Cost 6 Process-costing

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Systems Design:Process Costing

Chapter 4

I Made R. Natawidnyana, Ak., CPMA

Job-orderCosting

ProcessCosting

F Many units of a single, homogeneous productflow evenly through a continuous productionprocess.

F One unit of product is indistinguishable from anyother unit of product.

F Each unit of product is assigned the sameaverage cost.

Types of Costing Systems Used to Determine Product Costs

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Types of Costing Systems Used to Determine Product Costs

Job-orderCosting

ProcessCosting

Typical process cost applications:

v Petrochemical refinery

v Paint manufacturer

v Paper mill


Job order costing

l Many jobs are worked during the period.

l Costs are accumulated by individual jobs.

l Job cost sheet is the key document.

l Unit cost computed by job.

Process costing

l A single product is produced for a long period of time.

l Costs are accumulated by departments.

l Department production report is key document.

l Unit costs are computed by department.

Differences Between Job-Order and Process Costing

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Process Costing

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials

Type of Product Cost

Do

llar

Am

ou

nt

DirectLabor

Conversion


Process Costing

Type of Product Cost

Do

llar

Am

ou

nt Conversion

So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials

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Comparing Job-Orderand Process Costing

FinishedGoods

Cost of GoodsSold

Work inProcess

Direct Materials

Direct Labor

ManufacturingOverhead



FinishedGoods

Cost of GoodsSold

Direct Labor


Jobs

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct

Materials

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FinishedGoods

Cost of GoodsSold

Direct Labor


ProcessingDepartment

Costs are traced and applied to departments

in a process cost system.

Direct Materials


Process Cost Flows

Let’s look at cost flows in a process cost system with

Departments A and B.We will use

T-accounts andstart with materials.

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Raw Materials•Purchases •Direct

Materials

Process Cost Flows

•IndirectMaterials

•DirectMaterials

Work in ProcessDepartment B

Work in ProcessDepartment A

•OtherOverhead

Manufacturing Overhead

Actual Applied

•IndirectMaterials

•DirectMaterials•Direct Labor


Process Cost Flows


•DirectLabor


•OtherOverhead


Actual Applied

•IndirectMaterials•Indirect

Labor

Wages Payable

•DirectLabor

•IndirectLabor

•DirectMaterials

•Direct Labor

•DirectMaterials

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Process Cost Flows



•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•OtherOverhead


Actual Applied

•IndirectMaterials•Indirect

Labor

•DirectLabor

•DirectMaterials

•Direct Labor

•DirectMaterials


Process Cost Flows

Next, transfer workfrom Department Ato Department B.

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Process Cost Flows

Work in Process Department B


•DirectMaterials•DirectLabor

•AppliedOverhead


•AppliedOverhead

Transferredto Dept. B

•Transferredfrom Dept. A


Process Cost Flows

Now let’s completethe goods in

Department Band sell them.

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Finished Goods

Cost of Goods Sold

Process Cost Flows


•Cost ofGoods

Manufactured


•AppliedOverhead

•Transferredfrom Dept. A

•Cost ofGoodsSold

•Cost ofGoodsSold

•Cost ofGoods

Manufactured


Equivalent Units of Production

Equivalent units are partially completeand are part of work in process inventory. Partially completed

products are expressed in terms of a smaller number of fully completed

units.

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Equivalent Units of Production

Two half completed products are equivalent to one completed product.

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

+ = 1


Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit=

Costs for the period

Equivalent units of production

for the period

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Equivalent Units of Production –Weighted Average Method

The weighted average method . . .

l Makes no distinction between work done in prior and current period.

l Blends together units and costs from prior period and current period.

Let’s see how this works!


Weighted Average Example

Smith Company reported the following activity in Department A for the month of June:

Percent Completed

Units Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

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Equivalent units are calculated as follows:


Materials Conversion

Units completed and transferred

out of Department A in June 5,400 5,400







Work in process, June 30:

900 units × 60% 540

Equivalent units of Production in

Department A during June 5,940

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900 units × 60% 540

900 units × 30% 270


Department A during June 5,940 5,670






900 units × 60% 540

900 units × 30% 270


Department A during June 5,940 5,670

Equivalent units of production always equals:


+ Equivalent units remaining in work in process


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BeginningWork in Process

300 Units40% Complete

EndingWork in Process


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed


Materials

5,400 Units Completed540 Equivalent Units 900 × 60%

5,940 Equivalent unitsof production


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed

270 Equivalent Units 900 × 30%

5,670 Equivalent unitsof production

BeginningWork in Process


EndingWork in Process



Conversion

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Production Report

ProductionReport

Helps managerscontrol theirdepartments

Provides costinformation for

financialstatements

Shows the flowof units and coststhrough work in

process

Becomes thejob cost sheet

in processcosting


Production Report

çA computation ofcost per equivalent unit.

