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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
Comparison of Job-Order Costingand Process Costing
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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.
Comparison of Job-Order Costingand Process Costing
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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.
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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
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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
Equivalent Units Question 1
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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
Equivalent Units Question 2
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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
Equivalent Units Question 2
$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
Production Report Example
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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
Work in process, March 31 10,000
Total units accounted for 50,000
Production Report Example
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Conversion Equivalent Units
Physical 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 40,000Work 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.
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Conversion Equivalent Units
Physical 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 40,000Work 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
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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
Production Report Example
$140,000 50,000 equivalent units
$200,700 45,000 equivalent units
$2.80 + $4.46
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Learning
Objective5
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Production Report Example
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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Production Report Example
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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Production Report Example
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 $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for 340,700$
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
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
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
40,000 units x $7.26 per equivalent unit 290,400$
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units x $2.80 per equivalent unit 28,000$
Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for 340,700$
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
Sequential Production Departments
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Analysis of Physical Flow of Units
Sequential Production Departments
Physical
Units
Work in process, March 1 10,000
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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Calculation of Equivalent Units
Sequential Production Departments
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
Total units to account for 50,000
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
Production Report Example
Computation of unit costs
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Cost of goods completed and transferred out of Stitching Dept. during March
30,000 units x $12.228 per equivalent unit 366,840$
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:
18,000 equivalent units x $4.95 per equivalent unit 89,100
Total cost of March 31 work-in-process 229,660
Total costs accounted for 596,500$
Production Report Example
Analysis of total costs
All costsaccounted for
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Im ready to processsome leisure time.
End of Chapter 4