Chapter 20

Process Costing andProcess Costing andActivity-Based CostingActivity-Based Costing

© 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 2

Job Order versus Process Costing

Job Order Costing Process Costing

Type of Product

Unique Products and services such as a customer built ship

Homogeneous products and services such as cans of soda

Manufacturing Approach

Customized to meet the needs of the customer or client

Mass produced in a series of standardized processes

Cost Accumulation

Costs Accumulated by jobs or by customer

Costs accumulated by process

Major cost report

Job cost sheet for each unique unit, customer, or job

Production report for each major production process

Job Order Costing Process Costing

Type of Product

Unique Products and services such as a customer built ship

Homogeneous products and services such as cans of soda

Manufacturing Approach

Customized to meet the needs of the customer or client

Mass produced in a series of standardized processes

Cost Accumulation

Costs Accumulated by jobs or by customer

Costs accumulated by process

Major cost report

Job cost sheet for each unique unit, customer, or job

Production report for each major production process

McGraw-Hill/Irwin Slide 3

ProductionReport

The Process Costing Production Report

Step 4: Reconcilethe total cost ofwork in process.

Step 2: Translate thephysical units intoequivalent units.

Step 1: Reconcile thenumber of physical

units worked onduring the period.

Step 3: Calculatethe cost per

equivalent unit.

McGraw-Hill/Irwin Slide 4

Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed ?Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed ?Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed 1,600 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed 1,600 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Step 1: Reconcile the Physical Units

Barrels Completed = 2,000 ‒ 400 = 1,600

McGraw-Hill/Irwin Slide 5

Beginning Barrels in Process 200 Barrels Started and Completed ?Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started and Completed ?Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Barrels Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400

ORBarrels Startedand Completed

=Barrels

CompletedBeginning

Barrels ‒ = 1,600 – 200 = 1,400

ORBarrels Startedand Completed

=Barrels Started

EndingBarrels

‒ = 1,800 – 400 = 1,400

Step 1: Reconcile the Physical Units

Beginning Barrels in Process 200 Barrels Started and Completed 1,400 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started and Completed 1,400 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

McGraw-Hill/Irwin Slide 6

Equivalent units are the product of the number of partially completed units times the percentage of

completion for those units.

We need to calculate equivalent units because a process usually has some partially completed units

in its beginning and ending inventory.

Step 2: Translate Physical Units into Equivalent Units

+ = 1

Two half completed units are equivalent to one completed unit, so 10,000 units 70% complete

are equivalent to 7,000 complete units.

Two half completed units are equivalent to one completed unit, so 10,000 units 70% complete

are equivalent to 7,000 complete units.

McGraw-Hill/Irwin Slide 7

Exh. 20-21

Step 2: Translate Physical Units into Equivalent Units

• Direct materials are added at the beginning of the process, so, once a unit is started, it will have 100% of the required direct materials. • Conversion costs are incurred uniformly in the process. The 200 units in beginning inventory were 70% of the way through the process, and the 400 units in ending inventory were 60% of the way through the process. • The 1,400 units that were started and completed during the period are 100% complete for material and conversion.

McGraw-Hill/Irwin Slide 8

Exh. 20-22

Step 2: Translate Physical Units into Equivalent Units

1,400 units × 100% = 1,400200 units × (100% ‒ 70%) = 60

400 units × 60% = 240

McGraw-Hill/Irwin Slide 9

Step 3: Calculate Cost per Equivalent UnitCost per

EquivalentUnit

Current Period CostsEquivalent Units=

McGraw-Hill/Irwin Slide 10

Step 4: Reconcile the Total Cost of Work in Process

Materials Conversion TotalEquivalent units in Ending Inventory 400 240 Cost per Equivalent Unit × 450$ × 540$ Cost of Ending Inventory = 180,000$ = 129,600$ 309,600$

Mondavi CFA ProcessCost of Ending Inventory

McGraw-Hill/Irwin Slide 11

Step 4: Reconcile the Total Cost of Work in Process

Materials Conversion Total

Beginning Inventory Cost (From Prior Period) 165,600$ Cost to Complete Beginning Inventory: Equivalent Units to Complete - 60 Cost per equivalent unit × 540$ Cost to Complete Beginning Inventory -$ = 32,400$ 32,400$ Cost of Units Started and Completed: Units Started and Completed 1,400 1,400 Cost per Equivalent Unit × 450$ × 540$ Cost of Units Started and Completed = 630,000$ = 756,000$ 1,386,000$ Cost of Goods Completed 1,584,000$

Mondavi CFA ProcessCost of Goods Completed

McGraw-Hill/Irwin Slide 12

Activity Based Costing

Four BasicSteps in ABC

Step 4: Assign coststo products or

services based ontheir activity demands.

Step 2: Form activitypools and assignindirect costs to

each pool.

Step 1: Identify andclassify activities

Step 3: Select a costdriver for each pool

and calculatethe activity rate.

