8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 1/16
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rightsMcGraw-Hill/Irwin
Process CostingProcess CostingChapter 18
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 2/16
Job Order Costing
Custom orders
Unique products
Low production volume
High product flexibility
Low to mediumstandardization of labor and material
Process Costing
Repetitive operations
Identical products
High production volume
Low product flexibility
High standardization of labor and material
Production of Goods andProduction of Goods andServices and CostingServices and Costing
SystemsSystems
18-2
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 3/16
Used for production of small,identical, low-cost items.Mass produced in automatedcontinuous production process.
Costs cannot be directly traced toeach unit of product.
Process CostingProcess Costing
Typical process cost applications:Petrochemical refinery
Paint manufacturer
Paper mill18-3
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 4/16
DirectMaterials
FinishedGoods
Cost per unit for
each job
DirectLabor
FactoryOverhead
Jobs
The Work in Processaccount consists of
individual jobs in job costing .
Tracking the Physical Flow Tracking the Physical Flowand Related Productionand Related Production
CostsCosts
18-4
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 5/16
DirectMaterials
FinishedGoods
Direct Labor and Factory
Overhead(Conversion)
Processes
The Work in Processaccount consists of specific processes in
process costing .
Cost per unit
processed
Tracking the Physical Flow Tracking the Physical Flowand Related Productionand Related Production
CostsCosts
18-5
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 6/16
Same objective: to determinethe cost of products
Same inventory accounts: raw materials,work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
Tracking the Physical Flow Tracking the Physical Flowand Related Productionand Related Production
CostsCosts
18-6
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 7/16
Work in
ProcessAssembly
Labor
Materials
I n
d i r e c
t
FinishedGoods
ConversionCosts
Direct
Deliveredto
Customers
Work inProcess
Packaging
Understanding Cost FlowsUnderstanding Cost Flows
FactoryOverhead
18-7
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 8/16
Costs are accumulated for a periodof time by process or department.
Costs are accumulated for a periodof time by process or department.
Unit cost is computed by dividing theaccumulated costs by the number of units
produced in the period.
Unit cost is computed by dividing theaccumulated costs by the number of unitsproduced in the period.
Understanding Cost FlowsUnderstanding Cost Flows
If partially complete units remain inprocess, we must use equivalent units as
the divisor to obtain unit costs.
If partially complete units remain inprocess, we must use equivalent units as
the divisor to obtain unit costs.
18-8
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 9/16
Equivalent units is a concept expressing anumber of partially completed units as asmaller number of fully completed units.
Equivalent units is a concept expressing anumber of partially completed units as asmaller number of fully completed units.
Two one-half full pitchers areequivalent to one full pitcher.
+ = 1
Process Costing andProcess Costing andEquivalent UnitsEquivalent Units
18-9
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 10/16
Cost per equivalent
unit
= Product costs for the periodEquivalent units for the period
Cost per Equivalent UnitCost per Equivalent Unit
18-10
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 11/16
Equivalent units may bedifferent for material and
conversion at different stagesof a process.
Equivalent units may bedifferent for material and
conversion at different stagesof a process.
At completion of Stage 1 of the process,material is 40% complete, but conversion
is only 25% complete.
At completion of Stage 1 of the process,material is 40% complete, but conversion
is only 25% complete.
Process Costing andProcess Costing andEquivalent UnitsEquivalent Units
Stage 1
40% of Material
25% of Conversion
18-11
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 12/16
=
=
100%
50%
Process Costing andProcess Costing andEquivalent UnitsEquivalent Units
Stage 2
25% of Conversion
60% of Material
Stage 1
40% of Material
25% of Conversion
+
+
18-12
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 13/16
Stage 3
50% of Conversion
The process is now complete.
Stage 2
25% of Conversion
60% of Material
Stage 1
40% of Material
25% of Conversion
Process Costing andProcess Costing andEquivalent UnitsEquivalent Units
18-13
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 14/16
Evaluating DepartmentalEvaluating DepartmentalEfficiencyEfficiency
Only those costs incurred within a department areconsidered for efficiency analysis. Costs transferred
in from other departments should not be allowed to
cloud the picture.
Comparing the current period’s unit costs, for materialand conversion, with budgeted unit costs or with lastperiod’s unit costs are common efficiency measures.
18-14
8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 18
http://slidepdf.com/reader/full/financialmanagerial-accounting15e-williamshakabettner-chap-18 15/16
Ethics, Fraud andEthics, Fraud andCorporate GovernanceCorporate Governance
Overstating the number of equivalent unitsof production understates the cost per
equivalent, resulting in an understatement of cost of goods manufactured and sold, and
an overstatement of income.
Overstating the number of equivalent unitsin ending inventory understates cost of
goods sold and overstates income.
18-15
Top Related