Chap 04 Notes

11th Edition
Chapter 4
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Systems Design:
Process Costing
Chapter Four
McGrawHill/Irwin
Similarities Between Job-Order and Process

Costing
Both
Both systems
systems assign
assign material,
material, labor
labor and
overhead
overhead costs
costs to
to products
products and
and they
they provide
provide aa
mechanism
mechanism for
for computing
computing unit
unit product
product cost.
cost.
Both
Both systems
systems use
use the
the same
same manufacturing
manufacturing
accounts,
accounts, including
including Manufacturing
Manufacturing Overhead,
Raw
Raw Materials,
Materials, Work
Work in
in Process,
Process, and
and Finished
Finished
Goods.
Goods.
The
The flow
flow of
of costs
costs through the manufacturing
accounts
accounts is
is basically
basically the same in both
both systems.
systems.
McGrawHill/Irwin
Differences Between Job-Order and Process

Costing
Process
Process costing
costing is
is used
used when
when aa single
single product
product is
is produced
produced on
on
aa continuing
continuing basis
basis or
or for
for aa long
long period
period of
of time.
time. Job-order
Job-order
costing
costing is
is used
used when
when many
many different
different jobs
jobs are
are worked
worked on
on each
each
period.
period.
Process
Process costing
costing systems
systems accumulate
accumulate costs
costs by
by department.
department.
Job-order
Job-order costing
costing systems
systems accumulated
accumulated costs
costs by
by individual
individual
jobs.
jobs.
Process
Process costing
costing systems
systems use
use department
department production
production reports
reports to
to
accumulate
accumulate costs.
costs. Job-order
Job-order costing
costing systems
systems use
use job
job cost
cost
sheets
sheets to
to accumulate
accumulate costs.
costs.
Process
Process costing
costing systems
systems compute
compute unit
unit costs
costs by
by department.
department.
Job-order
Job-order costing
costing systems
systems compute
compute unit
unit costs
costs by
by job.
job.
McGrawHill/Irwin
Quick Check
Process costing is used for products that are:

a. Different and produced continuously.
b.
c.
Similar and produced continuously.

Individual units produced to customer
specifications.
d. Purchased from vendors.
McGrawHill/Irwin
Quick Check
Process costing is used for products that are:

a. Different and produced continuously.
b.
c.
Similar and produced continuously.

Individual units produced to customer
specifications.
d. Purchased from vendors.
McGrawHill/Irwin
What is a Processing Department?

Any location in an organization where materials,
labor or overhead are added to the product.
The activities performed in a processing
department are performed uniformly on all
units of production. Furthermore, the output of
a processing department must be
homogeneous.
McGrawHill/Irwin
Sequential vs. Parallel Processing

Sequential
Sequential processing
processing means
means that
that units
units
flow
flow in
in aa sequence
sequence from
from one
one
department
department to
to another.
another.
Parallel
Parallel processing
processing is
is used
used when
when
after
after aa point,
point, some
some units
units go
go through
through
different
different processing
processing departments
departments
than
than others.
others. For
For example,
example, aa
petroleum
petroleum refinery
refinery separates
separates crude
crude
oil
oil into
into products
products like
like gasoline,
gasoline, jet
jet
fuel,
fuel, and
and heating
heating oil.
oil.
McGrawHill/Irwin
Comparing Job-Order
and Process Costing
Direct
Direct
Materials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Work in
Process
Finished
Finished
Goods
Goods
Cost
Cost of
of
Goods
Goods
Sold
Sold
Comparing Job-Order
and Process Costing
Costs
Costs are
are traced
traced and
and
applied
applied to
to individual
individual
jobs
jobs in
in aa job-order
job-order
cost
cost system.
system.
Direct
Direct
Materials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Jobs
Jobs
Finished
Finished
Goods
Goods
Cost
Cost of
of
Goods
Goods
Sold
Sold
Comparing Job-Order
and Process Costing
Direct
Direct
Materials
Materials
Direct
Direct Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
McGrawHill/Irwin
Costs
Costs are
are traced
traced and
and
applied
applied to
to departments
departments
in
in aa process
process cost
cost
system.
system.
Processing
Processing
Department
Department
Finished
Finished
Goods
Goods
Cost
Cost of
of
Goods
Goods
Sold
Sold
T-Account and Journal Entry Views of Cost Flows
For purposes of this example,

assume there are two
processing departments
Departments A and B.
We will use T-accounts and
journal entries.
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
Raw Materials
Direct
Materials
Work in Process
Department A
Direct
Materials
Work in Process
Department B
Direct
Materials
McGrawHill/Irwin
Process Cost Flows

