A325 SP17 - Lecture 11 Ch 17 - Handouts 2.pdf - A325 Cost...

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Unformatted text preview: A325 – Cost Accounting Chapter 17: Process Costing Source: 2 Ch. 17: Learning Objectives • Identify when process costing may be appropriate • Understand the basic concepts of process costing and compute the average costs per unit. • Explain the process and calculate equivalent units. • Apply both the weighted-average and “first-in, first-out” (FIFO) method of process costing • Apply these same methods in situations with transfer-in costs • Additional Key Terms to know – Hybrid costing systems – Operation-costing system – Previous department costs 3 Opposite Ends of the same Continuum Although there are industries and products that fall at each end of the continuum, most fall in-between the two extremes. Job-Costing Systems Distinct, identifiable units of a product or service Examples: Custom-made machines, Houses Process-Costing Systems Masses of identical or similar units of a product or service Examples: Food, Chemical processing 4 Process-Costing Process-costing is a system where the unit cost of a product or service is obtained by assigning total costs to many identical or similar units • Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead • Unit costs are computed by dividing total costs incurred by the number of units of output from the production process • Common assumptions include: – Direct Materials are added at the beginning of the production process, or at the start of work in a subsequent department down the assembly line – Conversion Costs are added equally along the production process 5 Sample General Ledger Cost Flows While the flow of costs should be familiar to you, in a process system we often have products that are partially completed at the end of the period making accounting for their costs more challenging. 6 Five-Step Process-Costing Allocation As I have noted in previous classes, while students should understand and perform these calculations they will not be asked to identify the individual steps 1. Summarize the flow of physical units of output 2. Compute output in terms of equivalent units 3. Summarize total costs 4. Compute cost per equivalent unit 5. Assign total costs to units completed and to units in ending Work-in-Process 7 Equivalent Units Equivalent units are a derived amount of output units that converts the quantity of input into the amount of completed output units that could be produced with that quantity of input. • Equivalent units are calculated separately for each input (direct materials and conversion cost) • Example: Your homework was to read one chapter for each of four different classes. Each chapter is approximately 20 pages long. If you only read 10 pages for each class how many chapters could you have read to completion? – This is the same idea with equivalent units • Equivalent units may be calculated using the weighted average or FIFO method 8 In Class Exercise: Weighted Avg. Data Cook Medical is ramping up production on new coronary artery stent for heart patient. Calculate equivalent units and the cost per unit • Assign costs to completed and transferred out units. – Assume DM100% at beginning of the process – Assume Conversion Costs 60% complete on Oct. 1; 70% complete on Oct. 31 Units Work in Progress, Oct. 1 5,000 Started in October 20,000 Completed in October 22,500 Work in Progress, Oct. 31 Total Costs Added in October DM Costs Conversion Costs $1,250,000 $402,750 $4,500,000 $2,337,500 2,500 9 In Class Exercise: Weighted Avg. 1 & 2 First we should summarize the flow of physical units of output and then compute the period output in terms of equivalent units. (Step 1) Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period Work in process, ending* (given) 2,500 100%; 2,500 70% Accounted for Equivalent units of work done to date Physical Units 5,000 20,000 25,000 22,500 2,500 (Step 2) Equivalent Units Conversion Direct Costs Materials 22,500 22,500 2,500 1,750 25,000 24,250 25,000 * Degree of completion in this department: direct materials, 100% (since they are added at the start of the process); conversion costs, 70%. 10 Weighted-Average: Process-Costing Method The weighted-average method calculates the cost per equivalent unit based on total units in process regardless of the accounting period in which it was done, either the current period and the previous period. • Costs are assigned to equivalent units completed & transferred out of the process, and to incomplete units still in-process • Weighted-average costs is the total of all costs in the Work-inProcess Account divided by the total equivalent units regardless if the work was started this period or last. • In other words, the costs in the beginning balance of the Work-inProcess account (work done in a prior period) are blended in with costs incurred in the current period. 