PPT 4 -1 Don R. Hansen Maryanne M. Mowen COST MANAGEMENT.
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Transcript of PPT 4 -1 Don R. Hansen Maryanne M. Mowen COST MANAGEMENT.
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PPT 4 -1
Don R. Hansen
Maryanne M. Mowen
COST MANAGEMENT
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PPT 4 -2
Chapter Four
Product and Service Costing: Overhead Application and Job-Order System
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PPT 4 -3
Learning Objectives
Differentiate the cost accounting systems of service and manufacturing firms and of unique and standardized products.
Discuss the interrelationship of cost accumulation, cost measurement, and cost assignment.
Compute a predetermined overhead rate, and use the rate to assign overhead to production.
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PPT 4 -4
Learning Objectives (continued)
Explain the difference between job-order and process costing, and identify the source documents used in job-order costing.
Describe the cost flows associated with job-order costing, and prepare the journal entries.
Explain why multiple overhead rates may be preferred to a single, plantwide rate.
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PPT 4 -5
Manufacturing Firms VersusService Firms
Manufacturing involves putting together materials, labor, and overhead to produce a new product. The good produced is tangible and can be inventoried and transported from the plant to the customer.
A service is characterized by its intangible nature. It is not separable from the customer and cannot be inventoried.
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PPT 4 -6
Interface of Services with theCost Management System
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
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PPT 4 -7
Relationship to BusinessImpact on
Cost Management System
*Many of these effects are also true of tangible products.
Services cannot be stored.
Services cannot be protected through patents.
Services cannot readily be displayed or communicated.
Prices are difficult to set.
There are no inventory accounts.
There is a strong ethical code.*
Costs must be related to entire organization.*
Intangibility
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PPT 4 -8
Relationship to BusinessImpact on
Cost Management System
*Many of these effects are also true of tangible products.
Consumer is involved in production.
Other consumers are involved in production
Centralized mass production of services is difficult.
Costs often accounted for by customer type.*
System must be generated to encourage consistent quality.*
Inseparability
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PPT 4 -9
Relationship to BusinessImpact on
Cost Management System
*Many of these effects are also true of tangible products.
Standardization and quality control are difficult.
A strong systems approach is needed.
Productivity measurement is ongoing.*
Total quality management is critical.*
Heterogeneity
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PPT 4 -10
Relationship to BusinessImpact on
Cost Management System
*Many of these effects are also true of tangible products.
Service benefits expire quickly.
Service may be repeated often for one customer.
There are no inventories.
There needs to be a standardized system to handle repeat customers.*
Perishability
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PPT 4 -11
Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment
CostAccumulation
Record Costs:
CostMeasurement
Classify Costs:
CostAssignment
Assign to Cost Objects:
Purchase materialsAssemblers’ payrollFinishers’ payrollSupervisors’ payrollDepreciationUtilitiesProperty taxesLandscaping
Direct Materials
Direct Labor
Overhead
Product 1
Product 2
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PPT 4 -12
Cost Accumulation
Cost accumulation refers to the recognition and recording of costs.
The cost accountant needs to develop source documents, which keep track of costs as they occur. A source document describes a transaction. Data from these source documents can then be recorded in a data-base. Well-designed source documents can supply information in a flexible way.
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PPT 4 -13
Cost Measurement
There are two commonly used ways to measure the costs associated with production: actual costing and normal costing.
An actual cost system uses actual costs for direct materials, direct labor, and overhead to determine unit cost.
Normal costing systems measure overhead costs on a predetermined basis and use actual costs for direct materials and direct labor.
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PPT 4 -14
Johnson Leathergoods - Example
Suppose that Stan Johnson forms a new company, Johnson Leathergoods, which specializes in the production of custom leather products. Stan believes that there is a market for one-of-a-kind leather purses, briefcases, and backpacks. In its first month of operations, he obtains two orders: the first is for 20 leather backpacks for a local sporting goods store; the second is for 10 distinctively tooled briefcases for the coaches of a local college. Stan agrees to provide these orders at a price of cost plus 50 percent.
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PPT 4 -15
Johnson Leathergoods - Unit Cost
Direct materials $1,000
Direct labor 1,080
Overhead 240
Total $2,320
number of units 20
Unit cost $ 116======
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PPT 4 -16
Overhead Application a NormalCosting View
A predetermined overhead rate is calculated using the following formula:
Overhead rate = Budgeted annual overhead/Budgeted annual activity level
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PPT 4 -17
Choosing the Activity Base
1. Units produced
2. Direct labor hours
3. Direct labor dollars
4. Machine hours
5. Direct materials
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PPT 4 -18
Choosing the Activity Level
Expected activity level is simply the production level the firm expects to attain for the coming year.
