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6-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
ProcessProcessCostingCosting
66
PowerPresentation® prepared by PowerPresentation® prepared by
David J. McConomy, Queen’s UniversityDavid J. McConomy, Queen’s University
6-2Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning ObjectivesLearning Objectives
Describe the basic characteristics and
cost flows associated with process
manufacturing.
Define equivalent units and explain their
role in process costing.
6-3Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning Objectives (continued)Learning Objectives (continued)
Prepare a departmental production report using the weighted average method.
Explain how process costing is affected by nonuniform application of manufacturing inputs and the existence of multiple processing departments.
6-4Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning Objectives (continued)Learning Objectives (continued)
Prepare a departmental production report
using the FIFO method. (Appendix)
6-5Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Comparison of Job-Order andComparison of Job-Order andProcess CostingProcess Costing
Job-Order Costing Process Costing
1. Wide variety of distinct 1. Homogeneous products
products
2. Cost accumulated by job 2. Costs accumulated by
process or department
3. Unit cost computed by 3. Unit cost computed by
dividing total job costs dividing process costs of
by units produced on that the period by the units
job produced in the period
6-6Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Homogeneous units pass through a series of similar processes.
Each unit in each process receives a similar dose of manufacturing costs.
Manufacturing costs are accumulated for a process for a given period of time.
Characteristics of Process CostingCharacteristics of Process Costing
6-7Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Characteristics of Process Costing Characteristics of Process Costing (continued)(continued)
Manufacturing cost flows and the associated journal entries are generally similar to job-order costing.
The departmental production report is the key document for tracking manufacturing activity and costs.
Unit costs are computed by dividing the departmental costs of the period by the output for the period.
6-8Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
UnitsStarted
Work inProcess
Units inEWIP
Units Completed
Units inBWIP
1,000 units - 20% of materials added;60% of conversion costs added
10,000 units;
1,500 units - 33% of materials added;50% of conversion costs added
9,500 units
Units to account for = Units accounted for
Units in BWIP + Units Started = Units in EWIP + Units Completed
1,000 + 10,000 = 1,500 + 9,500
The Concept of Equivalent UnitsThe Concept of Equivalent Units
6-9Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
The Concept of Equivalent Units The Concept of Equivalent Units (continued)(continued)
Equivalent Units Calculation: Direct Materials Conversion CostsUnits Completed 9,500 9,500Ending WIP Inventory 500 750Total Units Processed *10,000 *10,250Less beginning WIP Inventory 200 600Units Processed This Period **9,800 **9,650
==== ====
*Equivalent units for weighted average (total units worked on)** Equivalent units for FIFO (units worked on this period)
6-10Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
A Cost AnalysisA Cost Analysis
Cost ofUnits Started
Work inProcess
Costs addedto EWIP
Cost of Units Completed
Cost addedto BWIP
1,000 units - $5,000 materials added;$10,000 conversion costs added
10,000 units; $23,000 material added; $120,175
conversion cost added
1,500 units - $8,000 materials added;$13,000 conversion costs added
9,500 units
Costs to account for = Costs accounted for $158,175 = $158,175
6-11Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Steps for Preparing aSteps for Preparing aProduction ReportProduction Report
1. Analysis of the flow of physical units
2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation of inventories (goods transferred out and ending work in process)
5. Cost reconciliation
6-12Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Weighted Average CostingWeighted Average Costing
Step 1- Physical Flow Analysis
Units to account for: Units accounted for: Units, BWIP 20,000 Units, Completed 50,000 Units, Started 40,000 Units, EWIP 10,000
Total 60,000 Total 60,000
===== =====
6-13Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Weighted Average Costing (continued)Weighted Average Costing (continued)
Step 2 - Calculation of Equivalent Units
Units
Completed 50,000
EWIP (10,000 @ 25%) 2,500
Total Equivalent Units 52,500
=====
6-14Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Weighted Average Costing (continued)Weighted Average Costing (continued)
Step 3 - Computation of Unit Cost
Costs
Beginning WIP $ 3,525
Added this period 10,125
Total $ 13,650
Equivalent units 52,500
Unit cost $ 0.26 per equivalent unit
=======
6-15Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Weighted Average Costing (continued)Weighted Average Costing (continued)
Step 4 - Valuation of Inventories
Goods Transferred out (50,000 x 0.26) $13,000
EWIP
Materials (2,500 x $0.26) $ 650
$13,650
========
6-16Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Weighted Average Costing (continued)Weighted Average Costing (continued)
Step 5 - Cost Reconciliation:
Costs to account for:
BWIP $ 3,525
Cost added 10,125
$ 13,650
======
Costs accounted for:
Goods Transferred out $13,000
EWIP 650
$13,650
=======
6-17Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonuniform Inputs: ExampleNonuniform Inputs: Example
Materials are added at the beginning of the process.