11 In Class Exercise: Weighted Avg. 3 & 4 After we summarize total costs to be accounted for in the period (given in this example) then we may compute cost per equivalent unit (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-30A) Cost per equivalent unit of work done to date (Step 5) Assignment of costs: Completed and transferred out (22,500 units) Work in process, ending (2,500 units) Total costs accounted for Total Production Costs $1,652,750 6,837,500 $8,490,250 Direct Materials $1,250,000 4,500,000 $5,750,000 Conversion Costs $ 402,750 2,337,500 $2,740,250 $5,750,000 $2,740,250 25,000 $ 230 24,250 $ 113 $7,717,500 (22,500* $230) + (22,500* $113) 772,750 (2,500† $230) + (1,750† $113) 12 $8,490,250 $5,750,000 + $2,740,250 Total Production Costs $1,652,750 6,837,500 $8,490,250 Direct Materials $1,250,000 4,500,000 $5,750,000 Conversion Costs $ 402,750 2,337,500 $2,740,250 In Class Exercise: Work in process, beginning (given) Weighted Avg. Step 5 (Step 3) Costs added in current period (given) Total costs to account for Finally we may assign total costs to units completed and in ending Total Work-in-Process Total (Step 4) Costs incurred to date $5,750,000 $2,740,250 Production Direct Conversion Direct Conversion Divide by equivalent units of work done to date Production Costs Materials Costs Costs Materials (Solution Exhibit 17-30A) 25,000 Costs 24,250 (Step 3) Work in process, beginning (given) $1,652,750 $1,250,000 $ 402,750 (Step 3) Work in process, beginning (given) $1,652,750 Cost per equivalent unit of work done to date $$1,250,000 230 $$ 402,750 113 Costs added in current period (given) 6,837,500 4,500,000 2,337,500 Formulas Costs added in current period (given) 6,837,500 4,500,000 2,337,500 Total costs to account for $8,490,250 $5,750,000 $2,740,250 costs toofaccount $8,490,250 $5,750,000 $2,740,250 (Step 5) Total Assignment costs: for Completed and transferred out (22,500 units) $7,717,500 (22,500* $230) + (22,500* $113) (Step 4) 4) Costs Costs incurred incurred to to date date $5,750,000 $2,740,250 † † (Step $5,750,000 $2,740,250 Work in process, ending (2,500 units) 772,750 (2,500 $230) + (1,750 $113) Divide by equivalent units of work done to date Divide by equivalent Total costs accountedunits for of work done to date $8,490,250 $5,750,000 + $2,740,250 (Solution Exhibit 17-30A) 25,000 24,250 (Solution Exhibit 17-30A) 25,000 24,250 Cost per per equivalent equivalent unit unit of of work work done done to to date date 230 113 Cost $$ 230 $$ 113 Figures (Step 5) 5) (Step Assignment of of costs: costs: Assignment Completed and and transferred transferred out out (22,500 (22,500 units) units) Completed Work in in process, process,ending ending (2,500 (2,500 units) units) Work Total costs costs accounted accounted for for Total * * $113) $7,717,500 (22,500* $230) + (22,500 $2,542,500 $7,717,500 (22,500* $230) + (22,500 $113) $5,175,000 † † † $230) + (1,750 772,750 † (2,500 $113) 772,750 (2,500575,000 $230) + (1,750197,750 $113) $8,490,250 $5,750,000 ++ $2,740,250 $2,740,250 $5,750,000 $8,490,250 $5,750,000 $2,740,250 13 In Class Exercise: Journal Entries After we summarize total costs to be accounted for in the period (given in this example) then we may compute cost per equivalent unit of product. Record direct materials purchased and used in production in October. Work in Process––Assembly Department Accounts Payable 4,500,000 4,500,000 Conversion costs incurred in October. Work in Process––Assembly Department 2,337,500 Various accounts, e.g. OH and D. Labor 2,337,500 14 Sample Exercise: Journal Entries Journal entries for the cost of goods completed and transferred out of the Assembly Department to the Testing Department are needed. • Beginning Inventory was “given” • DM and Conversion Costs were calculated – As was the “Completed and Transferred Out” total and thus the journal entry must be: Work in Process––Testing Department 7,717,500 Work in Process––Assembly Department 7,717,500 Work in Process––Assembly Department Beginning inventory, October 1 1,652,750 3. Transferred out to 1. Direct materials 4,500,000 Work in Process–Testing 2. Conversion costs 2,337,500 Ending Inventory, October 31 772,750 7,717,500 15 Result of the Process Note that the same two important figures are calculated in Step Five of the cost allocation process: 1. The journal entry transferring the allocated cost of units completed and sent from Work-in-Process Inventory to Finished Goods Inventory $ 7,717,500 2. The ending balance of the Work-in-Process Inventory account that