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Contrôle Interne Avancé-HEC Lausanne-2007/2008
CHAPTER 17
Process Costing
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Job-Costing and Process Costing: Opposite Ends of a Continuum
Job-Costing Systems
Distinct, identifiableunits of a product
or service
Examples:Custom-made
machines,Houses
Process-CostingSystems
Masses of identicalor similar units of aproduct or service
Examples:Food,
Chemical processing
Contrôle Interne Avancé-HEC Lausanne-2007/2008
ProcessCosting
Job OrderCosting
Used for production of large, unique, high-cost items.
Built to order rather than mass produced.
Many costs can be directly traced to each job.
Basic Cost Accounting Procedures
Contrôle Interne Avancé-HEC Lausanne-2007/2008
ProcessCosting
Job OrderCosting
Typical job order cost applications: Special-order printing Building construction
Also used in service industry Hospitals Law firms
Basic Cost Accounting Procedures
Contrôle Interne Avancé-HEC Lausanne-2007/2008
ProcessCosting
Job OrderCosting
Used for production of small, identical, low-cost items.
Mass produced in automated continuous production process.
Costs cannot be directly traced to each unit of product.
Basic Cost Accounting Procedures
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Typical process cost applications:
Petrochemical refinery
Paint manufacturer
Paper mill
ProcessCosting
Job OrderCosting
Basic Cost Accounting Procedures
Contrôle Interne Avancé-HEC Lausanne-2007/2008
DirectMaterials
FinishedGoods
Cost per unit for
each job
DirectLabor
FactoryOverhead
Jobs
The Work in Process account consists of
individual jobs in job costing.
Job and Process Costing
Contrôle Interne Avancé-HEC Lausanne-2007/2008
DirectMaterials
FinishedGoods
DirectLabor
FactoryOverhead
Processes
Job and Process Costing
The Work in Process account consists of specific processes in
process costing.
Cost per unit
processed
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Job and Process Costing Similarities
Same objective: to determine the cost of products
Same inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Work in Process Accounts — The Key to Process Costing
Work in Process
Assembly
Labor
Materials
Ind
irec
tIn
dir
ect
FinishedGoods
FactoryOverhead
Direct
Direct
Deliveredto
Customers
AppliedOverhead
Work in Process
Packaging
Contrôle Interne Avancé-HEC Lausanne-2007/2008
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.
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Process-Costing Assumptions
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.
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Costs are accumulated for a period of time by process or department.
Costs are accumulated for a period of time by process or department.
Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
Understanding Cost Flows
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
If partially complete units remain in process, we must use equivalent units
as the divisor to obtain unit costs.
If partially complete units remain in process, we must use equivalent units
as the divisor to obtain unit costs.
Understanding Cost Flows
Costs are accumulated for a period of time by process or department.
Costs are accumulated for a period of time by process or department.
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.
Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.
Two one-half full pitchers are equivalent to one full pitcher.
+ = 1
Process Costing and Equivalent Units
Contrôle Interne Avancé-HEC Lausanne-2007/2008
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Process Costing and Equivalent Units
Contrôle Interne Avancé-HEC Lausanne-2007/2008
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
10,000 units + (5,000 units × .30) = 11,500 equivalent units
Process Costing and Equivalent Units
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Cost perequivalent
unit
= Product costs for the periodEquivalent units for the period
Cost per Equivalent Unit
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Cost per Equivalent Unit
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Cost per Equivalent Unit
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Weighted-Average Process-Costing Method
Calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done),
Assigns this cost to equivalent units completed and transferred out of the process, and to incomplete units still in process.
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Weighted-Average Process-Costing Method
Weighted-average cost is the total of all costs in the Work-in-Process account divided by the total equivalent units of work done to date,
The beginning balance of the Work-in-Process account (work done in a prior period) is blended in with current period costs.
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Five-Step Process-Costing Allocation
1. Summarize the flow of physical units of output,
2. Compute output in terms of equivalent units,
3. Compute cost per equivalent unit,4. Summarize total costs to account for,5. Assign total costs to units completed
and to units in ending Work in Process.
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Steps 1 - 5
Weighted-Average Method
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Step 1: Summarize OutputStep 2: Compute Equivalent Units
Flow of Production
Beginning Work in ProcessUnits Started during the current periodTotal Units to Account ForUnits Completed and Transferred Out During the Current Period: 100%Ending Work in Process Ending WIP is: 100% complete as to materials 10% complete as to conversion costsUnits Accounted ForWork Done in Current Period Only
STEP 1
PhysicalUnits
2575
1009010
100
Direct ConversionMaterials Costs
90 90
101
100 91
Equivalent UnitsSTEP 2
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Step 3: Compute Cost per UnitStep 4: Summarize Total Costs
Beginning Work in ProcessCurrent Period Costs AddedTotal Costs to Account ForDivide by Equivalent Units from Step 2Cost per Equivalent Unit
STEP 4Total
ProductCosts
4,000$ 14,000 18,000$
Direct ConversionMaterials Costs
1,000$ 3,000$ 4,000 10,000 5,000 13,000
100 91 50.00$ 142.86$
STEP 3
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Step 5: Assign Costs to Units Completed and Ending Work in Process
Cost Assignment:Multiply Equivalent Units from Step 2 Direct Conversion Total by Cost per Unit from Step 3 Materials Costs Costs
Units Completed and Transferred Out Direct Materials: 90 X $50.00 4,500$ Conversion Costs: 90 X $142.86 12,857$ 17,357$
Ending Work in Process Direct Materials: 10 X $50.00 500 Conversion Costs: 1 X $142.86 143 643
Total Cost Accounted For 18,000$ (Ties to Step 4, rounded to nearest $)
Contrôle Interne Avancé-HEC Lausanne-2007/2008
Result of the Process (as before)
Two critical figures arise out of Step Five of the cost allocation process:
1. The amount of the Journal Entry transferring the allocated cost of units completed and sent from Work-in-Process Inventory to Finished Goods Inventory,
2. The ending balance of the Work-in-Process Inventory account that will appear on the Balance Sheet.