Normal activity level is the average activity usage that a firm experiences in the long term (normal volume is computed over more than one year).
Theoretical activity level is the absolute maximum production activity of a manufacturing firm.
Practical activity level is the maximum output that can be realized if everything operates efficiently.
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PPT 4 -19
Basic Concept of Overhead Application
In attempting to understand the concept of applied overhead, there are two points that should be emphasized.
1. Applied overhead is the basis for computing per-unit overhead cost.
2. Applied overhead is rarely equal to a period’s actual overhead.
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PPT 4 -20
Overhead Application Example
Suncalc, Inc., produces two unique, solar-powered products: a pocket calculator and a currency translator used to convert foreign currency exchange rates into dollars and vice versa. The company has the following estimated and actual data for 2001:
Budgeted overhead $360,000
Normal activity (in direct labor hours) 120,000
Actual activity (in direct labor hours) 100,000
Actual overhead $320,000
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PPT 4 -21
Overhead Application Example (continued)
Now assume that the firm bases its predetermined overhead rate on normal activity measured in direct labor hours (DLH). Thus, for 2001:Predetermined overhead rate = Budgeted overhead/Normal activity
= $360,000/120,000 direct labor hours
= $3 per DLH
Using the overhead rate, applied overhead for 2001 is:
Applied overhead = Overhead rate x Actual activity usage
= $3 per DLH x 100,000 DLH
= $300,000
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PPT 4 -22
Overhead Application Example (continued)
Pocket CurrencyCalculator Translator
Units produced 80,000 90,000
Direct labor hours 40,000 60,000
Overhead applied to production ($3 x DLH) $120,000 $180,000
Overhead per unit $1.50 $2.00
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PPT 4 -23
Overhead Variance
The difference between actual overhead and applied overhead an overhead variance. If actual overhead is greater than applied overhead, then the variance is called underapplied overhead. If applied overhead is greater than actual overhead, the the variance is called overapplied overhead.
The firm has underapplied overhead by ($320,000 - $300,000) or $20,000
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PPT 4 -24
Disposition of Overhead Variance
The overhead variance is disposed of in one of two ways.
1. All overhead variance is allocated to cost of goods sold.
2. The overhead variance is allocated among work in process, finished goods, and cost of goods sold.
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PPT 4 -25
Comparison of Job-order andProcess Costing
Job-Order Costing Process Costing
1. Wide variety of distinct 1. Homogeneous productsproducts
2. Cost accumulated by job 2. Costs accumulated byprocess or department
3. Unit cost computed by 3. Unit cost computed bydividing total job costs dividing process costs ofby units produced on that the period by the unitsjob produced in the period
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PPT 4 -26
A Job-Order Cost Sheet
Item Description: _________ Job Order Number: _______Quantity Completed: ______ Date Started: _____________ Date Completed:_________
Direct Materials Direct Labor Overhead
Req. No. Amount Ticket # Hours Rate Amt. Hours Rate Amt. 24-A $500 49 40 $10 $400 40 $1.60 $6446-B 650 71 30 8 240 30 3.00 90
Cost Summary Direct Materials_______ Total Cost_________ Direct Labor _______ Unit Cost _________ Overhead _______
$1,150$640$154
$1,944$19.44
Drill Bits100
16-C1/25/2000
1/31/2001
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PPT 4 -27
A Material Requisition Form
Requisition No._______Date:______ Department_________ Job No._____
Description Quantity Cost/unit Total Cost
Delivered By___________ Received by______________
24-A1/25/01 Fabrication 16-C
Steel Stock 100 $5.00 $500
J. Jones D. Reller
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PPT 4 -28
A Job Time Ticket
Employee No.______ Name____________ Date_________
Start Time Stop Time Total Time Rate Amt. Job No.
10:00 a.m. 4:00 p.m. 6.0 hours $10 $60 16-C
Ticket No._________49
101 F. Flintstone 1/24/2001
Approved by
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PPT 4 -29
Job-Order Costing – Material Purchases
A. Raw materials account is debited for the cost of materials purchased
Raw Materials Work in Process
(A)
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PPT 4 -30
Exercise 4-9
Materials were purchased on account for $23,175.
