Authors:
Susan ProcessCosting
Chapter4
PowerPoint Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
4-2
SimilaritiesBetweenJobOrderand
ProcessCosting*
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.
4-3
DifferencesBetweenJobOrderand
ProcessCosting
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.
4-4
QuickCheck
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.
4-5
QuickCheck
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.
4-6
ProcessingDepartments
Any 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 all
department
performed
units of production. Furthermore, the output of
a processing department must be homogeneous.
processing
homogeneous
Products in a process costing environment
typically flow in a sequence from one department
typically
to another.
4-7
LearningObjective1
Recordtheflowof
materials,labor,and
overheadthrougha
processcostingsystem.
4-8
ComparingJobOrderandProcess
Costing*
Direct
Materials
Direct Labor
Manufacturing
Manufacturing
Overhead
Work in
Process
Finished
Goods
Cost of
Goods
Sold
4-9
ComparingJobOrderandProcess
Costing
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials
Direct Labor
Manufacturing
Manufacturing
Overhead
Jobs
Jobs
Finished
Goods
Cost of
Goods
Sold
4-10
ComparingJobOrderandProcess
Costing
Direct
Materials
Direct Labor
Manufacturing
Manufacturing
Overhead
Costs are traced and
applied to departments
in a process cost
system.
Processing
Processing
Department
Finished
Goods
Cost of
Goods
Sold
4-11
TAccountandJournalEntryViewsof
ProcessCostFlows
For purposes of this example, assume
there are two processing departments
Departments A and B.
We will use T-accounts and journal
entries.
4-12
ProcessCostFlows:TheFlowofRaw
Materials(inTaccountform)*
Raw Materials
Direct
Materials
Work in Process
Department A
Direct
Materials
Work in Process
Department B
Direct
Materials
4-13
ProcessCostFlows:TheFlowofRaw
Materials(injournalentryform)
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Raw Materials
XXXXX
4-14
ProcessCostFlows:TheFlowofLabor
Costs(inTaccountform)
Salaries and
Wages Payable
Direct
Labor
Work in Process
Department A
Direct
Materials
Direct
Labor
Work in Process
Department B
Direct
Materials
Direct
Labor
4-15
ProcessCosting:TheFlowofLabor
Costs(injournalentryform)
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Salaries and Wages Payable
XXXXX
4-16
ProcessCostFlows:TheFlowofManufacturing
OverheadCosts(inTaccountform)
Work in Process
Department A
Manufacturing
Overhead
Actual
Overhead
Overhead
Applied to
Work in
Process
Direct
Materials
Direct
Labor
Applied
Overhead
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
4-17
ProcessCostFlows:TheFlowof
ManufacturingOverheadCosts(injournalentry
form)
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Manufacturing Overhead
XXXXX
4-18
ProcessCostFlows:TransfersfromWIP
Dept.AtoWIPDept.B(inTaccountform)
Work in Process
Department A
Direct
Transferred
Materials
to Dept. B
Direct
Labor
Applied
Overhead
Department
Department
A
A
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Department
Department
B
B
4-19
ProcessCostFlows:TransfersfromWIPDept.
AtoWIPDept.B(injournalentryform)
Work in Process - Department B
Work in Process - Department A
XXXXX
XXXXX
4-20
ProcessCostFlows:TransfersfromWIP
Dept.BtoFinishedGoods(inTaccountform)
Work in Process
Department B
Direct
Cost of
Materials
Goods
Direct
Manufactured
Labor
Applied
Overhead
Transferred
from Dept. A
Finished Goods
Cost of
Goods
Manufactured
4-21
ProcessCostFlows:TransfersfromWIPDept.
BtoFinishedGoods(injournalentryform)
Finished Goods
Work in Process - Department B
XXXXX
XXXXX
ProcessCostFlows:Transfersfrom
FinishedGoodstoCOGS(inTaccount
form)
Work in Process
Department B
Finished Goods
Direct
Cost of
Cost of
Cost of
Materials
Goods
Goods
Goods
Direct
Manufactured
Manufactured
Sold
Labor
Applied
Overhead
Transferred
Cost of Goods Sold
from Dept. A
Cost of
Goods
Sold
4-22
ProcessCostFlows:Transfersfrom
FinishedGoodstoCOGS(injournalentry
form)
Cost of Goods Sold
Finished Goods
XXXXX
XXXXX
4-23
4-24
EquivalentUnitsofProduction**
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 departments output for a given
period and the unit cost that should be assigned to
that output.
4-25
EquivalentUnitsTheBasicIdea
Two half completed products are
equivalent to one complete product.
+
=
1
So, 10,000 units 70% complete
So, 10,000 units 70% complete
are equivalent to 7,000 complete units.
are equivalent to 7,000 complete units.
4-26
QuickCheck
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
4-27
QuickCheck
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
10,000 units + (5,000 units 0.30)
b. 11,500
= 11,500 equivalent units
c. 13,500
d. 15,000
4-28
CalculatingEquivalentUnits
Equivalent units can be calculated
Equivalent units can
calculated
two ways:
two ways:
The First-In, First-Out Method FIFO is
The First-In, First-Out Method FIFO is
covered in the appendix to this chapter.
covered in the appendix to this chapter.
The Weighted-Average Method* This
The Weighted-Average Method* This
method
method
will be covered in the main portion of the chapter.
will be covered in the main portion of the chapter.
4-29
LearningObjective2
Computetheequivalent
unitsofproduction
usingtheweighted
averagemethod.
4-30
EquivalentUnitsofProduction
WeightedAverageMethod
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 the plus equivalent units in
ending Work in Process Inventory.
4-31
TreatmentofDirectLabor
Dollar Amount
Direct
Materials
Manufacturing
Overhead
Direct
Labor
Type of Product Cost
Direct labor
*costs
may be small
in comparison to
other product
costs in process
cost systems.
