PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Process CostingChapter 4
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Similarities 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.
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Differences Between Job-Order and Process Costing
Process costing: 1. 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.
2. Systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.
3. Systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.
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Process 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 ✓
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Process 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 ✓
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Processing DepartmentsAny 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 allunits 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 departmentto another.
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Learning Objective 1
Record the flow of materials, labor, and overhead through a
process costing system.
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Comparing Job-Order and Process Costing
FinishedGoods
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Labor
Manufacturing Overhead
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Comparing Job-Order and Process Costing
FinishedGoods
Cost of GoodsSold
Direct Labor
Manufacturing Overhead
Jobs
Costs are traced andapplied to individualjobs in a job-order
cost system.Direct
Materials
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Comparing Job-Order and Process Costing
FinishedGoods
Cost of GoodsSold
Direct Labor
Manufacturing Overhead
ProcessingDepartment
Costs are traced and applied to departments
in a process cost system.
Direct Materials
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T-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.
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Raw Materials
Process Cost Flows: The Flow of Raw Materials (in T-account form)
Work in Process Department B
Work in Process Department A
•DirectMaterials
•Direct Materials
•Direct Materials
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Process Cost Flows: The Flow of Raw Materials (in journal entry form)
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Process 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
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Process Costing: The Flow of Labor Costs (in journal entry form)
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Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)
Work in Process Department B
Work in Process Department A
Manufacturing Overhead
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•Direct Labor
•Direct Materials
•Direct Labor
•Direct Materials
•Actual Overhead
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Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form)
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Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)
Work in Process Department B
Work in ProcessDepartment A
•Direct Materials
•Direct Labor•Applied
Overhead
•Direct Materials
•Direct Labor•Applied
Overhead
Transferred to Dept. B
•Transferred from Dept. A
DepartmentA
DepartmentB
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Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form)
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Finished 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
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Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form)
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Finished 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
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Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form)
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Equivalent Units of Production
Equivalent units are the product of the number of partially completed
units and the percentage completion
of those units.
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.
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Equivalent Units – The Basic IdeaTwo half completed products are
equivalent to one complete product.
So, 10,000 units 70% completeare equivalent to 7,000 complete units.
+ = 1
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For 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 ✓
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For 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 ✓
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Calculating Equivalent UnitsEquivalent units can be calculated
two ways:
❶The First-In, First-Out Method – FIFO is covered in the appendix to this chapter.
❷The Weighted-Average Method – This method will be covered in the main portion of the chapter.
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Learning Objective 2
Compute the equivalent units of production using
the weighted-average method.
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Equivalent Units of ProductionWeighted-Average Method
The weighted-average method . . .1. Makes no distinction between work done in prior
or current periods.
2. Blends together units and costs from prior and current periods.
3. 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.
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Treatment of Direct Labor
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
DirectMaterials
Type of Product Cost
Dol
lar A
mou
nt
DirectLabor
ManufacturingOverhead
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Treatment of Direct Labor
Type of Product Cost
Dol
lar A
mou
nt
ConversionDirect labor and manufacturing
overhead may be combined into
one classification of product cost called
conversion costs.
DirectMaterials
DirectLabor
DirectLabor
ManufacturingOverhead
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Weighted-Average – An Example Smith Company reported the following activity in the Assembly Department for the month of June:
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Weighted-Average – An ExampleThe first step in calculating the equivalent units is to
identify the units completed and transferred out of Assembly Department in June (5,400 units)
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Weighted-Average – An ExampleThe 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.
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Weighted-Average – An ExampleThe 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.
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Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process
Weighted-Average – An Example
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BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Weighted-Average – An Example
Materials
5,400 Units Completed 540 Equivalent Units 900 × 60%
5,940 Equivalent units of production
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6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
270 Equivalent Units 900 × 30%
5,670 Equivalent units of production
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
Weighted-Average – An Example
Conversion
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Learning Objective 3
Compute the cost per equivalent unit using the
weighted-average method.
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Compute and Apply CostsBeginning Work in Process Inventory: 400 units
Materials: 40% complete $6,119Conversion: 20% complete $3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete
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Compute and Apply CostsThe formula for computing the cost per
equivalent unit is:
Cost perequivalent
unit=
Cost of beginningWork in Process
Inventory Cost added during
the period
Equivalent units of production
+
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Here is a schedule with the cost and equivalent unit information.
Compute and Apply Costs
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Compute 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
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Learning Objective 4
Assign costs to units using the weighted-
average method.
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Applying Costs
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Applying Costs
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Applying Costs
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Computing the Cost of Units Transferred Out
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Computing the Cost of Units Transferred Out
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Computing the Cost of Units Transferred Out
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Learning Objective 5
Prepare a cost reconciliation report.
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Reconciling Costs
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Reconciling Costs
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Operation CostingOperation 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.
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
FIFO MethodAppendix 4A
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FIFO 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:
1. The computation of equivalent units.
2. The way in which the costs of beginning inventory are treated.
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Learning Objective 6
Compute the equivalent units of production using
the FIFO method.
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Equivalent Units – FIFO MethodLet’s revisit the Smith Company example. Here is information concerning the Assembly Department
for the month of June.
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Equivalent Units – FIFO MethodStep 1: Determine equivalent units needed to complete
beginning Work in Process Inventory.
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Equivalent Units – FIFO MethodStep 2: Determine units started and completed during
the period.
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Equivalent Units – FIFO MethodStep 3: Add the equivalent units in ending Work in
Process Inventory.
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BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
Materials
5,100 Units Completed 540 Equivalent Units 900 × 60%
5,820 Equivalent units of production
180 Equivalent Units300 × 60%
4-64
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
Conversion
5,100 Units Completed 270 Equivalent Units 900 × 30%
5,610 Equivalent units of production
240 Equivalent Units300 × 80%
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Equivalent 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.
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Learning Objective 7
Compute the cost per equivalent unit using the
FIFO method.
4-67
Beginning work in process: 400 units Materials: 40% complete $6,119Conversion: 20% complete $3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete
Cost per Equivalent Unit - FIFOLet’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.
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Cost per Equivalent Unit - FIFOThe formula for computing the cost per equivalent
unit under FIFO method is:
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Cost per Equivalent Unit - FIFO
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$118,621 ÷ 5,820 $81,130 ÷ 5,610
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Learning Objective 8
Assign costs to units using the FIFO method.
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Applying Costs - FIFOStep 1: Record the equivalent units of production in ending Work
in Process Inventory.
900 units × 60% 900 units × 30%
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Applying Costs - FIFOStep 2: Record the cost per equivalent unit.
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Applying Costs - FIFOStep 3: Compute the cost of ending Work in Process Inventory.
540 × $20.3816 270 × 14.4617
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Cost of Units Transferred OutStep 1: Record the cost in beginning Work in Process Inventory.
4-75
Cost of Units Transferred OutStep 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
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Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this
period.
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Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.
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Learning Objective 9
Prepare a cost reconciliation report
using the FIFO method.
Prepare a cost reconciliation report
using the FIFO method.
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Reconciling Costs
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Reconciling Costs
* $1 rounding error.
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A Comparison of Costing MethodsIn 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.
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Service Department AllocationsAppendix 4B
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End of Chapter 4
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