Raw Materials 23,175
Accounts Payable 23,175
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PPT 4 -31
Job-Order Costing – Material Requisitions
B. Raw Materials is credited for the cost of materials issued to jobs.
Work in Process is debited for the cost of materials issued to jobs.
Raw Materials Work in Process
(A) (B) (B)
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PPT 4 -32
Exercise 4-9 (continued)
Materials totaling $19,000 were requisitioned for use in production.
Work in Process 19,000
Raw Materials 19,000
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PPT 4 -33
Job-Order Costing – Direct Labor Incurred
C. Wages Payable is credited for direct labor.
Work in Process is debited for the cost of direct labor.
Wages Payable Work in Process
(C) (C)
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PPT 4 -34
Exercise 4-9 (continued)
Direct labor payroll for the month was $17,850 with an average wage of $8.50 per hour.
Work in Process 17,850
Wages Payable 17,850
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PPT 4 -35
Job-Order Costing – Actual Overhead
D. Overhead Control is debited for actual overhead.
Overhead Control Work in Process
(D)
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PPT 4 -36
Exercise 4-9 (continued)
Actual overhead of $15,500 was incurred and paid.
Overhead Control 15,500
Cash 15,500
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PPT 4 -37
Job-Order Costing – Applied Overhead
E. Overhead Control is credited for applied overhead.
Work in Process is debited for applied overhead.
Overhead Control Work in Process
(D) (E) (E)
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PPT 4 -38
Exercise 4-9 (continued)
Factory overhead is charged to production at the rate of $7.00 per direct labor hour.
Work in Process 14,700
Overhead Control 14,700
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PPT 4 -39
Job-Order Costing – Transfer of Completed Goods
F. Credit Work in Process for the COGM.
Debit Finished Goods for the COGM.
Work in Process Finished Goods
(B)(C)(E)
(F) (F)
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PPT 4 -40
Exercise 4-9 (continued)
Completed units costing $36,085 were transferred to finished goods.
Finished Goods 36,085
Work in Process 36,085
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PPT 4 -41
Job-Order Costing – Recognition of Expense
G. Credit Finished Goods for value of units sold.
Debit Cost of Goods Sold for value of units sold.
Finished Goods Cost of Goods Sold
(G) (G)
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PPT 4 -42
Exercise 4-9 (continued)
Bags costing $30,000 were sold on account for $36,000.
Cost of Goods Sold 30,000
Finished Goods 30,000
Accounts Receivable 36,000
Sales Revenue 36,000
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PPT 4 -43
General Contractor Example
Direct Materials House #1 $ 90,000
House #2 100,000
House #3 30,000
Direct Labor House #1 $ 65,000
House #2 70,000
House #3 15,000
Overhead is applied at 50 percent of DLC.
Houses #1 and #2 are completed during the period
House #1 is sold for $200,000 cash.
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PPT 4 -44
General Contractor Example – Solution
Work in Process Finished Goods
(1) 220,000 (4) 187,500(2) 150,000 (4) 187,500 (5) 205,000 (6) 187,500(3) 75,000 (5) 205,000
52,500 205,000
Cost of Goods Sold
(6) 187,500
187,500
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PPT 4 -45
Job Cost Sheets for Example
(1) 90,000 (2) 65,000 (3) 32,500 (1) 110,000 (2) 70,000 (3) 35,000
187,500 205,000
House #1 House #2
House #3
(1) 30,000 (2) 15,000 (3) 7,500
52,500
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PPT 4 -46
Accounting for Spoilage
If the defective work was a consequence of the demanding nature of this particular job, then rework (spoilage) is assigned to the job.
On the other hand, if the defective work was a consequence of assigning new, untrained labor to the job, then the rework (spoilage) is assigned to overhead control.
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PPT 4 -47
End of Chapter 4
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PPT 4 -48
Don R. Hansen
Maryanne M. Mowen
COST MANAGEMENT
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PPT 4 -49
Product and Service Costing: A
Process Systems Approach
Chapter Five
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PPT 4 -50
Learning Objectives
Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report.
Describe process costing for settings without work in process inventories.
Define equivalent units, and explain their role in process costing.
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PPT 4 -51
Learning Objectives (continued)
Prepare a departmental production report using the FIFO method.
Prepare a departmental production report using the weighted average method.
Prepare a departmental production report with transferred-in goods and changes in output measures.
Describe the basic features of operation costing.