4-32
TreatmentofDirectLabor
Dollar Amount
Direct
Materials
Conversion
Direct
Labor
Direct
Labor
Type of Product Cost
Manufacturing
Overhead
Direct labor and
manufacturing
overhead may be
combined into
one classification
of product
cost called
conversion costs.
4-33
WeightedAverageAnExample*
Smith Company reported the following activity in
the Assembly Department for the month of June:
Percent Completed
Units
Work in process, June 1
300
Units started into production in June
40%
20%
60%
30%
6,000
Units completed and transferred out
of Department A during June
Materials Conversion
5,400
Work in process, June 30
900
4-34
WeightedAverageAnExample
The first step in calculating the equivalent units is to
identify the units completed and transferred out of
Assembly Department in June (5,400 units)
Materials
Units completed and transferred
out of the Department in June
5,400
Conversion
5,400
4-35
WeightedAverageAnExample
The 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.
Materials
Units completed and transferred
out of the Department in June
5,400
W ork in process, June 30:
900 units 60%
Equivalent units of Production in
the Department during June
540
5,940
Conversion
5,400
4-36
WeightedAverageAnExample
The 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.
Materials
Units completed and transferred
out of the Department in June
5,400
Conversion
5,400
W ork in process, June 30:
900 units 60%
540
900 units 30%
Equivalent units of Production in
the Department during June
270
5,940
5,670
4-37
WeightedAverageAnExample
Equivalent units of production always equals:
Equivalent
Units completed and transferred
+ Equivalent units remaining in work in process
Materials
Units completed and transferred
out of the Department in June
5,400
Conversion
5,400
W ork in process, June 30:
900 units 60%
540
900 units 30%
Equivalent units of Production in
the Department during June
270
5,940
5,670
4-38
WeightedAverageAnExample
Materials
Beginning
Work in Process
300 Units
40% Complete
6,000 Units Started
5,100 Units Started
and Completed
5,400 Units Completed
540 Equivalent Units
5,940 Equivalent units
of production
Ending
Work in Process
900 Units
60% Complete
900 60%
4-39
WeightedAverageAnExample
Conversion
Beginning
Work in Process
300 Units
20% Complete
6,000 Units Started
5,100 Units Started
and Completed
5,400 Units Completed
270 Equivalent Units
5,670 Equivalent units
of production
Ending
Work in Process
900 Units
30% Complete
900 30%
4-40
LearningObjective3
Computethecostper
equivalentunitusingthe
weightedaverage
method.
4-41
ComputeandApplyCosts
Beginning Work in Process Inventory:
Materials: 40% complete
Conversion: 20% complete
$
$
Production started during June
Production completed during June
Costs added to production in June
Materials cost
Conversion cost
Ending Work in Process Inventory:
Materials:
60% complete
Conversion: 30% complete
400 units
6,119
3,920
6,000 units
5,400 units
$ 118,621
$ 81,130
900 units
4-42
ComputeandApplyCosts
The formula for computing the cost per
equivalent unit is*:
Cost per
equivalent =
unit
Cost of beginning
Work in Process + Cost added during
the period
Inventory
Equivalent units of production
4-43
ComputeandApplyCosts
Here is a schedule with the cost and equivalent
unit information.
Total
Cost
Cost to be accounted for:
W ork in process, June 1
Cost added in Assembly
Total cost
Equivalent units
Materials
Conversion
$
10,039
199,751
$
6,119
118,621
$
3,920
81,130
$
209,790
$ 124,740
$
85,050
5,940
5,670
4-44
ComputeandApplyCosts
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
Total
Cost
Cost to be accounted for:
W ork in process, June 1
Cost added in Assembly
Total cost
Materials
Conversion
$
10,039
199,751
$
6,119
118,621
$
3,920
81,130
$
209,790
$ 124,740
$
85,050
Equivalent units
Cost per equivalent unit
5,940
$
21.00
5,670
$
15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
4-45
LearningObjective4
Assigncoststounits
usingtheweighted
averagemethod.
4-46
ApplyingCosts
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
4-47
ApplyingCosts
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
4-48
ApplyingCosts
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
4-49
ComputingtheCostofUnits
TransferredOut
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
Units completed and transferred out:
Units transferred
5,400
5,400
4-50
ComputingtheCostofUnits
TransferredOut
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
Units completed and transferred out:
Units transferred
5,400
5,400
Cost per equivalent unit
$
21.00
$
15.00
4-51
ComputingtheCostofUnits
TransferredOut
Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion
Total
Ending WIP inventory:
Equivalent units
540
270
Cost per equivalent unit
$
21.00
$
15.00
Cost of Ending WIP inventory
$ 11,340
$
4,050
$ 15,390
Units completed and transferred out:
Units transferred
5,400
5,400
Cost per equivalent unit
$
21.00
$
15.00
Cost of units transferred out
$ 113,400
$ 81,000
$ 194,400
4-52
LearningObjective5
Prepareacost
reconciliationreport.
4-53
ReconcilingCosts
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
$
$
10,039
199,751
209,790
4-54
ReconcilingCosts*maybe
Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory
Costs added to production during the period
Total cost to be accounted for
Cost accounted for as follows:
Cost of ending Work in Process Inventory
Cost of units transferred out
Total cost accounted for
$
$
$
$
10,039
199,751
209,790
15,390
194,400
209,790
4-55
OperationCosting*
Operation cost is a hybrid of job-order and
process costing because it possesses
attributes of both approaches.
Operation costing is
Operation costing is
commonly used when
commonly used when
batches of many
batches of many
different products pass
different products pass
tthrough the same
hrough the same
processing department.
processing department.