McGraw-Hill/Irwin

4-4-11

Process Costing and Hybrid Product-Costing Systems

4Chapter Four

McGraw-Hill/Irwin

4-4-22

Comparison of Job-Order Costing and Process Costing

ProcessCostingProcessCosting

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.

McGraw-Hill/Irwin

4-4-33

ProcessCostingProcessCosting

Job-orderCosting

Typical process cost applications:

Petrochemical refinery

Paint manufacturer

Paper mill

Comparison of Job-Order Costing and Process Costing

McGraw-Hill/Irwin

4-4-44

Job-order costingJob-order costing Costs accumulated by Costs accumulated by

thethe job job..

Work in process has a Work in process has a job-cost sheet for each job-cost sheet for each jobjob..

Many unique, Many unique, high cost high cost jobs.jobs.

Jobs built toJobs built to customer customer order.order.

Process costingProcess costing Costs accumulated by Costs accumulated by

department or department or processprocess..

Work in process has a Work in process has a production report for production report for each batch of each batch of productsproducts. .

A few identical,A few identical, low cost low cost products. products.

UnitsUnits continuously continuously produced for inventory produced for inventory in automated process.in automated process.

Comparison of Job-Order Costing and Process Costing

McGraw-Hill/Irwin

4-4-55

Process Cost Flows

Let’s examine the cost flows in a process cost system

with Departments A and B. We will use T-accounts and

start with materials.

McGraw-Hill/Irwin

4-4-66

Raw Materials•Purchases •Direct

Material•Direct

Material

•OtherOverhead

Factory Overhead

Process Cost Flows Work in Process Department A

•Indirect Material

•Indirect Material

McGraw-Hill/Irwin

4-4-77

Process Cost Flows

Next let’s add labor and manufacturing overhead

to the process cost flows. Are you with me?

McGraw-Hill/Irwin

4-4-88

•Direct Labor

•Other Overhead

Factory Overhead

Process Cost Flows Work in Process Department A•Direct

Material

Salaries andWages Payable

•IndirectLabor

•Direct Labor

•OverheadApplied to

Work inProcess

•Overhead

•Indirect Material•Indirect

Labor

McGraw-Hill/Irwin

4-4-99

Process Cost Flows

Next let’s transfer work from Department A to

Department B. Are you ready?

McGraw-Hill/Irwin

4-4-1010

Process Cost Flows

Work in Process Department B

Work in Process Department A•Direct

Material•Direct Labor

•Overhead

•Transferred to Dept. B

•Transferred from Dept. A

McGraw-Hill/Irwin

4-4-1111

Process Cost Flows

Next let’s add material, labor, and manufacturing

overhead to Department B. Are you with me?

McGraw-Hill/Irwin

4-4-1212

Process Cost Flows

Work in Process Department B

Work in Process Department A•Direct

Material•Direct Labor

•Overhead

•Transferred from Dept. A

•Direct Material•Direct Labor

Raw Materials•Purchases •Direct

Material

•Direct Labor

Salaries andWages Payable

•Transferred to Dept. B

McGraw-Hill/Irwin

4-4-1313

Process Cost Flows

Work in Process Department B

Work in Process Department A•Direct

Material•Direct Labor

•Overhead

•Transferred from Dept. A

•Direct Material•Direct Labor

•Other Overhead

Factory Overhead•OverheadApplied to

Work inProcess

•Indirect Material•Indirect

Labor

•Overhead

•Transferred to Dept. B

McGraw-Hill/Irwin

4-4-1414

Process Cost Flows

Now let’s complete the goods in Department B and

sell them. Still with me?

McGraw-Hill/Irwin

4-4-1515

Finished Goods

•Cost of GoodsSold

•Cost of Goods

Mfd.

•Cost of GoodsSold

Cost of Goods Sold

Process Cost Flows

•Cost of Goods

Mfd.

Work in Process Department B

•Direct Material•Direct Labor

•Overhead

•Transferred from Dept. A

McGraw-Hill/Irwin

4-4-1616

Process CostingDirect

MaterialDirect-labor costsare usually smallin comparison to

other productcosts in process

cost systems.(high level of automation)

Type of Product Cost

Do

llar

Am

ou

nt

DirectLabor

ManufacturingOverhead

McGraw-Hill/Irwin

4-4-1717

Process Costing

Conversion

Direct-labor costsare usually smallin comparison to

other productcosts in process

cost systems.(high level of automation)

So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.

DirectMaterial

Type of Product Cost

Do

llar

Am

ou

nt

McGraw-Hill/Irwin

4-4-1818

Direct Material

FinishedGoods

Cost of GoodsSold

Direct Labor

ManufacturingOverhead

Jobs

The work-in-process account consists of individual jobs in a

job-order cost system.

Differences Between Job-Order and Process Costing

McGraw-Hill/Irwin

4-4-1919

Direct Material

FinishedGoods

Cost of GoodsSold

Products

The work-in-process account consists of

individual products in a process cost system.

Differences Between Job-Order and Process Costing

Direct Labor& Overhead

(Conversion)

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

combined with overhead.

McGraw-Hill/Irwin

4-4-2020

Equivalent Units: A Key Concept

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

Products in work-in-process inventory at the beginning and end of the period are only partially complete.

Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

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

Products in work-in-process inventory at the beginning and end of the period are only partially complete.

Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

McGraw-Hill/Irwin

4-4-2121

Equivalent Units Example

Two one-half completed products are equivalent to one completed product.

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

+ = l

McGraw-Hill/Irwin

4-4-2222

For the current period, Jones 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 Jones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units Question 1

McGraw-Hill/Irwin

4-4-2323

For the current period, Jones 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 Jones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

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

Equivalent Units Question 1

McGraw-Hill/Irwin

4-4-2424

Calculating and Using Equivalent Units of Production

To calculate the cost perTo calculate the cost perequivalent unit for the period:equivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period

McGraw-Hill/Irwin

4-4-2525

If Jones incurred $27,600 inproduction costs for the 11,500

equivalent units. What was Jones’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units Question 2

McGraw-Hill/Irwin

4-4-2626

If Jones incurred $27,600 inproduction costs for the 11,500

equivalent units. What was Jones’s cost per equivalent 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

Equivalent Units Question 2

McGraw-Hill/Irwin

4-4-2727

Departmental Production Report

ProductionReport

Analysis of physical flow

of units.

Calculationof equivalent

units.

Computationof unit costs.

Analysis of total costs.

McGraw-Hill/Irwin

4-4-2828

Equivalent Units of Production –Weighted-Average Method

The weighted-average method . . .The weighted-average method . . . Makes no distinction between work done in the Makes no distinction between work done in the

prior period and work done in the current period.prior period and work done in the current period. Blends together units and costs from the prior Blends together units and costs from the prior

period and the current period.period and the current period.

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

McGraw-Hill/Irwin

4-4-2929

Production Report Example

At this point, we need to look at an example

to illustrate the departmental

production report.

McGraw-Hill/Irwin

4-4-3030

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

MVP uses the MVP uses the weighted-averageweighted-average cost procedure. cost procedure.

Material is added at the beginning of the Cutting Material is added at the beginning of the Cutting Department, and conversion is incurred uniformly Department, and conversion is incurred uniformly throughout the process.throughout the process.

Using the following information for the month of Using the following information for the month of March, let’s prepare a production report for the March, let’s prepare a production report for the Cutting Department. Cutting Department.

Production Report Example

McGraw-Hill/Irwin

4-4-3131

Work in process, March 1: 20,000 units 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 unitsMaterials 100% complete.Conversion 50% complete.

Costs incurred during MarchMaterials cost $ 90,000Conversion cost 193,500

Cost

Production Report Example

McGraw-Hill/Irwin

4-4-3232

Analysis of Physical Flow of Units

PhysicalUnits

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 Work in process, March 31 10,000 Total units accounted for 50,000

Production Report Example

McGraw-Hill/Irwin

4-4-3333

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

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

Total equivalent units 50,000 45,000

Production Report Example

Calculation of Equivalent Units

50% of 10,000 units

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

McGraw-Hill/Irwin

4-4-3434

Conversion Equivalent UnitsPhysical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%Units started during March 30,000 Total units to account for 50,000

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

Total equivalent units 50,000 45,000

Production Report Example

Calculation of Equivalent Units

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

McGraw-Hill/Irwin

4-4-3535

DirectMaterial 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

Production Report Example

$140,000 ÷ 50,000 equivalent units

$200,700 ÷ 45,000 equivalent units

$2.80 + $4.46

McGraw-Hill/Irwin

4-4-3636

Cost of goods completed and transferred during March 40,000 units × $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units × $2.80 per equivalent unit 28,000$

Conversion: 5,000 equivalent units × $4.46 per equivalent unit 22,300

Total cost of March 31 work in process 50,300

Total costs accounted for 340,700$All costs

accounted for

Production Report Example

Analysis of total costs

McGraw-Hill/Irwin

4-4-3737

Operation Costing

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

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

Conversion costsassigned to batches

as in process costing.

Material Costs Chargedto batches as in

job-order costing.

McGraw-Hill/Irwin

4-4-3838

Process CostingTypical Accounting Entries

Let’s look at the accounting journal entries for a process cost system. We’ll omit the

numbers so that we can focus on accounts.

McGraw-Hill/Irwin

4-4-3939

Process CostingTypical Accounting Entries

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Raw Materials XXXXX

Accounts Payable XXXXX

To record the purchase of material.

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Raw Materials XXXXX

To record the use of direct material.

McGraw-Hill/Irwin

4-4-4040

Process CostingTypical Accounting Entries

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Salaries and Wages Payable XXXXX

To record direct labor costs.

McGraw-Hill/Irwin

4-4-4141

Process CostingTypical Accounting Entries

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Manufacturing Overhead XXXXX

To apply overhead to departments.

McGraw-Hill/Irwin

4-4-4242

Process CostingTypical Accounting Entries

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department B XXXXX

Work in Process - Department A XXXXX

To record the transfer of goods from

Department A to Department B.

McGraw-Hill/Irwin

4-4-4343

Process CostingTypical Accounting Entries

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Finished Goods XXXXX

Work in Process - Department B XXXXX

To record the completion of goods

and their transfer from Department B

to finished-goods inventory.

McGraw-Hill/Irwin

4-4-4444

Process CostingTypical Accounting Entries

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Accounts Receivable XXXXX

Sales XXXXX

To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX

To record cost of goods sold.

McGraw-Hill/Irwin

4-4-4545

I’m ready to processsome leisure time.

End of Chapter 4