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PPT 4 -52
Job-Order Costing Process Costing
1. Wide variety of distinct 1. Homogeneous productsproducts
2. Cost accumulated by job 2. Costs accumulated by process or department
3. Unit cost computed by 3. Unit cost computed bydividing total job costs dividing process costs ofby units produced on that the period by the unitsjob produced in the period
Comparison of Job-Order andProcess Costing
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PPT 4 -53
Characteristics of Process Costing
Homogeneous units pass through a series of similar processes.
Each unit in each process receives a similar dose of manufacturing costs.
Manufacturing costs are accumulated for a process for a given period of time.
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PPT 4 -54
Characteristics of Process Costing (continued)
There is a work in process account for each process. Manufacturing cost flows and the associated journal
entries are generally similar to job-order costing. The departmental production report is the key
document for tracking manufacturing activity and costs.
Unit costs are computed by dividing the departmental costs of the period by the output for the period.
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PPT 4 -55
Process Costing Cost Flow
Direct MaterialsDirect Labor
Applied Overhead
Picking Encapsulating Bottling
Finished Goods
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PPT 4 -56
Service Organization Without Work in Process Inventories
To illustrate how services without work in process inventories are costed using a process approach, consider the teeth cleaning process offered by most dentists.
The production costs and the number of cleanings (patients served) for the month of March are given below:
Direct materials $ 200
Hygienist salary 2,500
Overhead 1,800
Total production cost $4,500=====
Number of cleanings 300
Unit cost = $4,500/300 = $15 per cleaning
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PPT 4 -57
Steps for Costing Out Productionin Process Costing
1. Analysis of the flow of physical units
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation of inventories (goods transferred out and ending work in process)
5. Cost reconciliation
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PPT 4 -58
A Cost Analysis
Cost ofUnits Started
Work inProcess
Costs addedto EWIP
Cost of Units Completed
Cost addedto BWIP
1,000 units - $5,000 materials added;$10,000 conversion costs added
10,000 units; $23,000 mat’l added; $120,175 conversion cost added
1,500 units - $8,000 materials added;$13,000 conversion costs added
9,500 units
Input Costs = Output Costs $158,175 = $158,175
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PPT 4 -59
UnitsStarted
Work inProcess
Units inEWIP
Units Completed
Units inBWIP
1,000 units - 20% materials added;60% conversion costs added
10,000 units;
1,500 units - 1/3 materials added;50% conversion costs added
9,500 units
Units of Input = Units of OutputUnits in BWIP + Units Started = Units in EWIP + Units Completed 1,000 + 10,000 = 1,500 + 9,500
The Concept of Equivalent Units
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PPT 4 -60
Equivalent Units Calculation: Materials Conversion Costs
Units Completed 9,500 9,500 Ending WIP 500 750 Total Units Processed *10,000 *10,250 Beg. WIP Inventory (200) (600)Units Processed
This Period **9,800 **9,650==== ====
*Equivalent units for weighted average (total units worked on)
** Equivalent units for FIFO (units worked on this period)
The Concept of Equivalent Units (continued)
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PPT 4 -61
Materials are added at the beginning of the process.
Units started 24,000
Units completed and transferred out 20,000
Units in process, May 31, 25% complete 4,000
Costs:
Cost Added
Materials $126,000
Conversion Costs 42,000
ExampleNo Beginning Inventory
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PPT 4 -62
Step 1 - Physical Flow:
Units to account for:
Units, BWIP 0
Units started 24,000
Total 24,000=====
Units accounted for:
Units completed 20,000
Units, EWIP 4,000
Total 24,000
====
ExampleNo Beginning Inventory (continued)
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PPT 4 -63
ExampleNo Beginning Inventory (continued)
Step 2 - Equivalent units:
Materials Conversion
Units completed 20,000 20,000
EWIP 4,000 1,000
Total Equivalent Units 24,000 21,000
========
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PPT 4 -64
ExampleNo Beginning Inventory (continued)
Step 3 - Unit Cost:
Unit Cost = $126,000/24,000 + $42,000/21,000
= $5.25 + $2.00
= $7.25
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PPT 4 -65
ExampleNo Beginning Inventory (continued)
Step 4 - Valuation of Inventories:
Goods Transferred Out:
$7.25 x 20,000 = $145,000
Ending Work in Process:
($5.25 x 4,000) + ($2.00 x 1,000 = $23,000
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PPT 4 -66
ExampleNo Beginning Inventory (continued)
Step 5 - Cost Reconciliation:
Cost Assigned:
Goods transferred $145,000
EWIP 23,000
$168,000=======
Cost to Account For:
BWIP $126,000
Cost added 42,000$168,000=======
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PPT 4 -67
FIFO Costing ExampleProduction:
Units in process, October 1, 70% complete 10,000
Units completed and transferred out 60,000
Units in process, October 31, 40% complete 20,000
Costs:
Work in process, October 1:
Materials $ 1,000
Conversion costs 350
Total work in process $ 1,350======
Current costs;
Materials $12,600
Conversion costs 3,050
Total current costs $15,650======
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PPT 4 -68
FIFO Costing Method
Under the FIFO costing method the equivalent units and manufacturing costs in beginning work in process are excluded from the current-period unit cost calculation. Thus, FIFO recognizes that the work and costs carried over from the prior period legitimately belong to that period.
