Systems Design: Process Costing - mheducation.ca · Systems Design: Process Costing Chapter4. 4-2...

Systems Design:Process Costing

Chapter

4

4-2

© McGraw-Hill Ryerson Limited., 2001

LEARNING OBJECTIVES

1. Prepare journal entries to record the flow ofmaterials, labour and overhead through aprocess costing system.

2. Compute the equivalent units of production fora period by the weighted-average method.

3. Prepare a quantity schedule for a period bythe weighted-average method.

4. Compute the costs per equivalent unit for aperiod by the weighted-average method.

5. Prepare a cost reconciliation for a period bythe weighted-average method.

After studying this chapter, you should be able to:

4-3


Types of Costing Systems Used toDetermine Product Costs

Job-orderCosting

ProcessCosting

✦ Many units of a single, homogeneous product flow evenly through a continuous production process.

✦ One unit of product is indistinguishable from any other unit of product.

✦ Each unit of product is assigned the same average cost.

✦ Many units of a single, homogeneous product flow evenly through a continuous production process.

✦ One unit of product is indistinguishable from any other unit of product.

✦ Each unit of product is assigned the same average cost.

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Types of Costing Systems Used toDetermine Product Costs

ProcessCosting

Job-orderCosting

Typical process cost applications:

! Petrochemical refinery

! Paint manufacturer

! Paper mill

Typical process cost applications:

! Petrochemical refinery

! Paint manufacturer

! Paper mill

Job-orderCosting

ProcessCosting

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Job order costing! Many jobs are worked

during the period.

! Costs are accumulatedby individual jobs.

! Job cost sheet is thekey document.

! Unit cost computed byjob.

Job order costing! Many jobs are worked

during the period.

! Costs are accumulatedby individual jobs.

! Job cost sheet is thekey document.

! Unit cost computed byjob.

Process costing! A single product is

produced for a longperiod of time.

! Costs are accumulatedby departments.

! Department productionreport is key document.

! Unit costs are computedby department.

Process costing! A single product is

produced for a longperiod of time.

! Costs are accumulatedby departments.

! Department productionreport is key document.

! Unit costs are computedby department.

Differences Between Job-Order andProcess Costing

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Process CostingDirect

Materials Direct labour costsmay be small

in comparison toother product

costs in processcost systems.

Direct labour costsmay be small



Type of Product Cost

Do

llar

Am

ou

nt

DirectLabour

ManufacturingOverhead

4-7


Process CostingDirect

Materials

Type of Product Cost

Do

llar

Am

ou

nt Conversion

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

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







4-8


Comparing Job-Order and ProcessCosting

DirectMaterials

DirectMaterials

FinishedGoods

FinishedGoods

Cost ofGoodsSold

Cost ofGoodsSold

Direct LabourDirect Labour



Work inProcess

4-9



FinishedGoods

FinishedGoods

Cost ofGoodsSold

Cost ofGoodsSold




JobsJobs

Costs are traced andapplied to individualjobs in a job-order

cost system.

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct

Materials

DirectMaterials

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FinishedGoods

FinishedGoods

Cost ofGoodsSold

Cost ofGoodsSold




ProcessingDepartmentProcessingDepartment

Costs are traced andapplied to departments

in a process costsystem.

Costs are traced andapplied to departments

in a process costsystem.

DirectMaterials

DirectMaterials

4-11


Process Cost Flows

Let’s look at cost flows in aprocess cost system withDepartments A and B. We

will use T-accounts and startwith materials.

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Raw Materials•Purchases •Direct

Materials

•OtherOverhead


•Direct Materials

Process Cost Flows

Work in Process Department B

Work in Process Department A

•Indirect Materials

•IndirectMaterials

Actual Applied

•DirectMaterials

4-13


Wages Payable•Direct

Materials

•Direct Materials

Process Cost Flows



•Direct Labour •Direct

Labour

•Direct Labour

•IndirectLabour

•OtherOverhead


•IndirectMaterials

Actual Applied

•IndirectLabour

4-14


Wages Payable•Direct

Materials

•Direct Materials

Process Cost Flows



•Direct Labour •Direct

Labour

•Direct Labour

•IndirectLabour

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•OtherOverhead


Actual Applied

•IndirectMaterials•IndirectLabour

4-15


Process Cost Flows

Next, transfer work fromDepartment A toDepartment B.

4-16


Process Cost Flows

Work in ProcessDepartment B

Work in ProcessDepartment A

•Direct Materials

•Direct Labour•Applied

Overhead

•Direct Materials


Overhead

Transferred to Dept. B

•Transferred from Dept. A

4-17


Process Cost Flows

Now let’s complete thegoods in Department B and

sell them.

4-18


Finished Goods

Cost of Goods Sold

Process Cost Flows


•Cost of Goods

Manufactured

•Cost of Goods

Manufactured

•Direct Materials


Overhead•Transferred from Dept. A

•Cost of Goods

Sold

•Cost of Goods

Sold

4-19


Equivalent Units of Production

Equivalent units are partially completepartially completeand are part of work in processinventory. Partially completed

products are expressed in terms of asmaller number of fully completed

units.

4-20


Equivalent Units of Production

+ =

Two half completed products areequivalent to one completed product.