will appear on the Balance Sheet $ 772,750 16 First-in, First-Out: Process-Costing Method FIFO assigns the cost incurred during the previous accounting period directly to the equivalent units in beginning work-in-process inventory and NOT to any units started in the current period. • Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to started and complete new units, and lastly to units in ending work-in-process inventory • The beginning balance of the Work-in-Process account (work done in a prior period) is kept separate from current period costs 17 In Class Exercise: FIFO (Same assumptions as the earlier weighted average example) Just like with the weighted average example, the first step is to calculate equivalent units and the cost per unit and then assign costs to completed and transferred out units. • • Assume DM100% at beginning of the process Assume Conversion Costs 60% complete on Oct. 1; 70% complete on Oct. 31 Units Work in Progress, Oct. 1 5,000 Started in October 20,000 Completed in October 22,500 Work in Progress, Oct. 31 Total Costs Added in October DM Costs Conversion Costs $1,250,000 $402,750 $4,500,000 $2,337,500 2,500 18 In Class Exercise: FIFO - Steps 1 & 2 First summarize the flow of physical units of output and then compute the period output in terms of equivalent units. 19 In Class Exercise: FIFO - Steps 3 & 4 After we summarize total costs to be accounted for in the period (given in this example) then we may compute cost per equivalent unit 20 In Class Exercise: FIFO – Step 5 Finally we may assign total costs to units completed and in ending Work-in-Process Total (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-30A) Cost per equivalent unit of work done to date Production Costs $1,652,750 6,837,500 $8,490,250 Direct Materials $1,250,000 4,500,000 $5,750,000 Conversion Costs $ 402,750 2,337,500 $2,740,250 $5,750,000 $2,740,250 25,000 $ 230 24,250 $ 113 (Step 5) Assignment of costs: Completed and transferred out (22,500 units) $7,717,500 (22,500* $230) + (22,500* $113) $ 220,000 0 † Calculated 772,750 $ (2,500† $230) Work in process, ending (2,500 units) + (1,750 $113) 1,925,000 3,937,500 Total costs accounted for $5,750,000 + $2,740,250 Figures$8,490,250 192,500 562,500 21 Transferred-in Costs Transferred in cost are incurred in previous departments and are carried forward as products (and their costs) moves to a subsequent process in the production cycle • Also called Previous Department Costs • Journal entries are made to mirror the progress in production from department to department • Transferred-in costs are treated as if they are a separate type of direct material added 100% at the beginning of the process 22 Transferred In & Weighted Avg.: Steps 1 & 2 With transferred in costs the process does not change there are is simply another set of costs to be considered as we summarize the flow of physical units of output and then compute equivalent units. Assume the following DM added when 90% complete; BI is 70% complete, EI is 60% complete Note this is different than earlier example 23 Transferred In & Weighted Avg.: Steps 3 & 4 As before we Summarize total costs to account for in the period (given) and compute cost per equivalent unit. 24 Transferred In & Weighted Avg.: Step 5 Finally, assign total costs to units completed and in ending Work-in-Process Formulas Figures $9,336,500 1,313,500 $9,704,700 0 $4,418,400 372,960 25 Transferred In & FIFO: Steps 1 & 2 Step 1: Summarize the flow of physical units of output Step 2: Compute output in terms of equivalent units (Again assume: BI 70% & EI 60%) 26 Transferred In & FIFO: Steps 3 & 4 Step 3: Summarize total costs to account for in the period (given) Step 4: Compute cost per equivalent unit 27 Transferred In & FIFO: Step 5 Step 5: Assign total costs to units completed and in ending Work-in-Process Formulas $ 10,535,250 Figures $ 0 $ 2,767,500 $ 382,500 6,463,231 6,937,200 3,196,000 1,272,019 0 377,400 $ 10,535,250 Hybrid Costing Systems A Hybrid-Costing System blends characteristics from both jobcosting and process-costing systems • Many actual production systems are in fact hybrids • Examples include manufacturers of televisions, dishwashers and washing machines, as well as Adidas 29 Next Class Ch. 18: Learning Objectives • Define spoilage, rework and scrap • Identify the difference between normal and abnormal spoilage • Account for spoilage using both the weighted-average and “first-in, first-out” (FIFO) method of process costing • Measure spoilage at various stages of completion in process costing • Properly account for rework and scrap in process costing • Additional Key Terms to know – Inspection point 30 ...
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