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PPT 4 -69
FIFO Costing (continued)
Step 1- Physical Flow Analysis
Inputs: Outputs:BWIP 10,000 EWIP 20,000Started 70,000 Completed 60,000
Total 80,000 Total 80,000===== =====
*Step one is the same for weighted average and FIFO
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PPT 4 -70
Step 2 - Calculation of Equivalent Units
Materials Conversion
EWIP 20,000 8,000
Completed 60,000 60,000
Units Worked On in Total 80,000 68,000
BWIP 10,000 7,000
Units Worked On this Period 70,000 61,000===== =====
FIFO Costing (continued)
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PPT 4 -71
FIFO Costing (continued)
Step 3 - Computation of Unit Cost Calculation
Materials ConversionTotal
Beginning WIP $ 1,000 $ 350$ 1,350
Added this period 12,600 3,050 15,650
Total $ 13,600 $ 3,400$17,000
Added this period $ 12,600 $ 3,050 $15,650
Equivalent units 70,000 61,000
Unit cost $ 0.18 $ 0.05$ 0.23
======= =============
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PPT 4 -72
FIFO Costing (continued)
Step 4 - Value of Goods Completed and EWIP (Short-cut method)
Total Input Costs $17,000
Less: EWIP
Materials (20,000 x $0.18) $3,600
Conversion Cost (8,000 x $0.05) 400 4,000
Cost of Goods Completed $13,000======
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PPT 4 -73
FIFO Costing (continued)
Manufacturing costs are reconciled as follows:
Costs to account for: Beginning work in process
$ 1,350 Incurred during the period:
Materials $12,600 Conversion costs 3,050
15,650 Total costs to account for
$17,000
======Costs accounted for:
Goods transferred out: Units, beginning work in process
$ 1,500 Units started and completed
11,500Goods in ending work in process
4,000Total costs accounted for
$17,000
======
Step 5 - Cost Reconciliation
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PPT 4 -74
Journal Entries
Work in Process--Mixing 12,600Materials 12,600To record requisitions of materials for October.
Work in Process--Mixing 3,050Conversion Cost Control 3,050To record the application of overhead and incurrence of direct labor.
Work in Process--Tableting 13,000Work in Process--Mixing 13,000To record the transfer of cost of goods completed from Mixing toTableting.
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PPT 4 -75
Step 1- Physical Flow Analysis
Inputs: Outputs:BWIP 10,000 EWIP 20,000Started 70,000 Completed 60,000
Total 80,000 Total 80,000===== =====
*Step one is the same for weighted average and FIFO
Weighted Average Costing
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PPT 4 -76
Weighted Average Costing (continued)
Step 2 - Calculation of Equivalent Units
Materials Conversion
EWIP 20,000 8,000
Completed 60,000 60,000
Equivalent units 80,000 68,000===== =====
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PPT 4 -77
Weighted Average Costing (continued)
Step 3 - Computation of Unit Cost Calculation
Materials CCTotal
Beginning WIP $ 1,000 $ 350$ 1,350
Added this period 12,600 3,050 15,650
Total $ 13,600 $ 3,400$17,000
Equivalent units 80,000 68,000
Unit cost $ 0.17 $ 0.05$ 0.22
======= =============
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PPT 4 -78
Weighted Average Costing (continued)
Step 4 - Valuation of Inventories
Cost of Goods Transferred Out (0.22 x 60,000 ) = $13,200
Ending Work in Process:
Materials: ( $0.17 x 20,000) $3,400
Conversion: ($0.05 x 8,000) 400 3,800
Total $17,000======
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PPT 4 -79
Basics of Operation Costing
Operation costing is a blend of job and process costing procedures applied to batches of homogeneous products. This costing system uses job-order procedures to assign materials costs to batches and process procedures to assign conversion costs.
Work orders are used to collect production costs for each batch.
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PPT 4 -80
End of Chapter 5