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Similarities Between Job-Order and
Process Costing1. Both systems assign material, labor, and overhead
costs to products and they provide a mechanism forcomputing unit product costs.
2. Both systems use the same manufacturing accounts,including Manufacturing Overhead, Raw Materials,Work in Process, and Finished Goods.
3. The flow of costs through the manufacturing accounts isbasically the same in both systems.
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Differences Between Job-Order and
Process CostingProcess costing:1. Is used when a single product is produced on a
continuing basis or for a long period of time. Job-order
costing is used when many different jobs havingdifferent production requirements are worked on eachperiod.
2. Systems accumulate costs by department. Job-ordercosting systems accumulated costs by individual jobs.
3. Systems compute unit costs by department. Job-ordercosting systems compute unit costs by job on the job
cost sheet.
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Quick Check
Process costing is used for productsthat are:
a. Different and produced continuously.b. Similar and produced continuously.
c. Individual units produced to customerspecifications.
d. Purchased from vendors.
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Process costing is used for productsthat are:
a. Different and produced continuously.b. Similar and produced continuously.
c. Individual units produced to customerspecifications.
d. Purchased from vendors.
Quick Check
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Processing Departments
Any unit in an organization where materials, labor,or overhead are added to the product.
The activities performed in a processing
department areperformed uniformlyon allunits of production. Furthermore, the output ofa processing department must be homogeneous.
Products in a process costing environment
typically flow in a sequence from one departmentto another.
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Comparing Job-Order and Process
Costing
FinishedGoods
Cost ofGoodsSold
Work inProcess
DirectMaterials
Direct Labor
ManufacturingOverhead
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Comparing Job-Order and Process
Costing
FinishedGoods
Cost ofGoodsSold
Direct Labor
ManufacturingOverhead
ProcessingDepartment
Costs are traced andapplied to departments
in a process costsystem.
DirectMaterials
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T-Account and Journal Entry Views of
Process Cost FlowsFor purposes of this example, assumethere are two processing departments
DepartmentsAand B.We will use T-accounts and journalentries.
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Raw Materials
Process Cost Flows: The Flow of
Raw Materials (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment A
DirectMaterials
DirectMaterials
DirectMaterials
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Process Cost Flows: The Flow of
Raw Materials (in journal entry form)
Work in Process - Department A XX,XXXWork in Process - Department B XX,XXX
Raw Materials XX,XXX
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Process Costing: The Flow of LaborCosts (in journal entry form)
Work in Process - Department A XX,XXX
Work in Process - Department B XX,XXX
Salaries and Wages Payable XX,XXX
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Process Cost Flows: The Flow of ManufacturingOverhead Costs (in T-account form)
Work in Process
Department B
Work in ProcessDepartment A
ManufacturingOverhead
OverheadApplied to
Work inProcess
AppliedOverhead
AppliedOverhead
DirectLabor
DirectMaterials
DirectLabor
DirectMaterials
ActualOverhead
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Process Cost Flows: Transfers from WIP-Dept.A to WIP-Dept. B (in T-account form)
Work in ProcessDepartment B
Work in ProcessDepartment A
DirectMaterialsDirectLabor
AppliedOverhead
Direct
MaterialsDirectLabor
AppliedOverhead
Transferred
to Dept. B
Transferredfrom Dept. A
DepartmentA
DepartmentB
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Process Cost Flows: Transfers from WIP-Dept.A to WIP-Dept. B (in journal entry form)
Work in Process - Department B XX,XXX Work in Process - Department A XX,XXX
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Finished Goods
Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in T-account form)
Work in ProcessDepartment B
Cost of
GoodsManufactured
DirectMaterialsDirectLabor
AppliedOverhead
Transferred
from Dept. A
Cost of
GoodsManufactured
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Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in journal entry form)
Finished Goods XX,XXX Work in Process - Department B XX,XXX
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Finished Goods
Cost of Goods Sold
Process Cost Flows: Transfers from FinishedGoods to COGS (in T-account form)
Work in ProcessDepartment B
Cost ofGoods
Manufactured
DirectMaterials
DirectLabor
AppliedOverhead
Transferred
from Dept. ACost ofGoodsSold
Cost ofGoods
Sold
Cost ofGoods
Manufactured
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Process Cost Flows: Transfers from FinishedGoods to COGS (in journal entry form)
Cost of Goods Sold XX,XXX
Finished Goods XX,XXX
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Equivalent Units of Production
Equivalent units are theproduct of the numberof partially completed
units and thepercentage completion
of those units.
These partially completed units complicate thedetermination of a departments output for a given
period and the unit cost that should be assigned tothat output.
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Equivalent UnitsThe Basic Idea
Two half-completed products areequivalent toone complete product.