(in journal entry form)
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
Wages Payable
Direct
Labor
Work in Process
Department A
Direct
Materials
Direct
Labor
Work in Process
Department B
Direct
Materials
Direct
Labor
McGrawHill/Irwin
Process Costing
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Work in Process - Department A
XXXXX
Work in Process - Department B
XXXXX
Salaries and Wages Payable
Credit
XXXXX
To record direct labor costs.
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
Work in Process
Department A
Manufacturing
Overhead
Actual
Overhead
Overhead
Applied to
Work in
Process
Direct
Materials
Direct
Labor
Applied
Overhead
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
McGrawHill/Irwin
Process Costing
(In journal entry form)
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
XXXXX
XXXXX
Manufacturing Overhead
Credit
XXXXX
To apply overhead to departments.
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
Work in Process
Department A
Direct
Transferred
Materials
to Dept. B
Direct
Labor
Applied
Overhead
McGrawHill/Irwin
Work in Process
Department B
Direct
Materials
Direct
Labor
Applied
Overhead
Transferred
from Dept. A
Process Costing
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the transfer of goods from

Department A to Department B.
McGrawHill/Irwin
Process Cost Flows

(in T-account form)
Work in Process
Department B
Direct
Cost of
Materials
Goods
Direct
Manufactured
Labor
Applied
Overhead
Transferred
from Dept. A
McGrawHill/Irwin
Finished Goods
Cost of
Goods
Manufactured
Process Costing
GENERAL JOURNAL
Date
Description
Finished Goods
Post.
Ref.
Page 4
Debit
Credit
XXXXX
XXXXX
To record the completion of goods

and their transfer from Department B
to finished goods inventory.
McGrawHill/Irwin
Process Cost Flows

Work in Process
Department B
Finished Goods
Direct
Cost of
Cost of
Cost of
Materials
Goods
Goods
Goods
Direct
Manufactured
Manufactured
Sold
Labor
Applied
Overhead
Transferred
Cost of Goods Sold
from Dept. A
Cost of
Goods
Sold
McGrawHill/Irwin
Process Costing
GENERAL JOURNAL
Date
Description
Accounts Receivable
Post.
Ref.
Page 4
Debit
Credit
XXXXX
Sales
XXXXX
To record sales on account.

Cost of Goods Sold
Finished Goods
XXXXX
XXXXX
To record cost of goods sold.
McGrawHill/Irwin
Equivalent Units of Production

Equivalent units are the product of the number of
partially completed units and the percentage
completion of those units.
We need to calculate equivalent units because a

department usually has some partially completed units
in its beginning and ending inventory.
McGrawHill/Irwin
Equivalent Units The Basic Idea

Two half completed products are
equivalent to one completed product.
So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
McGrawHill/Irwin
Quick Check
For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
b.
b. 11,500
11,500
c.
c. 13,500
13,500
d.
d. 15,000
15,000
McGrawHill/Irwin
Quick Check
For
For the
the current
current period,
period, Jones
Jones started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in process 30 percent complete.
How
How many
many equivalent
equivalent units
units of
of production
production did
did
Jones
Jones have
have for
for the
the period?
period?
a.
a. 10,000
10,000
10,000 units + (5,000 units 0.30)
b.
b. 11,500
11,500
= 11,500 equivalent units
c.
c. 13,500
13,500
d.
d. 15,000
15,000
McGrawHill/Irwin
Calculating Equivalent Units

Equivalent
Equivalent units
units can
can be
be calculated
calculated two
two
ways:
ways:
The
The First-In,
First-In, First-Out
First-Out Method
Method FIFO
FIFO is
is
covered
covered in
in the
the appendix
appendix to
to this
this chapter.
chapter.
The
The Weighted-Average
Weighted-Average Method
Method This
This
method
method will
will be
be covered
covered in
in the
the main
main portion
portion of
of the
the
chapter.
chapter.
McGrawHill/Irwin
Equivalent Units of Production

Weighted-Average Method
The weighted-average method . . .
Makes no distinction between work done in prior or
current periods.
Blends together units and costs from prior and
current periods.
Cost per
equivalent
Costs for the period

