Process CostingObjectives

— Compare job order and process costing

— Talk about costs to account for

— Understand the concept of equivalent units

ProcessCosting

Job-OrderCosting

• Used for production of small, identical, low cost items.

• Mass produced, automated continuous production process.

• Costs cannot be directly traced to each unit of product.

Types of Product-Costing Systems

• Used for production of large, unique, high-cost items.

• Built to order rather than mass produced.

• Many costs can be directly traced to each job.

Direct Materials

Direct Materials

Direct LaborDirect Labor

Manufacturing Overhead

Manufacturing Overhead

Job No. 1Job No. 1

Job No. 2Job No. 2

Job No. 3Job No. 3

Accumulating Costs - Job-Order Costing System

Cost of

Goods

Sold

Cost of

Goods

Sold

Finished

Goods

Finished

Goods

Process AProcess A

Process BProcess B

AssemblyAssembly

Assigning Costs - Process Costing

Cost of Goods Sold

Account

Cost of Goods Sold

Account

Finished Goods

Account

Finished Goods

Account

Direct Materials

Direct Materials

Direct LaborDirect Labor

Manufacturing Overhead

Manufacturing Overhead

Work-in-Process

Commonalities: Job Order & Process

The same purpose - assign manu-facturing costs to Cost of Goods Sold, inventories, and products

Both systems use the same basic manufacturing accounts

The flow of costs through each system is similar

Differences – Job Order & Process

The flow of units in a process system is more or less continuous and units are indistinguishable from one anotherCosts are accumulated by department (activity) rather than by job. A firm is likely to have more than one Work-in-Process (subsidiary) inventory account.

Process Costing

DirectMaterial Direct-labor costs

are usually smallin comparison to

other productcosts in process

cost systems.(high level of automation)

Type of Product Cost

Do

llar

Am

oun

t

DirectLabor

ManufacturingOverhead

Process Costing

DirectMaterial

Conversion

Direct-labor costsare usually smallin comparison to

other productcosts in process

cost systems.(high level of automation)

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

Type of Product Cost

Do

llar

Am

oun

t

Process Costing - 5 Key Steps

Step 1 -- Summarize the flow of physical units -- where are the costs?

Step 2 -- Calculate output in terms of Equivalent Units

Step 3 -- Summarize total costs to account for which are the costs charged (debited) to WIP

Step 4 -- Calculate equivalent unit costs

Step 5 -- Apply/assign costs to units completed and to units in the ending WIP

Equivalent Units of Production –Weighted-Average Method

Makes no distinction between work done in the prior period and work done in the current period.

Blends together units and costs from the prior period and the current period.

The weighted-average method . .

Step 1 and Step 2 -- Equivalent Units

Costs are accumulated for a period of time for products in work-in-process inventory.

Products in work-in-process inventory at the beginning and end of the period are only partially complete.

Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

Step 1 and Step 2: In Pictures

Two one-half completed products are equivalent to one completed product.

+ =

So, 10,000 units 80 percent completeare equivalent to ? complete units.

During the current period, Regina started 15,000 units and completed 10,000 units, leaving 5,000 units in process, 30 percent complete.

How many equivalent units of production did Regina have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units Question 1

Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units for the period

Regina incurred $27,600 in production costs for the 11,500 equivalent units. What was Regina’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units Question 2

MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching.

MVP uses the weighted-average process costing method.

Material is added at the beginning of the Cutting Department, and conversion costs are incurred uniformly throughout the process.

A Process Costing Example

Work in process, March 1: 20,000 units 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 unitsMaterials 100% complete.Conversion 50% complete.

Costs incurred during MarchMaterials cost $ 90,000Conversion cost 193,500

Cost

Production Report

(1) Analysis of Physical Flow of Units

PhysicalUnits

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

Conversion Equivalent UnitsPhysical 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 40,000 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

100% of 10,000 units, allmaterial added at beginning

(2) Calculation of Equivalent Units

Conversion Equivalent UnitsPhysical 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 40,000 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

(2) Calculation of Equivalent Units (con’t)

50% of 10,000 units

Beginning inventory % is not used in weighted-average method.