So, 10,000 units 70% completeare equivalent to7,000 complete units.
+ = 1
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For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check
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For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units 0.30)= 11,500 equivalent units
Quick Check
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Calculating Equivalent Units
Equivalent units can be calculatedtwo ways:
The First-In, First-Out MethodFIFO iscovered in the appendix to this chapter.
The Weighted-Average MethodThis method
will be covered in the main portion of the chapter.
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Learning Objective 2
Compute the equivalent
units of productionusing the weighted-
average method.
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Treatment of Direct Labor
Type of Product Cost
Do
llarAmoun
t Conversion
Direct labor andmanufacturing
overhead may becombined into
one classificationof product
cost calledconvers ion costs.
DirectMaterials
Direct
Labor
DirectLabor
ManufacturingOverhead
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Weighted-AverageAn Example
Smith Company reported the following activity in theAssembly Department for the month of June:
Percent Completed
Units Materials ConversionWork 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%
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Weighted-AverageAn Example
The first step in calculating the equivalent units is to identifythe units completed and transferred out of Assembly
Department in June (5,400 units)
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
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Weighted-AverageAn Example
The second step is to identify the equivalent unitsof production inending work in processwith respect to materialsfor the month(540 units) and adding this to the 5,400 units from step one.
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units 60% 540
Equivalent units of Production in
the Department during June 5,940
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Weighted-AverageAn Example
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units 60% 540
900 units 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
The third step is to identify the equivalent unitsof production inending work in processwith respect to conversionfor the month
(270 units) and adding this to the 5,400 units from step one.
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Beginning
Work in Process300 Units
40% Complete
Ending
Work in Process900 Units
60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Weighted-AverageAn Example
Materials
5,400 Units Completed540 Equivalent Units 900 60%
5,940 Equivalent units
of production
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Learning Objective 3
Compute the cost per
equivalent unit using theweighted-averagemethod.
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Compute and Apply Costs
Beginning Work in Process Inventory: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 units
Production completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130
Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete
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Compute and Apply Costs
The formula for computing the cost perequivalent unit is:
Cost perequivalent
unit=
Cost of beginningWork in Process
InventoryCost added during
the period
Equivalent units of production
+
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Here is a schedule with the cost and equivalentunit information.
Compute and Apply Costs
Total
Cost Materials ConversionCost to be accounted for:
Work in process, June 1 10,039$ 6,119$ 3,920$
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
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Total
Cost Materials ConversionCost to be accounted for:
Work in process, June 1 10,039$ 6,119$ 3,920$
Cost added in Assembly 199,751 118,621 81,130
Total cost 209,790$ 124,740$ 85,050$
Equivalent units 5,940 5,670
Cost per equivalent unit 21.00$ 15.00$
Compute and Apply Costs
Here is a schedule with the cost and equivalentunit information.
$124,740 5,940 units = $21.00 $85,050 5,670 units = $15.00
Cost per equivalent unit = $21.00 + $15.00 = $36.00
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Learning Objective 4
Assign costs to units
using the weighted-average method.
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
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Applying Costs
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of UnitsTransferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of UnitsTransferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit 21.00$ 15.00$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
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Computing the Cost of UnitsTransferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit 21.00$ 15.00$Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit 21.00$ 15.00$
Cost of units transferred out 113,400$ 81,000$ 194,400$
Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out
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Learning Objective 5
Prepare a costreconciliation report.
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751
Total cost to be accounted for 209,790$
Assembly DepartmentCost Reconciliation
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPAMcGraw-Hill/Irwin Copyri ght 2013 by The McGraw-H il l Companies, Inc. Al l r ights reserved.
Appendix 4A
Process Costing Using theFIFO Method
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FIFO vs. Weighted-Average Method
The FIFO method (generally considered moreaccurate than the weighted-average method) differs
from the weighted-average method in two ways:
1. The computation of equivalent units.
2. The way in which the costs of beginning
inventory are treated.
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Learning Objective 6
Compute the equivalent
units of productionusing the FIFO method.
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Equivalent UnitsFIFO Method
Lets revisit the Smith Company example. Here isinformation concerning the Assembly Departmentfor 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%
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Equivalent UnitsFIFO Method
Step 1:Determine equivalent units needed to completebeginning Work in Process Inventory.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units (100% - 40%) 180
Conversion: 300 units (100% - 20%) 240
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Equivalent UnitsFIFO Method
Step 2:Determine units started and completed duringthe period.