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

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

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For the current period, Jones started 15,000units and completed 10,000 units, leaving5,000 units in process 30 percent complete.How many equivalent units of production didJones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000


a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units

4-22



a. 10,000

b. 11,500

c. 13,500

d. 15,000


a. 10,000

b. 11,500

c. 13,500

d. 15,000

10,000 units + (5,000 units × 0.30) = 11,500 equivalent units

Equivalent Units

4-23


Calculating and Using EquivalentUnits of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit=

Costs for the periodEquivalent units of production

for the period

4-24


Now assume that Jones incurred$27,600 in production costs for the11,500 equivalent units of production.What was Jones’ cost per equivalentunit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units

4-25



a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Equivalent Units

4-26


Equivalent Units of Production –Weighted Average Method

The Weighted Average method . . .!Makes no distinction between work done in prior

and current period.

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

Let’s see how this works!

4-27


Weighted Average Example

Smith Company reported the following activityin Department A for the month of June:

Percent Completed

Units Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900 60% 30%

4-28


Equivalent units are calculated as follows:


Materials Conversion

Units completed and transferred out of Department A in June 5,400 5,400

4-29






Work in process, June 30:

900 units × 60% 540

Equivalent units of Production in Department A during June 5,940

4-30







900 units × 60% 540

900 units × 30% 270

Equivalent units of Production in Department A during June 5,940 5,670

4-31





900 units × 60% 540

900 units × 30% 270

Equivalent units of Production in Department A during June 5,940 5,670

Equivalent units are calculated as follows:Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process

Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process


4-32


BeginningWork in Process

300 Units40% Complete

EndingWork in Process


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed


MaterialsMaterials

5,400 Units Completed 540 Equivalent Units 900 × 60%

5,940 Equivalent units of production

4-33


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed

270 Equivalent Units 900 × 30%

5,670 Equivalent units of production

BeginningWork in Process


EndingWork in Process



ConversionConversion

4-34


Production Report

ProductionReport

Shows the flowof units and coststhrough work inprocess

Becomes thejob cost sheetin processcosting

Helps managerscontrol theirdepartments

Provides costinformation for

financial statements

4-35


Production Report

"A computation ofcost per equivalent unit."A computation of

cost per equivalent unit.

Section 1

Section 2

Section 3

Production Report#A quantity schedule

showing the flow of unitsand the computation of

equivalent units.

#A quantity scheduleshowing the flow of unitsand the computation of

equivalent units.

4-36


Production Report

Section 1

Section 2

Section 3

Production Report$ A reconciliation of cost flows for the period, including:

❖ Total cost for units completed and transferred from the processing department.

❖ Total cost for partially completed units remaining in work in process.

$ A reconciliation of cost flows for the period, including:

❖ Total cost for units completed and transferred from the processing department.

❖ Total cost for partially completed units remaining in work in process.

4-37


% Double Diamond Skis uses process costing todetermine unit costs in its Shaping and MillingDepartment.

% Double Diamond uses the Weighted Averagecost procedure.

% Using the following information for the month ofMay, let’s prepare a production report forShaping and Milling.

Production Report Example

4-38


Work in process, May 1: 200 unitsMaterials: 50% complete. $ 3,000Conversion: 30% complete. 1,000

Units started into production in May: 5,000Units completed and transferred out in May: 4,800

Costs added to production in MayMaterials cost $ 74,000Conversion cost 70,000

Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.

Cost


4-39


Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800

4-40






Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160

5,200 4,960

4-41






Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900

4-42


Section 2: Compute cost per equivalent unit

Production Report Example`

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 4,000$ 3,000$ 1,000$ Costs added in the Shipping and Milling Department 144,000 74,000 70,000

Total cost 148,000$ 77,000$ 71,000$

Equivalent units 4,960 4,900

4-43






Total cost 148,000$ 77,000$ 71,000$


Cost per equivalent unit 15.524$

$77,000 ÷ 4,960 units = $15.524 (rounded)

4-44




Total cost 148,000$ 77,000$ 71,000$


Cost per equivalent unit 15.524$ 14.490$ Total cost per equivalent unit = $15.524 + $14.490 = $30.014


$71,000 ÷ 4,900 units = $14.490 (rounded)


4-45


Section 3: Cost Reconciliation


Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100

Total work in process, May 31

Total cost accounted for

4-46



Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100



4,800 units @ $30.014



4-47



Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materia ls 2,484 160 Conversion 100



160 units @ $15.524



4-48



Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materia ls 2,484 160 Conversion 1,449 100

Total work in process, May 31 3,933

Total cost accounted for 148,000$

100 units @ $14.490



4-49


Operation Costing

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

Conversion costsassigned to batches

as in process costing.

Conversion costsassigned to batches

as in process costing.

Material Costs Chargedto batches as in

job-order costing.

Material Costs Chargedto batches as in

job-order costing.

Job-orderCosting

ProcessCosting

Operation Costing(Products produced in batches)

4-50


Process CostingTypical Accounting Entries

Let’s look at the accountingjournal entries for a processcost system. We’ll omit the

numbers so that we can focuson concepts.

4-51



GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Raw Materials XXXXX

Accounts Payable XXXXX

To record the purchase of material.

4-52





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.

4-53







Salaries and Wages Payable XXXXX

To record direct labor costs.

4-54







Manufacturing Overhead XXXXX

To apply overhead to departments.

4-55







To record the transfer of goods from

Department A to Department B.

4-56





Finished Goods XXXXX


To record the completion of goods

and their transfer from Department B

to finished goods inventory.

4-57





Accounts Receivable XXXXX

Sales XXXXX

To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX

To record cost of goods sold.

4-58


End of Chapter 4

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