McGraw-Hill/Irwin Slide 13

Step 1. Identify and Classify ActivitiesLevel Activities Sample Activities Facility Performed for the company to Installing and maintaining

level support all customers and equipment. Paying forproducts/services. insurance, utilities, and taxes.

Customer Performed for specific Designing a special customerlevel customers. label. Negotiating prices for a

large customer.

Product Performed to support individual Research and development forlevel product lines. a new wine. Special tools

used only for certain wines.

Batch Performed for a group of units Aging wine in barrels or vats.level or customers all at once. Quality-testing each barrel

or vat.

Unit Performed for each unit or Pouring wine into bottles.level customer (one at a time). Labeling bottles and inserting

corks.

Level Activities Sample Activities Facility Performed for the company to Installing and maintaining

level support all customers and equipment. Paying forproducts/services. insurance, utilities, and taxes.

Customer Performed for specific Designing a special customerlevel customers. label. Negotiating prices for a

large customer.

Product Performed to support individual Research and development forlevel product lines. a new wine. Special tools

used only for certain wines.

Batch Performed for a group of units Aging wine in barrels or vats.level or customers all at once. Quality-testing each barrel

or vat.

Unit Performed for each unit or Pouring wine into bottles.level customer (one at a time). Labeling bottles and inserting

corks.

McGraw-Hill/Irwin Slide 14

Step 2: Form Activity Pools and Assign Indirect Costs to Each Pool

$90,000$90,000Purchasing/Purchasing/Receiving/Receiving/CrushingCrushing

$300,000$300,000Setting up andSetting up and

MaintainingMaintaining Equipment Equipment

$216,000$216,000Fermenting/Fermenting/

Aging inAging inBarrelsBarrels

$99,000$99,000Bottling/Bottling/LabelingLabeling

$175,000$175,000QualityQualityControlControl

$880,000 of Manufacturing Overhead Costs$880,000 of Manufacturing Overhead Costs

Mondavi has a total of $880,000 in manufacturing overheadcost that can be divided among five activity cost pools.

McGraw-Hill/Irwin Slide 15

Activity Cost Pools

Total Indirect

CostPurchasing 90,000$ ÷ 450,000 Pounds = 0.20$ per poundMachine setups 300,000 ÷ 500 Setups = 600.00 per setupFermenting 216,000 ÷ 270,000 Days = 0.80 per dayQuality Control 175,000 ÷ 10,000 Inspectons = 17.50 per insp.Bottling 99,000 ÷ 330,000 Bottles = 0.30 per bottle

880,000$

Activity RateActivity Cost Driver

Step 3: Select an Activity Cost Driver for Each Pool and Calculate an Activity Rate

Activity Cost Pools Activity Cost Driver Activity MeasurePurchasing/Receiving/Crushing Pounds of Grapes 450,000 PoundsSetting up and Maintaining Equipment Setups 500 SetupsFermenting/Aging in Barrels Fermentation/Aging Days 270,000 DaysQuality Control Quality Inspectons 10,000 InspectionsBottling/Labeling Bottles Processed 330,000 bottles

McGraw-Hill/Irwin Slide 16

Step 4: Assign costs to Products or Services Based on Activity Demands

Activity Requirements Standard Chardonnay Vintage CabernetPounds of Grapes 1250 Pounds per Batch 375 Pounds per BatchNumber of Setups 1 Setup per Batch 1 Setup per BatchFermentation/Aging Days 150 Days per Batch 900 Days per BatchQuality Inspections 10 per Batch 90 per BatchNumber of Bottles 1,000 Bottles per Batch 150 Bottles per Batch

Mondavi produces two types of wine, Standard Chardonnay and Vintage Cabernet with the following Activity requirements.

McGraw-Hill/Irwin Slide 17

Step 4: Assign costs to Products or Services Based on Activity DemandsCost Pools ABC Cost

Purchasing 0.20$ per pound × 1,250 Pounds = 250$ Machine setups 600.00 per setup × 1 Setups = 600 Fermenting 0.80 per day × 150 Days = 120 Quality Control 17.50 per insp. × 10 Inspectons= 175 Bottling 0.30 per bottle × 1,000 Bottles = 300

Manufacturing Overhead Cost Per Batch 1,445$ Number of Bottles per Batch ÷ 1,000 Manufacturing Overhead Cost Per Bottle = 1.45$

ActivityActivity Rate

Cost Pools ABC CostPurchasing 0.20$ per pound × 375 Pounds = 75$ Machine setups 600.00 per setup × 1 Setups = 600 Fermenting 0.80 per day × 900 Days = 720 Quality Control 17.50 per insp. × 90 Inspectons= 1,575 Bottling 0.30 per bottle × 150 Bottles = 45

Manufacturing Overhead Cost Per Batch 3,015$ Number of Bottles per Batch ÷ 150 Manufacturing Overhead Cost Per Bottle = 20.10$

ActivityActivity Rate

Cha

rdon

nay

Cab

erne

t

End of Chapter 20

© 2009 The McGraw-Hill Companies, Inc.