17-1 similarities and differences between job order cost and process cost systems job order cost ...
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17-1
Similarities and Differences Between Job Order Cost and Process Cost Systems
Job Order Cost
Costs assigned to each job.
Products have unique characteristics.
Process Cost
Costs tracked through a series of connected mfg processes or departments … (mixing, baking, packaging etc).
Products are uniform or identical (homogenous) and produced in a large volume.
Nature of Process Cost SystemsNature of Process Cost Systems
17-2
Illustration 17-2
Process and Job Cost Comparison
Nature of Process Cost SystemsNature of Process Cost Systems
17-3
Nature of Process Cost SystemsNature of Process Cost Systems
Every production department has it’s own Work-In-Process account.
If you have 5 departments you have 5 “Work-In-Process” accounts
One Work In Process Account
17-4
Process Cost Flow
Illustration 17-5
TCorp makes skateboard wheels. Manufacturing consists of two
processes: machining and assembly. Machining Dept shapes &
drills materials. Assembly Dept assembles & packages the parts.
Nature of Process Cost SystemsNature of Process Cost Systems
17-5
Assigning Manufacturing Costs
Handling materials, labor, and overhead same as in Ch 16.
► Debit Raw Materials Inv for purchases of raw materials
CREDIT W-I-P to assign direct materials costs.
► Debit Factory Labor for factory labor incurred.
CREDIT W-I-P to assign direct labor costs.
► Debit Factory (Mfg) Overhead for actual cost incurred
CREDIT W-I-P to apply (estimated) Mfg Overhead costs.
Use of more than one W-I-P (Work-In-Process) is different
in “process cost” (ch 17) versus “job order cost” (Ch 16)
17-6
A process cost system requires fewer material requisition
slips than a job order cost system.
► Materials are used for processes and not specific jobs.
► Requisitions are for larger quantities of materials.
► Journal entry to record materials used:
Material Costs
Nature of Process Cost SystemsNature of Process Cost Systems
17-7
Handling materials, labor, and overhead same as in Ch 16.
► Debit Raw Materials Inv for purchases of raw materials
CREDIT W-I-P to assign direct materials costs.
► Debit Factory Labor for factory labor incurred.
CREDIT W-I-P to assign direct labor costs.
► Debit Factory (Mfg) Overhead for actual cost incurred
CREDIT W-I-P to apply (estimated) Mfg Overhead costs.
Use of more than one W-I-P (Work-In-Process) is different
in “process cost” (ch 17) versus “job order cost” (Ch 16)
Assigning Manufacturing Costs
17-8
Time tickets may be used in both systems.
All labor costs incurred within a production department are
a cost of processing.
The journal entry to record factory labor costs:
Nature of Process Cost SystemsNature of Process Cost Systems
Factory Labor Costs
17-9
Handling materials, labor, and overhead same as in Ch 16.
► Debit Raw Materials Inv for purchases of raw materials
CREDIT W-I-P to assign direct materials costs.
► Debit Factory Labor for factory labor incurred.
CREDIT W-I-P to assign direct labor costs.
► Debit Factory (Mfg) Overhead for actual cost incurred
CREDIT W-I-P to apply (estimated) Mfg Overhead costs.
Use of more than one W-I-P (Work-In-Process) is different
in “process cost” (ch 17) versus “job order cost” (Ch 16)
Assigning Manufacturing Costs
17-10
Objective of assigning overhead is to allocate overhead to
production departments on objective and equitable basis.
Use the activity that “drives” or causes the costs.
Machine time used - primary driver.
Journal entry to allocate overhead:
Manufacturing Overhead Costs
Nature of Process Cost SystemsNature of Process Cost Systems
17-12
Equivalent Units of Production Equivalent Units of Production (EUP)(EUP)
A term used in cost accounting to arrive at the cost per unit.
* associated with the units that are not completed at the end of an accounting period (work-in-process).
* indicates how much work was done on the work units that are still in-process units at the end of a designated period.
* basically, all of the work-in-process inventory at the end of a period is expressed as fully-completed units which gives us the equivalent units of production.
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Equivalent units is a concept expressing a Equivalent units is a concept expressing a number of partially completed units as a number of partially completed units as a smaller number of fully completed units.smaller number of fully completed units.
Equivalent units is a concept expressing a Equivalent units is a concept expressing a number of partially completed units as a number of partially completed units as a smaller number of fully completed units.smaller number of fully completed units.
2 half full pitchers = 1 full pitcher.
+ =
Equivalent Units of Production Equivalent Units of Production (EUP)(EUP)
17-14
Illustration: Suppose a professor is asked to compute the cost of instruction per full-time equivalent student at your college. The college’s finance dept. provides the following information.
Costs:
Total cost of instruction $9,000,000
Student population:
Full-time students 900
Part-time students 1,000
Illustration 17-6
Equivalent UnitsEquivalent Units
17-15
Total cost of instruction $9,000,000
Number of full-time equivalent students / 1,500
$ 6,000
Illustration 17-7
Illustration: Part-time students take 60% of the classes of a full-time student during the year. To compute the number of full-time equivalent students per year, you would make the following computation.
Cost of instruction per full-time equivalent student =
Equivalent UnitsEquivalent Units
17-16
Considers the degree of completion (weighting) of
units completed and transferred out and units in ending
work in process.
Most widely used method.
Beginning work in process not part of computation of
equivalent units.Illustration 17-8
Equivalent UnitsEquivalent Units
Weighted Average Method
17-17
Illustration: Output of the Packaging Dept consists of:
•10,000 units completed and transferred out,
•5,000 units in ending W-I-P which are 70% completed.
Calculate the equivalent units of production.