Equivalent units of production
for the period
unit
McGrawHill/Irwin
Process Costing and Direct Labor
Dollar Amount
Direct
Materials
Direct
Labor
Direct
Direct labor
labor costs
costs
may
may be
be small
small
in
in comparison
comparison to
to
Conversion
other
other product
product
costs
costs in
in process
process
cost
cost systems.
systems.
Type of Product Cost
McGrawHill/Irwin
Process Costing and Direct Labor
Dollar Amount
Direct
Materials
Direct
Direct labor
labor costs
costs
may
be
small
may
be
small
Conversion
in
in comparison
comparison to
to
other
other product
product
costs
costs in
in process
process
cost
cost systems.
systems.
Type of Product Cost
Direct
Direct labor
labor and
and manufacturing
manufacturing overhead
overhead may
may be
be
combined
combined into
into one
one product
product cost
cost called
called conversion
conversion..
McGrawHill/Irwin
Weighted-Average Example
Smith Company reported the following activity in

Department A for the month of June:
Percent Completed
Units
Work in process, June 1
300
Units started into production in June
6,000
Units completed and transferred out

of Department A during June
5,400

McGrawHill/Irwin
900
Materials Conversion
40%
20%
60%
30%
The first step in calculating the equivalent units is
to identify the units completed and transferred
out of Department A in June (5,400 units)
Materials
Units completed and transferred
out of Department A in June
McGrawHill/Irwin
5,400
Conversion
5,400
The second step is to identify the equivalent units of
production in ending work in process with respect to
materials for the month (540 units) and add this to the
5,400 units from step one.
Materials
5,400
Conversion
5,400
Work in process, June 30:

900 units 60%
Equivalent units of Production in
Department A during June
McGrawHill/Irwin
540
5,940
The third step is to identify the equivalent units of
production in ending work in process with respect to
conversion for the month (270 units) and add this to the
5,400 units from step one.
Materials
5,400
Conversion
5,400

900 units 60%
540
900 units 30%

McGrawHill/Irwin
270
5,940
5,670
Equivalent
Equivalent units
units of
of production
production always
always equals:
equals:
Units
Units completed
completed and
and transferred
transferred
++ Equivalent
Equivalent units
units remaining
remaining in
in work
work in
in process
process
Materials
5,400
Conversion
5,400

900 units 60%
540
900 units 30%

McGrawHill/Irwin
270
5,940
5,670
Materials
Materials
Beginning
Work in Process
300 Units
40% Complete
6,000 Units Started
5,100 Units Started

and Completed
5,400 Units Completed

540 Equivalent Units
5,940 Equivalent units
of production
McGrawHill/Irwin
Ending
Work in Process
900 Units
60% Complete
900 60%
Conversion
Conversion
Beginning
Work in Process
300 Units
20% Complete
6,000 Units Started
5,100 Units Started

and Completed
5,400 Units Completed

270 Equivalent Units
5,670 Equivalent units
of production
McGrawHill/Irwin
Ending
Work in Process
900 Units
30% Complete
900 30%
Production Report Weighted-Average

Production Report
Section 1
Section 2
AA quantity
quantity schedule
schedule
showing
showing the
the flow
flow of
of units
units
and
and the
the computation
computation of
of
equivalent
equivalent units.
units.
AA computation
computation of
of
cost
cost per
per equivalent
equivalent unit.
unit.
Section 3
McGrawHill/Irwin
Production Report
Production Report
Section 1
Section 2
Section 3
McGrawHill/Irwin
Cost
Cost Reconciliation
Reconciliation
section
section shows
shows the
the
reconciliation
reconciliation of
of all
all cost
cost
flows
flows into
into and
and out
out of
of the
the
department
department during
during the
the
period.
period.
Production Report Example
Assume
Assume that
that Double
Double Diamond
Diamond Skis
Skis uses
uses the
the
weighted-average
weighted-average method
method of
of process
process costing
costing to
to
determine
determine unit
unit costs
costs in
in itit Shaping
Shaping and
and Milling
Milling
Department.
Department.
McGrawHill/Irwin

Work
Work in
in process,
process, May
May 1:
1: 200
200 units
units
Materials:
Materials: 55%
55% complete
complete
Conversion:
Conversion: 30%
30% complete
complete
9,600
9,600
5,575
5,575
Production
Production started
started during
during May
May
Production
Production completed
completed during
during May
May
5,000
5,000 units
units
4,800
4,800 units
units
Costs
Costs added
added to
to production
production in
in May
May
Materials
Materials cost
cost
Conversion
Conversion cost
cost
$$ 368,600
368,600
350,900
350,900
Work
Work in
in process,
process, May
May 31
31
Materials:
40%
Materials:
40% complete
complete
Conversion:
Conversion: 25%
25% complete
complete
McGrawHill/Irwin
$$
400
400 units
units

Step1: Prepare Quantity Schedule with Equivalent Units.
Units to be accounted for:
Work in process, May 1
Started into production
Total units
200
5,000
5,200
Equivalent units
Materials
Conversion
Units accounted for as follows:

Completed and transferred
McGrawHill/Irwin
4,800
400
4,800
4,800

Total units
200
5,000
5,200
Equivalent units
Materials
Conversion

Materials 40% complete
4,800
400
4,800
160
5,200
McGrawHill/Irwin
4,800
4,960

Total units
200
5,000
5,200
Equivalent units
Materials
Conversion

Materials 40% complete
Conversion 25% complete
4,800
400
4,800
160
5,200
McGrawHill/Irwin
4,800
4,960
100
4,900
Step 2: Calculating the Costs Per Equivalent

Unit
To calculate the cost per equivalent unit
for the period:
Cost per
equivalent
Costs for the period

Equivalent units of production
for the period
unit
McGrawHill/Irwin

Step 2: Compute the cost per equivalent unit.
Total
Cost
Cost to be accounted for:
Costs added in the Shipping
and Milling Department
Total cost
Equivalent units
15,175
Materials
Conversion
9,600
5,575
719,500
368,600
350,900
$ 734,675
$ 378,200
$ 356,475
4,960
4,900
Cost per equivalent unit
McGrawHill/Irwin

Total
Cost
Total cost
15,175
Materials
Conversion
5,575
719,500
368,600
350,900
$ 734,675
$ 378,200
$ 356,475
4,960
4,900
Equivalent units
9,600
76.25
$378,200 4,960 units = $76.25

McGrawHill/Irwin

Total
Cost
Total cost
Equivalent units
15,175
Materials
Conversion
9,600
719,500
368,600
350,900
$ 734,675
$ 378,200
$ 356,475
4,960
4,900

$ 76.25
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
McGrawHill/Irwin
5,575
$356,475 4,900 units = $72.75
72.75

Step 3: Prepare a Cost Reconciliation
Total
Cost
Cost accounted for as follows:
Transferred out during May
Work in process, May 31:
Materials
Conversion
Equivalent Units
4,800
4,800
160
100
Total work in process, May 31

Total cost accounted for
McGrawHill/Irwin

4,800 units @ $149.00
Materials
Conversion
Total
Cost
$ 715,200
Equivalent Units
4,800
4,800
160
100

McGrawHill/Irwin

160 units @ $76.25
Materials
Conversion
McGrawHill/Irwin
Total
Cost
Equivalent Units
Materials
100
units @ Conversion
$72.75
$ 715,200
4,800
12,200
7,275
160
19,475
$ 734,675
4,800
100
All costs
accounted for
Operation Costing
Operation
Operation costing
costing is
is aa hybrid
hybrid of
of job-order
job-order
and
and process
process costing
costing because
because itit
possesses
possesses attributes
attributes of
of both
both approaches.
approaches.
Job-order
Costing
Operation Costing
(Products produced in batches)
Material
MaterialCosts
Costscharged
charged
to
tobatches
batchesas
asin
in
job-order
job-ordercosting.
costing.
McGrawHill/Irwin
Process
Costing
Conversion
Conversioncosts
costs
assigned
assignedto
tobatches
batches
as
asin
inprocess
processcosting.
costing.
FIFO Method
Appendix 4A
McGrawHill/Irwin
FIFO vs. Weighted-Average Method

The FIFO method (generally considered more
accurate that 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 in the cost
reconciliation report.
McGrawHill/Irwin
Equivalent Units FIFO Method

Lets revisit the Smith Company example.
Assume the following activity is reported in
Department A for the month of June:
Percent Completed
Units
300
6,000

5,400

McGrawHill/Irwin
900
40%
20%
60%
30%

Step 1:
1 Determine the number of units completed and
transferred out of Department A in June.
Percent Completed
Units
300
6,000

5,400

McGrawHill/Irwin
900
40%
20%
60%
30%

Step 2:
2 Add the equivalent units of production in ending
work in process inventory (540 units for material and 270
units for conversion) to the units completed and transferred
our during June.
McGrawHill/Irwin

Step 3:
3 Subtract the equivalent units in beginning work in process
inventory (120 units for materials and 60 units for conversion) from the
sum of the units completed and transferred out and the equivalent
units in ending work in process inventory.
McGrawHill/Irwin
Materials
Materials
Beginning
Work in Process
300 Units
40% Complete
McGrawHill/Irwin
6,000 Units Started
5,400 Units Started

and Completed
Ending
Work in Process
900 Units
60% Complete
Conversion
Conversion
Beginning
Work in Process
300 Units
20% Complete
McGrawHill/Irwin
6,000 Units Started
5,400 Units Started

and Completed
Ending
Work in Process
900 Units
30% Complete
Equivalent Units: Weighted Average vs. FIFO