Units in process, Sept 1, 50% complete 10,000
Units started in September 70,000
Units completed and transferred out 60,000
Units in process, Sept 30, 40% complete 20,000
Costs: BWIP Cost Current Cost
Materials $1,600 $12,000
Conversion Costs 200 3,200
6-18Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(continued)
Step 1 - Physical Flow Analysis:
Units to account for:
Units, BWIP 10,000
Units started 70,000
Total 80,000
=====
Units accounted for:
Units completed 60,000
Units, EWIP 20,000
Total 80,000
=====
6-19Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(continued)
Step 2 - Calculation of Equivalent units (Weighted Average):
MaterialsConversion
Units completed 60,00060,000
EWIP 20,000 8,000
Total Equivalent Units 80,00068,000
==========
6-20Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(continued)
Step 3 - Unit Cost:
Materials Conversion Total
Beginning WIP $ 1,600 $ 200 $ 1,800
Costs Incurred 12,000 3,200 15,200
Total $13,600 $3,400 $17,000
Equivalent Units 80,000 68,000
Cost per equivalent unit $0.17 $0.05 $0.22
6-21Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(continued)
Step 4 - Valuation of Inventories:
Goods Transferred Out:
$0.22 x 60,000 = $13,200
======= =====
Ending Work in Process:
($0.17 x 20,000) + ($0.05 x 8000) = $ 3,800 =======
6-22Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonuniform Inputs: Example Nonuniform Inputs: Example (continued)(continued)
Step 5 - Cost Reconciliation:
Costs to account for:
BWIP $ 1,800
Cost added 13,200
$17,000======
Costs accounted for:
Goods transferred out $13,200
EWIP 3,800
$17,000======
6-23Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
FIFO CostingFIFO Costing
Step 1- Physical Flow Analysis
Units to account for: Units accounted for: Units, BWIP 20,000 Units, Completed 50,000 Units, Started 40,000 Units, EWIP 10,000
Total 60,000 Total 60,000
===== =====
6-24Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
FIFO Costing (continued)FIFO Costing (continued)
Step 2 - Calculation of Equivalent Units
Units
Units started and completed 30,000
Units in Beginning WIP x fraction to be completed 5,000
Units in Ending WIP x fraction 2,500
Total Equivalent Units 37,500
=====
6-25Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
FIFO Costing (continued)FIFO Costing (continued)
Step 3 - Computation of Unit Cost
Costs
Beginning WIP N/A
Added this period 10,125
Total $ 10,125
Added this period $ 10,125
Equivalent units 37,500
Unit cost $ 0.27
=======
6-26Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
FIFO Costing (continued)FIFO Costing (continued)
Step 4 - Valuation of Inventories
Trans. Out EWIPTotal
Units in BWIP:
From Prior Period $3,525 ---$3,525
From Current Period:
(5,000 x $0.27) 1,350 ---1,350
Units Started and Completed
(30,000 x $0.27) 8,100 ---8,100
Units in EWIP
(2,500 x $0.27) --- 675 675
Total Costs accounted for $ 12,975 $ 675$ 13,650
======= =============
6-27Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
FIFO Costing (continued)FIFO Costing (continued)
Step 5 - Cost Reconciliation:
Cost to account for:
BWIP $ 3,525
Cost added 10,125
$13,650
======Cost accounted for:
Goods transferred out—Opening WIP $4,875
---Started and Completed 8,100
EWIP 675
$13,650
=======