of vegetables purchased are not suitable for consumption
Expected – Normal Losses with scrap value
In clothes/shirts manufacturing – part of the fabrics are in irregular formats after trimming out the shape required, leaving some losses which may be able to sell as scrap
Unexpected – Abnormal Losses
In packaged/canned manufacturing – the refrigerator broke down without notice and food stored inside cannot be used – abnormal losses
Unexpected – Abnormal Losses with scrap value
In clothes/shirts manufacturing – a batch of shirts being rejected due to wrong fabric being used could be sold to rejected clothing merchandisers after removing the logos.
Slide100Accounting for Normal Losses and Scrap Value
Normal Losses
It is part of the production outputs
It is treated as part of the normal production cost for the finished items (i.e. is absorbed into all products and is included in inventory valuation)
Normal Losses with scrap value
Scrap value is part of the expected income to offset the expense therefore is net-off from the expenses.
Slide101Accounting for Abnormal Losses and Scrap Value
Abnormal Losses
They are a part of the production outputs
They are not part of the normal production cost, and therefore are expensed off separately from the production costs (i.e. cannot be used for inventory valuation)
Abnormal Losses with scrap value
Scrap value receivable is also not part of the normal production income, and therefore is treated as other income.
Slide102Beginning Work in Process Inventory: 400 units
Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units
Expected losses of 2% completed units cannot pass quality check. These rejected items can normal be sold for $5 each as scrap.
In addition to the normal losses of 2%, 200 of the latest produced items were found out of shape during the problem of the finishing touch from the machine.
Costs added to production in June
Materials cost $ 118,621 Conversion cost $ 81,130
Ending Work in Process Inventory: 900 units
Materials: 60% complete
Conversion: 30% complete
An Example: Losses with Scrap Value
Let’s revisit the Smith Company Assembly Department for the month of June with the additional losses information.
Slide103Learning Objective 10
Understand the treatment of
losses in process costing
weighted average
Slide104Physical Flow of Units (the Weighted Average Method)
Normal and Abnormal Losses are parts of the outputs
Completed quantity is most effectively calculated as a balancing figure
Slide105Compute the Equivalent Units of Production
Slide106Summarize the Total Cost Incurred and Compute the Cost Per Equivalent Unit
Scrap value receivable from Normal Losses normally is netting-off the cost as the loss and the income are part of the expected process. In most cases, scrap value is off-setting the material cost because scrap is normal valuing the material. In some cases, conversion work may even reduce the value of the scrap because the conversion may make it difficult to salvage the scrap material.
Slide107Calculate the Values of Completed and Ending WIP Inventories
Abnormal loss is not a part of the inventory valuation
Slide108Cost Reconciliation
Abnormal loss is not a part of the inventory valuation. It is treated as a part of the expense in COGS.
Slide109Understand the treatment of
losses in process costing
FIFO
Slide110Process Costing with Losses
Physical Flow of Units (the FIFO Method)
5,400 units
Slide111Compute the Equivalent Units of Production
Slide112Summarize the Total Cost Incurred and Compute the Cost Per Equivalent Unit
Slide113Calculate the Values of Completed and Ending WIP Inventories
Slide114Cost Reconciliation
Slide115Activity-based Process Costing
Appendix 9C
Slide116Learning Objective 11
Overview and example of activity-based process costing
Slide117Activity-based Process Costing
Large quantity homogeneous products with similarities
Sharing production facilities
Premium and low-end products with different consumption of the shared production facilities
Resource and activity consumption being traceable by using the activity-based costing technique within the process costing environment
Examples: Candies manufacturing, instant noodle manufacturing and wine bottling
Slide118End of Chapter 9