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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter 4

Process Costingand Hybrid

Product-Costing Systems

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LearningObjective

1

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Comparison of Job-OrderCosting and Process Costing

1-3

ProcessCosting

ProcessCosting

Job-orderCosting

Used for production of small,identical, low cost items.

Mass produced in automatedcontinuous production process. Costs cannot be directly traced toeach unit of product.

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Comparison of Job-OrderCosting and Process Costing

1-4

ProcessCosting

ProcessCosting

Job-orderCosting

Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill

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Comparison of Job-OrderCosting and Process Costing

1-5

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 customerorder.

Process costing – Costs accumulated by

department or process .

– Work in process has aproduction report foreach batch of products .

– A few identical, low costproducts.

– Units continuouslyproduced for inventoryin automated process.

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Differences Between Job-Orderand Process Costing

1-6

Direct Material

FinishedGoods

Cost ofGoods

Sold

Direct Labor

ManufacturingOverhead

Jobs

The work-in-processaccount consists ofindividual jobs in a

job-order cost system.

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Differences Between Job-Orderand Process Costing

1-7

Direct Material

FinishedGoods

Cost ofGoods

Sold

Products

The work-in-processaccount consists of

individual products in aprocess cost system.

Direct Labor& Overhead

(Conversion)

When direct labor is a relatively small amountcompared to material and overhead, it is often

combined with overhead.

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LearningObjective

2

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Process Cost Flows

1-9

Direct materialDirect labor

Applied manufacturing and transferred to during currentoverhead finished goods period

Cost of goods completed Cost of goods sold

Work-in-Process Finished GoodsCost of Goods Sold

One Production Department

Inventory Inventory

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Process Cost Flows

1-10

Direct materialDirect labor Applied manufacturing transferred to and transferred tooverhead department B finished goods

Direct materialDirect labor Applied manufacturing

overhead

during current period

Cost of goods sold

Cost of goods completedin department A and Cost of goods completed

Finished Goods Inventory Cost of Goods Sold

Two Sequential Production Departments

Work-in-Process Inventory Work-in-Process InventoryProduction Department A Production Department B

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LearningObjective

3

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Equivalent Units: A Key Concept

1-12

• Costs are accumulated for a period of time forproducts in work-in-process inventory.

• Products in work-in-process inventory at thebeginning and end of the period are onlypartially complete.

• Equivalent units is a concept expressing thesepartially completed products as a smallernumber of fully completed products.

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Equivalent Units Example

1-13

Two one-half completed products are equivalent to one completed product.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

+ = l

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Equivalent Units Question 1

1-14

For the current period, Jones started15,000 units and completed 10,000 units,leaving 5,000 units in process 30 percent

complete. How many equivalent units ofproduction did Jones have for the period?

a. 10,000

b. 11,500c. 13,500d. 15,000

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Equivalent Units Question 1

1-15

For the current period, Jones started15,000 units and completed 10,000 units,leaving 5,000 units in process 30 percent

complete. How many equivalent units ofproduction did Jones have for the period?

a. 10,000

b. 11,500c. 13,500d. 15,000

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

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Equivalent Units Question 2

1-16

If Jones incurred $27,600 inproduction costs for the 11,500equivalent units. What was Jones’s

cost per equivalent unit for the period?a. $1.84b. $2.40

c. $2.76d. $2.90

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Equivalent Units Question 2

1-17

If Jones incurred $27,600 inproduction costs for the 11,500equivalent units. What was Jones’s

cost per equivalent unit for the period?a. $1.84 b. $2.40

c. $2.76d. $2.90

$27,600 11,500 equivalentunits

= $2.40 per equivalent unit

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Calculating and Using EquivalentUnits of Production

1-18

To calculate the direct materials and conversioncosts per equivalent unit for the period:

Materialscost per

equivalentunit

=Materials cost for the periodMaterials equivalent units for

the period

Conversioncost per

equivalentunit

=Conversion cost for the periodConversion equivalent units for

the period

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Equivalent Units of Production – Weighted-Average Method

1-20

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.

The FIFO method is a morecomplex method and israrely used in practice.

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Production Report Example

1-21

• MVP Sports Equipment Company makes baseball glovesin two departments, Cutting and Stitching.

• MVP uses the weighted-average cost procedure.

• Material is added at the beginning of the CuttingDepartment, and conversion is incurred uniformlythroughout the process.

• Using the following information for the month of March,let’s prepare a production report for the CuttingDepartment.

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Production Report Example

1-22

Work in process, March 1: 20,000 units Cost

Materials: 100% complete. $ 50,000Conversion: 10% complete. 7,200

Units started into production in March: 30,000 unitsUnits completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 unitsMaterials 100% complete.Conversion 50% complete.

Costs incurred during March

Materials cost 90,000Conversion costs:Direct labor $ 86,000

Applied manufacturing overhead 107,500Total conversion costs 193,500

Total costs to account for $ 340,700

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Production Report Example

1-23

Analysis of Physical Flow of Units

PhysicalUnits

Work in process, March 1 20,000 Units started during March 30,000 Total units to account for 50,000

Units completed and transferred out during March 40,000 Work in process, March 31 10,000 Total units accounted for 50,000

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Production Report Example

1-24

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000 Total equivalent units 50,000 45,000

Calculation of Equivalent Units

50% of 10,000 units

Beginning inventory % is not used in weighted-average method.

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Production Report Example

1-25

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000 Total equivalent units 50,000 45,000

Calculation of Equivalent Units

100% of 10,000 units, allmaterial added at beginning

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4

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Production Report Example

1-27

DirectMaterial Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$

Computation of unit costs

$140,000 ÷ 50,000 equivalent units

$200,700 ÷ 45,000 equivalent units

$2.80 + $4.46

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LearningObjective

5

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Production Report Example

1-29

Analysis of total costs

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Production Report Example

1-31

Analysis of total costsCost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000 $

Convserion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$All costs

accounted for

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LearningObjective

6

MVP SPORTS EQUIPMENT COMPANYP d i R C i D

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1-33

Percentage ofCompletion Equivalent Units

Phys ical with Respect to Direc tUnits Conversion Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

Uni ts completed and transferred 40,000 100% 40,000 40,000 Work in process, March 31 10,000 50% 10,000 5,000 Total units accounted for 50,000 Total equivalent units 50,000 45,000

DirectMaterial Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$Costs incurred during March 90,000 193,500 283,500 Total costs to account for 140,000$ 200,700$ 340,700$

Equivalent units 50,000 45,000 Cost per equivalent unit 2.80$ 4.46$ 7.26$

Cost of goods completed and transferred during March40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:10,000 equivalent units x $2.80 per equivalent unit 28,000$

Conversion:5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$

Production Report: Cutting Department

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1-34

Manufacturingoverhead is

appliedto Work-in-

Process Inventoryusing a

predetermined

overhead rate

Actual costs ofmanufacturing overheadare entered in Work-in-

Process Inventory

Actual Costing vs. Normal Costing

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Departmental Production Report

1-35

Analysis ofphysical flowof units.

Calculationof equivalent

units. Computation

of unit costs.

Analysis oftotal costs.

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7

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End of Chapter 4

I’m ready to process some leisure time.