Managerial Accounting, Chap 4, 7e

8/22/2019 Managerial Accounting, Chap 4, 7e

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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 4

Process Costingand Hybrid

Product-Costing Systems


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LearningObjective

1


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Comparison of Job-Order Costingand Process Costing

ProcessCosting

ProcessCosting

Job-orderCosting

Used for production of small,identical, low cost items.

Mass produced in automatedcontinuous production process.

Costs cannot be directly traced toeach unit of product.


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ProcessCosting

ProcessCosting

Job-orderCosting

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill



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Job-order costing

Costs accumulated bythe job.

Work in process has ajob-cost sheet for eachjob.

Many unique, high costjobs.

Jobs built to customerorder.

Process costing

Costs accumulated bydepartment orprocess.

Work in process has aproduction report foreach batch ofproducts.

A few identical, low costproducts.

Units continuouslyproduced for inventoryin automated process.



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Direct Material

FinishedGoods

Cost ofGoodsSold

Direct Labor

ManufacturingOverhead

Jobs

The work-in-processaccount consists ofindividualjobs in a

job-ordercost system.

Differences Between Job-Orderand Process Costing


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Direct Material

FinishedGoods

Cost ofGoodsSold

Products

The work-in-processaccount consists of

individual products in aprocess cost system.

Differences Between Job-Orderand Process Costing

Direct Labor& Overhead

(Conversion)

When direct labor is a relatively small amountcompared to material and overhead, it is often

combined with overhead.


8/47Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LearningObjective

2


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Process Cost Flows

Direct material

Direct labor

Applied manufacturing and transferred to during currentoverhead finished goods period

Cost of goods completed Cost of goods sold

Work-in-Process Finished Goods

Cost of Goods Sold

One Production Department

Inventory Inventory


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Process Cost Flows

Direct material

Direct labor

Applied manufacturing transferred to and transferred to

overhead department B finished goods

Direct material

Direct labor

Applied manufacturing

overhead

during current period

Cost of goods sold

Cost of goods completed

in department A and Cost of goods completed

Finished Goods Inventory Cost of Goods Sold

Two Sequential Production Departments

Work-in-Process Inventory Work-in-Process InventoryProduction Department A Production Department B


11/47Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LearningObjective

3


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Equivalent Units: A Key Concept

Costs are accumulated for a period of time forproducts in work-in-process inventory.

Products in work-in-process inventory at thebeginning and end of the period are onlypartially complete.

Equivalent units is a concept expressing

these partially completed products as asmaller number of fully completed products.


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Equivalent Units Example

Two one-half completed products areequivalent to one completed product.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

+ = l


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For the current period, Jones started15,000 units and completed 10,000 units,leaving 5,000 units in process 30 percent

complete. How many equivalent units ofproduction did Jones have for the period?

a. 10,000

b. 11,500c. 13,500

d. 15,000

Equivalent Units Question 1


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For the current period, Jones started15,000 units and completed 10,000 units,leaving 5,000 units in process 30 percent

complete. How many equivalent units ofproduction did Jones have for the period?

a. 10,000

b. 11,500c. 13,500

d. 15,000

10,000 units + (5,000 units .30)= 11,500 equivalent units



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Calculating and Using EquivalentUnits of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period


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If Jones incurred $27,600 inproduction costs for the 11,500equivalent units. What was Joness

cost per equivalent unit for the period?a. $1.84

b. $2.40

c. $2.76d. $2.90



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If Jones incurred $27,600 inproduction costs for the 11,500equivalent units. What was Joness

cost per equivalent unit for the period?a. $1.84

b. $2.40

c. $2.76d. $2.90


$27,600 11,500 equivalent units

= $2.40 per equivalent unit


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Calculating and Using EquivalentUnits of Production

To calculate the direct materials and conversioncosts per equivalent unit for the period:

Materialscost per

equivalentunit

=Materials cost for the period

Materials equivalent units for

the period

Materialscost per

equivalentunit

=Materials cost for the period

Materials equivalent units for

the period


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Departmental Production Report

ProductionReport

Analysis ofphysical flow

of units.

Calculationof equivalent

units.

Computationof unit costs.

Analysis oftotal costs.


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Equivalent Units of ProductionWeighted-Average Method

The weighted-average method . . .

Makes no distinction between work done in theprior period and work done in the current period.

Blends together units and costs from the priorperiod and the current period.

The FIFO method is a morecomplex method and israrely used in practice.


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MVP Sports Equipment Company makes baseball glovesin two departments, Cutting and Stitching.

MVP uses the weighted-average cost procedure.

Material is added at the beginning of the CuttingDepartment, and conversion is incurred uniformlythroughout the process.

Using the following information for the month of March,lets prepare a production report for the CuttingDepartment.

Production Report Example


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Work in process, March 1: 20,000 units Cost

Materials: 100% complete. $ 50,000Conversion: 10% complete. 7,200

Units started into production in March: 30,000 unitsUnits completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 units

Materials 100% complete.

Conversion 50% complete.