Materials Conversion
To complete beginning Work in Process: Materials: 300 units (100% - 40%) 180
Conversion: 300 units (100% - 20%) 240
Units started and completed during June 5,100 5,100
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Beginning
Work in Process300 Units40% Complete
Ending
Work in Process900 Units60% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
Materials
900 60%5,100 Units Completed540 Equivalent Units
5,820 Equivalent unitsof production
180 Equivalent Units300 60%
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Beginning
Work in Process300 Units20% Complete
Ending
Work in Process900 Units30% Complete
6,000 Units Started
5,100 Units Startedand Completed
FIFO Example
Conversion
5,100 Units Completed270 Equivalent Units
900 30%
5,610 Equivalent unitsof production
240 Equivalent Units300 80%
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Equivalent Units:Weighted-Average vs. FIFO
Materials Conversion
Equivalent units - weighted-average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units 40% 120300 units 20% 60
Equivalent units - FIFO method 5,820 5,610
As shown below, the equivalent units in beginning inventory aresubtracted from the equivalent units of production per theweighted-average method to obtain the equivalent units of
production under the FIFO method.
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Learning Objective 7
Compute the cost per
equivalent unit using theFIFO method.
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Beginning work in process: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920
Production started during June 6,000 unitsProduction completed during June 5,400 units
Costs added to production in JuneMaterials cost $ 118,621
Conversion cost $ 81,130
Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete
Cost per Equivalent Unit - FIFO
Lets revisit the Smith Company Assembly Departmentfor the month of June to prepare our production report.
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Cost per Equivalent Unit - FIFO
Total
Cost Materials Conversion
Cost added in June 199,751$ 118,621$ 81,130$
Equivalent units 5,820 5,610Cost per equivalent unit 20.3816$ 14.4617$
Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433
$118,621
5,820$81,1305,610
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Learning Objective 8
Assign costs to unitsusing the FIFO method.
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Materials Conversion Total
Ending WIP inventory:Equivalent units 540 270
Assembly Department
Cost of Ending WIP Inventory
Applying Costs - FIFOStep 1: Record the equivalent units of production in ending Work
in Process Inventory.
900 units60% 900 units30%
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Applying Costs - FIFO
Step 2: Record the cost per equivalent unit.
Materials Conversion Total
Ending WIP inventory:Equivalent units 540 270
Cost per equivalent unit 20.3816$ 14.4617$
Assembly Department
Cost of Ending WIP Inventory
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Materials Conversion Total
Ending WIP inventory:Equivalent units 540 270
Cost per equivalent unit 20.3816$ 14.4617$
Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$
Assembly Department
Cost of Ending WIP Inventory
Applying Costs - FIFO
Step 3: Compute the cost of ending Work in Process Inventory.
540$20.3816 270$14.4617
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Cost of Units Transferred OutStep 1: Record the cost in beginning Work in Process Inventory.
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit 20.3816$ 14.4617$
Cost to complete beginning WIP 3,669$ 3,471$ 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit 20.3816$ 14.4617$
Cost of units started and completed 103,946$ 73,755$ 177,701
Cost of Units Transferred Out 194,880$
Assembly Department
Cost of Units Transferred Out in June
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Cost of Units Transferred OutStep 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit 20.3816$ 14.4617$
Cost to complete beginning WIP 3,669$ 3,471$ 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit 20.3816$ 14.4617$
Cost of units started and completed 103,946$ 73,755$ 177,701
Cost of Units Transferred Out 194,880$
Assembly Department
Cost of Units Transferred Out in June
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Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this
period.
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit 20.3816$ 14.4617$
Cost to complete beginning WIP 3,669$ 3,471$ 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit 20.3816$ 14.4617$
Cost of units started and completed 103,946$ 73,755$ 177,701
Cost of Units Transferred Out 194,880$
Assembly Department
Cost of Units Transferred Out in June
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Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit 20.3816$ 14.4617$
Cost to complete beginning WIP 3,669$ 3,471$ 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit 20.3816$ 14.4617$
Cost of units started and completed 103,946$ 73,755$ 177,701
Cost of Units Transferred Out 194,880$
Assembly Department
Cost of Units Transferred Out in June
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Learning Objective 9
Prepare a costreconciliation report
using the FIFO method.
Prepare a cost
reconciliation reportusing the FIFO method.
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Reconciling Costs
Costs to be accounted for:
Cost of beginning Work in Process Inventory 10,039$
Costs added to production during the period 199,751Total cost to be accounted for 209,790$
Cost accounted for as follows:
Cost of ending Work in Process Inventory 14,911$
Cost of units transferred out 194,880Total cost accounted for* 209,791$
Assembly Department
Cost Reconciliation for June
*$1 rounding error.
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A Comparison of Costing Methods
In a lean production environment, FIFO andweighted-average methods yield similar
unit costs.
When considering cost control, FIFO issuperior to weighted-average because it
does not mix costs of the current period with
costs of the prior period.
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End of Chapter 04