Completed units …………………...... __________
Work in process equivalent units …. __________
Equivalent UnitsEquivalent Units
Weighted Average Method
17-18
Illustration: Output of the Packaging Dept consists of:
•10,000 units completed and transferred out,
•5,000 units in ending W-I-P which are 70% completed.
Calculate the equivalent units of production.
Equivalent UnitsEquivalent Units
Weighted Average Method
Completed units ………………………… 10,000Work in process EU (5,000 x 70%) ……. 3,500
13,500
17-19
The bread (product) is still a work “In Process”.
The Manufacturing Process is NOT complete.
The bread (product) is still a work “In Process”.
The Manufacturing Process is NOT complete.
W-I-P Baking
25% ofLabor andOverhead
20% ofMaterial
W-I-P Mixing
80% ofMaterial
35% ofLabor andOverhead
EUP while still “work-in-process”EUP while still “work-in-process”
At this point in time
100% Complete
for Materials
At this point in time
60% Complete for Labor &
Overhead
Month End
Month End
Month End
17-20
Illustration: Kellogg produces Eggo® Waffles using three
departments: Mixing, Baking, and Packaging.
The Mixing Department combines dry ingredients, including
flour, salt, and baking powder, with liquid ingredients, including
eggs and vegetable oil, to make waffle batter.
Illustration 17-9 provides information related to the Mixing
Department at the end of June.
Refinements on the Weighted-Average Method
Equivalent UnitsEquivalent Units
17-21
Illustration: Info for the Mixing Dept at the end of June.
Equivalent UnitsEquivalent Units
Refinements on the Weighted-Average Method
* Conversion costs = labor costs + overhead costs.
17-22
Beginning work in process is not part of the
equivalent-units-of-production formula … WHY NOT ?
Equivalent UnitsEquivalent Units
17-23
Conversion CostsConversion Costs
Conversion costs are those costs required to convert raw materials into finished goods that are ready for sale.
Conversion costs = Direct labor + Manufacturing overhead
Examples of costs that may be considered conversion costs are: Direct labor & benefits Equipment depreciation Equipment maintenance Factory rent Factory supplies Factory insurance Factory utilities Factory supervisors
Most conversion costs are likely to be “manufacturing overhead”.
17-24
The fabricating department has the following production and
cost data for the current month.
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
Materials are entered at the beginning of the process. The
ending work in process units are 30% complete as to
conversion costs.
Compute the equivalent units of production for (a) materials and
(b) conversion costs.
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Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out …………. 15,000
Ending work in process units .. 10,000
25,000
The fabricating department has the following production and
cost data for the current month.
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
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Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out …… 15,000
Equiv Units-ending WIP .. 3,000 (10,000 x 30%)
18,000
The fabricating department has the following production and
cost data for the current month.
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
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A production cost report is the
Key document used to understand activities.
Prepared for each department and shows Production
Quantity and Cost data.
Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
Production Cost ReportProduction Cost Report
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Illustration 17-12Flow of costs in makingEggo® Waffles
Production Cost ReportProduction Cost Report
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Illustration 17-13 Unit and cost data—Mixing Department
Production Cost ReportProduction Cost Report
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Physical units - actual units to be accounted for
during a period, regardless of work performed.
Total units to be accounted for - units started (or
transferred) into production during the period + units
in production at beginning of period.
Total units accounted for - units transferred out
during period + units in process at end of period.
Compute the Physical Unit Flow (Step 1)
Production Cost ReportProduction Cost Report
17-34
Illustration 17-14
Production Cost ReportProduction Cost Report
Compute the Physical Unit Flow (Step 1)
17-35
Mixing Department
Department adds materials at beginning of process and
Incurs conversion costs uniformly during the process.Illustration 17-15
Production Cost ReportProduction Cost Report
Compute Equivalent Units of Production (Step 2)
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Costs expressed in terms of equivalent units of
production.
When equivalent units of production are different for
materials and for conversion costs, three unit costs are
computed:
1. Materials
2. Conversion
3. Total Manufacturing
Compute Unit Production Costs (Step 3)
Production Cost ReportProduction Cost Report
17-37 LO 6
Compute total materials cost related to Eggo® Waffles:
Work in process, June 1
Direct materials costs $ 50,000
Cost added to production during June
Direct material cost 400,000
Total material costs $450,000
Illustration 17-17
Illustration 17-16
Production Cost ReportProduction Cost Report
Compute Unit Production Costs (Step 3)
17-38
Compute total conversion costs related to Eggo® Waffles:
Work in process, June 1
Conversion costs $ 35,000
Costs added to production during June
Conversion costs 170,000
Total conversion costs $205,000
Illustration 17-19
Production Cost ReportProduction Cost Report
Compute Unit Production Costs (Step 3)
Illustration 17-18
17-39
Compute total manufacturing costs per unit: Illustration 17-20
Production Cost ReportProduction Cost Report
Compute Unit Production Costs (Step 3)Illustration 17-19
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Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows.
Costs to be accounted for
Work in process, June 1 $ 85,000
Started into production 570,000
Total costs $655,000
Illustration 17-21
Production Cost ReportProduction Cost Report
Prepare a Cost Reconciliation Schedule (Step 4)
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Prepare the Production Cost Report
LO 7
Production Cost ReportProduction Cost ReportIllustration 17-23
17-43
Companies often use a combination of a process cost
and a job order cost system.
Called operations costing, this hybrid system is similar
to process costing in its assumption that standardized
methods are used to manufacture the product.
At the same time, the product may have some
customized, individual features that require the use of
a job order cost system.
Costing Systems – Final Comments
Production Cost ReportProduction Cost Report