(3) Computation of total costs to account for

DirectMaterial 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$

(4) Computation of unit costs

DirectMaterial Conversion Total

Work in Process, March1 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$

$140,000 ÷ 50,000 equivalent units

$200,700 ÷ 45,000 equivalent units

$2.80 + $4.46

(5) Analysis of total costs

Cost of goods completed and transferred during March 40,000 units × $7.26 per equivalent unit 290,400$

Cost of goods completed and transferred during March 40,000 units × $7.26 per equivalent unit 290,400$

Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units × $2.80 per equivalent unit 28,000$

Conversion: 5,000 equivalent units × $4.46 per equivalent unit 22,300

Total cost of March 31 work in process 50,300

Total costs accounted for 340,700$All costs

accounted for

(5) Analysis of total costs

Equivalent Units Practice

The following data are from Energy Resource’s Amarillo Plant:

WIP, November 1 2,000,000 gallons

DM 100% complete

CC 25% complete

Units started during November 950,000 gallons

WIP, November 30 240,000 gallons

DM 100% complete

CC 80% complete

Calculate the equivalent unit amounts necessary to determine per unit costs.

Process Costing

Equivalent Units Physical

Units % comp w/r/t CC

Direct Materials

Conversion Costs

Beginning WIP Total units started Units to account for Comp & Transferred Out

Ending WIP Units to account for

Process Costing

Equivalent Units Physical

Units % comp w/r/t CC

Direct Materials

Conversion Costs

Beginning WIP Total units started Units to account for Comp & Transferred Out

Ending WIP Units to account for

Process Costing Practice

Centura completed and transferred 900,000 units to finished goods during 1999. WIP as of December 31, 1999, had 300,000 units that were 50% complete w/r/t CC and 100% w/r/t DM. Finished goods inventory consisted of 200,000 units. Materials are added at the beginning of production and overhead is applied at a rate of 60% of direct labor costs. There was no finished goods inventory on January 1, 1999. Their inventory cost records provide the following information:

Units Materials Labor

WI P 1/ 1/ 1999 (80% complete w/ r/ t CC) 200,000 $200,000 $315,000

Units started in production 1,000,000

Direct materials cost $1,300,000

Direct labor cost $1,995,000

Costs

Process Costing

Equivalent Units Physical

Units % comp w/r/t CC

Direct Materials

Conversion Costs

Beginning WIP Total units started Units to account for Comp & Transferred Out

Ending WIP Units to account for

Process Costing in Subsequent Production Departments

An added complication in process costing system is that production often takes place in more than one department.

In the previous example, only costs and units in the MVP’s Cutting Department were taken into consideration.

Now let’s work with the Cutting and Stitching Department.

Subsequent Departments

Work In Process Inventory:

Stitching Department

Work In Process Inventory:

Cutting Department

Directmaterial

Conversion:Direct laborManufacturingoverhead

Cost of goodscompleted andtransferredout

Transferred-in costs

Directmaterial

Conversion:Direct laborManufacturingoverhead

Cost of goodscompleted andtransferredout

MVP Sports - Additional FactsIn Stitching, DM are added at the end of production process.

40,000 units from Cutting are transferred in to Stitching during March

10,000 units are in Stitching’s Beginning WIP (March 1)

30,000 units are transferred to Finished Goods in March

With respect to Stitching’s Ending WIP (March 31)

Transferred In: 100% complete

Direct Material: None

Conversion: 90% complete

Transferred-In Costs

The costs assigned to the units completed in each department and transferred to the next department’s work in process inventory account.

Equivalent Units for Stitching

Step 1

Physical Units

% comp w/r/t Transferred

conversion In DM CC

Step 2

Equivalent Units