Costs incurred during March

Materials cost 90,000Conversion costs:

Direct labor $ 86,000Applied manufacturing overhead 107,500

Total conversion costs 193,500

Total costs to account for $ 340,700



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Analysis of Physical Flow of Units

Physical

Units

Work in process, March 1 20,000

Units started during March 30,000

Total units to account for 50,000

Units completed and transferred out during March 40,000


Total units accounted for 50,000



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Conversion Equivalent Units

Physical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%



Units completed and transferred 40,000 100% 40,000 40,000Work in process, March 31 10,000 50% 10,000 5,000


Total equivalent units 50,000 45,000


Calculation of Equivalent Units

50% of 10,000 units

Beginning inventory % is not used in weighted-average method.


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Conversion Equivalent Units

Physical Percentage Direct

Units Complete Material Conversion




Units completed and transferred 40,000 100% 40,000 40,000Work in process, March 31 10,000 50% 10,000 5,000





100% of 10,000 units, allmaterial added at beginning


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Learning

Objective4


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Direct

Material Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$Costs incurred during March 90,000 193,500 283,500

Total costs to account for 140,000$ 200,700$ 340,700$

Equivalent units 50,000 45,000

Cost per equivalent unit 2.80$ 4.46$ 7.26$

Computation of unit costs




$2.80 + $4.46


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Learning

Objective5


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Analysis of total costsCost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31Direct Material:

10,000 equivalent units x $2.80 per equivalent unit 28,000$

Convserion:

5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for 340,700$


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Convserion:





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Convserion:




All costsaccounted for


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Learning

Objective6

MVP SPORTS EQUIPMENT COMPANY

Production Report: Cutting Department


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Percentage of

Completion Equivalent Units

Phys ical with Respect to Direc t

Units Conversion Material Conversion




Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000



Direct

Material Conversion Total

Work in Process, March 1 50,000$ 7,200$ 57,200$

Costs incurred during March 90,000 193,500 283,500

Total costs to account for 140,000$ 200,700$ 340,700$

Equivalent units 50,000 45,000

Cost per equivalent unit 2.80$ 4.46$ 7.26$

Cost of goods completed and transferred during March


Costs remaining in work-in-process on March 31

Direct Material:


Conversion:




Production Report: Cutting Department


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Manufacturingoverhead is

applied

to Work-in-Process Inventory

using apredetermined

overhead rate

Actual costs of

manufacturing overheadare entered in Work-in-

Process Inventory

Actual Costing vs. Normal Costing


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Departmental Production Report

Analysis ofphysical flowof units.

Calculationof equivalent

units. Computation

of unit costs.

Analysis oftotal costs.


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Learning

Objective7


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Operation Costing

Operation costing employs some aspectsof both job-order and process costing.

Job-order Operation Costing ProcessCosting (Products produced in batches) Costing


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Operation Costing

Operation costing employs some aspectsof both job-order and process costing.

Job-order Operation Costing ProcessCosting (Products produced in batches) Costing

Conversion costsassigned to batches

as in process costing.

Material Costs chargedto batches as in

job-order costing.


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Learning

Objective8(appendix)


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Sequential Production Departments

Direct material Cost of goods Transferred-

completed and in costs

Conversion: transferred out

Direct labor Direct materialManufacturing

overhead Conversion:

Direct labor

Manufacturing

overhead

Work-in-Process Inventory:Cutting Department

Work-in-Process Inventory:Stitching Department

Exh.

4 4


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Work in process, March 1: 10,000 units Cost

Transferred in: 100% complete. $ 61,000

Materials: none -0-

Conversion: 20% complete. 7,600

Units transferred in during March: 40,000 units

Units completed and transferred out in March: 30,000 units

Work in process, March 31: 20,000 unitsTransferred in: 100% complete.

Materials: none

Conversion: 90% complete.

Costs incurred during March

Transferred in 290,400

Materials cost 7,500Conversion costs:

Direct labor $115,000

Applied manufacturing overhead 115,000

Total conversion costs 230,000

Total costs to account for $ 596,500

4-4



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Analysis of Physical Flow of Units


Physical

Units


Units transferred in during March 40,000Total units to account for 50,000

Units completed and transferred out during March 30,000

Work in process, March 31 20,000Total units accounted for 50,000


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Conversion

Physical Percentage Transferred Direct

Units Completion In Material Conversion

Work in process, March 1 10,000 20%Units transferred in during March 40,000


Units completed and transferred out during March 30,000 30,000 30,000 30,000

Work in process, March 31 20,000 90% 20,000 -0- 18,000Total units accounted for 50,000

Total equivalent units 50,000 30,000 48,000

90% of 20,000 units


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Transferred DirectIn Material Conversion Total

Work in Process, March 1 61,000$ -0- 7,600$ 68,600$Costs incurred during March 290,400 7,500$ 230,000 527,900Total costs to account for 351,400$ 7,500$ 237,600$ 596,500$

Equivalent units 50,000 30,000 48,000

Cost per equivalent unit 7.028$ 0.25$ 4.95$ 12.228$

$351,400 $7,500 $237,600 7.028$

50,000 30,000 48,000 + $.25

+ $4.95


Computation of unit costs


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Cost of goods completed and transferred out of Stitching Dept. during March


Costs remaining in work-in-process in Stitching Dept. on March 31

Direct Material:20,000 equivalent units x $7.028 per equivalent unit 140,560$

Convserion:





Analysis of total costs

All costsaccounted for


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Im ready to processsome leisure time.

End of Chapter 4

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Managerial Accounting, Chap 4, 7e

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