As shown below, the equivalent units in beginning inventory are
subtracted from the equivalent units of production per the weightedaverage method to obtain the equivalent units of production under
the FIFO method.
McGrawHill/Irwin
The Production Report - FIFO Method

Lets revisit the Double Diamond Skis Shaping and Milling
Department for the Month of May to prepare our production report.
Work
Work in
in process,
process, May
May 1:
1: 200
200 units
units
Materials:
Materials: 55%
55% complete
complete
Conversion:
Conversion: 30%
30% complete
complete
Production
Production started
started during
during May
May
Production
Production completed
completed during
during May
May
Costs
Costs added
added to
to production
production in
in May
May
Materials
Materials cost
cost
Conversion
Conversion cost
cost
Work
Work in
in process,
process, May
May 31
31
Materials:
40%
Materials:
40% complete
complete
Conversion:
Conversion: 25%
25% complete
complete
McGrawHill/Irwin
$$ 9,600
9,600
5,575
5,575
$15,
$15, 175
175
5,000
5,000 units
units
4,800
4,800 units
units
$$ 368,600
368,600
350,900
350,900
400
400 units
units

Step 1:
1 Prepare the quantity schedule and compute
equivalent units.
McGrawHill/Irwin

Step 2:
2 Calculate the equivalent units of material and conversion
that were transferred from beginning work in process to the next
department.
McGrawHill/Irwin

Step 3:
3 Determine the number of units started and
completed during the period.
McGrawHill/Irwin

Step 4:
4 Calculate the equivalent units of material and
conversion that are in ending work in process inventory.
McGrawHill/Irwin

Step 5:
5 Calculate the total equivalent units for
materials and conversion.
McGrawHill/Irwin
Cost per Equivalent Unit

Notice that the costs of beginning work in process
inventory of $15,175, is not broken down by
materials and conversion components
McGrawHill/Irwin

We divide the costs added in the Shipping and
Milling Department by the number of equivalent
unit for materials.
McGrawHill/Irwin

We follow the same procedure for conversion and
add the two equivalent unit costs to get the total cost
per equivalent unit.
McGrawHill/Irwin
Cost Reconciliation
Step 1:
1 Calculate the total cost from beginning
inventory transferred to the next department.
McGrawHill/Irwin
Cost Reconciliation
Step 2:
2 Calculate the cost of units started and
completed during the period.
4,600 units $148.50
McGrawHill/Irwin
Cost Reconciliation
Step 3:
3 Calculate the costs in ending working in process
inventory and the sum of the cost accounted for.
McGrawHill/Irwin
All costs
accounted for
End of Chapter 4
McGrawHill/Irwin

Chap 04 Notes

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Chap 04 Notes

Hochgeladen von

Copyright:

Verfügbare Formate

11th Edition

Similarities Between Job-Order and Process

Differences Between Job-Order and Process

Process costing is used for products that are:

Similar and produced continuously.

Process costing is used for products that are:

Similar and produced continuously.

What is a Processing Department?

Sequential vs. Parallel Processing

T-Account and Journal Entry Views of Cost Flows

For purposes of this example,

Process Cost Flows

Process Cost Flows

Process Cost Flows

Work in Process - Department A

Work in Process - Department B

Salaries and Wages Payable

To record direct labor costs.

Process Cost Flows

Work in Process - Department A

Work in Process - Department B

To apply overhead to departments.

Process Cost Flows

To record the transfer of goods from

Process Cost Flows

To record the completion of goods

Process Cost Flows

To record sales on account.

To record cost of goods sold.

Equivalent Units of Production

We need to calculate equivalent units because a

Equivalent Units The Basic Idea

Calculating Equivalent Units

Equivalent Units of Production

Costs for the period

Process Costing and Direct Labor

Type of Product Cost

Process Costing and Direct Labor

Type of Product Cost

Smith Company reported the following activity in

Units started into production in June

Units completed and transferred out

Work in process, June 30

Work in process, June 30:

Work in process, June 30:

900 units 30%

Work in process, June 30:

900 units 30%

6,000 Units Started

5,100 Units Started

5,400 Units Completed

6,000 Units Started

5,100 Units Started

5,400 Units Completed

Production Report Weighted-Average

Production Report Example

Production Report Example

Production Report Example

Units accounted for as follows:

Production Report Example

Units accounted for as follows:

Production Report Example

Units accounted for as follows:

Step 2: Calculating the Costs Per Equivalent