Section 1

Section 2

Section 3

Production ReportåA quantity schedule

showing the flow of units and the computation of

equivalent units.

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Production Report

é A reconciliation of cost flows for the period,including:

vTotal cost for unitscompleted andtransferred from theprocessing department.

vTotal cost for partiallycompleted unitsremaining in work inprocess.

Section 1

Section 2

Section 3

Production Report


Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.

Double Diamond uses the weighted averagecost procedure.

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

Production Report Example

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Work in process, May 1: 200 units

Materials: 55% complete. $ 9,600

Conversion: 30% complete. 5,575

Production started during May: 5,000 units

Production completed during May: 4,800 units

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.



Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for:

Work in process, May 1 200

Started into production 5,000

Total units 5,200

Equivalent units


Units accounted for as follows:

Completed and transferred 4,800 4,800 4,800


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Total units 5,200

Equivalent units





Materials 40% complete 160

5,200 4,960







Total units 5,200

Equivalent units





Materials 40% complete 160

Conversion 25% complete 100

5,200 4,960 4,900


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Section 2: Compute cost per equivalent unit


Total

Cost Materials Conversion

Cost to be accounted for:

Work in process, May 1 15,175$ 9,600$ 5,575$

Costs added in the Shipping

and Milling Department 719,500 368,600 350,900

Total cost 734,675$ 378,200$ 356,475$

Equivalent units 4,960 4,900

Cost per equivalent unit


Total






Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$



$378,200 ÷ 4,960 units = $76.25

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Total






Total cost 734,675$ 378,200$ 356,475$


Cost per equivalent unit 76.25$ 72.75$

Total cost per equivalent unit = $76.25 + $72.75 = $149.00


$356,475 ÷ 4,900 units = $72.75



Section 3: Cost Reconciliation


Total Equivalent Units


Cost accounted for as follows:

Transferred out during May 4,800 4,800

Work in process, May 31:

Materials 160

Conversion 100

Total work in process, May 31

Total cost accounted for

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Transferred out during May 715,200$ 4,800 4,800


Materials 160

Conversion 100

Total work in process, May 31

Total cost accounted for

4,800 units @ $149.00







Transferred out during May 715,200$ 4,800 4,800


Materials 12,200 160

Conversion 7,275 100

Total work in process, May 31 19,475

Total cost accounted for 734,675$

160 units @ $76.25



All costs accounted for

100 units @ $72.75

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Operation Costing

Operation costing employs some aspectsof both job-order and process costing.

Conversion costsassigned to batches

as in process costing.

Material Costs Chargedto batches as in

job-order costing.

Job-orderCosting

ProcessCosting

Operation Costing(Products produced in batches)


I’m going to end this chapter and process some leisure time, unless

you want to see some journal entries.

Do You Want to SeeJournal Entries?

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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 concepts.



GENERAL JOURNAL Page 4

Date Description

Post.

Ref. Debit Credit

Raw Materials XXXXX

Accounts Payable XXXXX

To record the purchase of material.

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Date Description

Post.

Ref. Debit Credit

Raw Materials XXXXX

Accounts Payable XXXXX

To record the purchase of material.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Raw Materials XXXXX

To record the use of direct material.




Date Description

Post.

Ref. Debit Credit



Salaries and Wages Payable XXXXX

To record direct labor costs.

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Date Description

Post.

Ref. Debit Credit



Manufacturing Overhead XXXXX

To apply overhead to departments.




Date Description

Post.

Ref. Debit Credit



To record the transfer of goods from

Department A to Department B.

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Date Description

Post.

Ref. Debit Credit

Finished Goods XXXXX


To record the completion of goods

and their transfer from Department B

to finished goods inventory.




Date Description

Post.

Ref. Debit Credit

Accounts Receivable XXXXX

Sales XXXXX

To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX

To record cost of goods sold.

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End of Chapter 4

Cost 6 Process-costing

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