ACN3101 TOPIC 9 211224.ppt

Process Costing
ACN3101
Topic 9

Job-order
Costing
Process
Costing
 Many units of a single, homogeneous product
flow evenly through a continuous production
process.
 One unit of product is indistinguishable from any
other unit of product.
 Each unit of product is assigned the same
average cost.
Types of Costing Systems Used
to Determine Product Costs

Types of Costing Systems Used
to Determine Product Costs
Job-order
Costing
Process
Costing
Typical process cost applications:
 Petrochemical refinery
 Paint manufacturer
 Paper mill

Job order costing
 Many jobs are worked
during the period.
 Costs are accumulated
by individual jobs.
 Job cost sheet is the
key document.
 Unit cost computed by
job.
Process costing
 A single product is
produced for a long
period of time.
 Costs are accumulated
by departments.
 Department production
report is key document.
 Unit costs are computed
by department.
Differences Between Job-
Order and Process Costing

Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer
specifications.
d. Purchased from vendors.
Quick Check 

Process Costing
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct
Materials
Type of Product Cost
Dollar
Amount
Direct
Labor
Overhead

Process Costing
Type of Product Cost
Dollar
Amount
Conversion
So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
Direct labor costs
may be small
in comparison to
other product
costs in process
cost systems.
Direct
Materials

Comparing Job-Order
and Process Costing
Finished
Goods
Cost of
Goods
Sold
Work in
Process
Direct
Materials
Direct Labor
Manufacturing
Overhead

Comparing Job-Order
and Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Jobs
Costs are traced and
applied to individual
jobs in a job-order
cost system.
Direct
Materials

Comparing Job-Order
and Process Costing
Finished
Goods
Cost of
Goods
Sold
Direct Labor
Manufacturing
Overhead
Processing
Department
Costs are traced and
applied to departments
in a process cost
system.
Direct
Materials

Process Cost Flows
Let’s look at cost flows in a
process cost system with
Departments A and B.
We will use
T-accounts and
start with materials.

Raw Materials
•Purchases •Direct
Materials
Process Cost Flows
•Indirect
Materials
•Direct
Materials
Work in Process
Department B
Work in Process
Department A
•Other
Overhead
Manufacturing
Overhead
Actual Applied
•Indirect
Materials
•Direct
Materials
•Direct
Labor

Process Cost Flows
Work in Process
Department B
•Direct
Labor
Work in Process
Department A
•Other
Overhead
Manufacturing
Overhead
Actual Applied
•Indirect
Materials
•Indirect
Labor
Wages Payable
•Direct
Labor
•Indirect
Labor
•Direct
Materials
•Direct
Labor
•Direct
Materials

Process Cost Flows
Work in Process
Department B
Work in Process
Department A
•Overhead
Applied to
Work in
Process
•Applied
Overhead
•Applied
Overhead
•Other
Overhead
Manufacturing
Overhead
Actual Applied
•Indirect
Materials
•Indirect
Labor
•Direct
Labor
•Direct
Materials
•Direct
Labor
•Direct
Materials

Process Cost Flows
Next, transfer work
from Department A
to Department B.

Process Cost Flows
Work in Process
Department B
Work in Process
Department A
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Direct
Materials
•Direct
Labor
•Applied
Overhead
Transferred
to Dept. B
•Transferred
from Dept. A

Process Cost Flows
Now let’s complete
the goods in
Department B
and sell them.

Finished Goods
Cost of Goods Sold
Process Cost Flows
Work in Process
Department B
•Cost of
Goods
Manufactured
•Direct
Materials
•Direct
Labor
•Applied
Overhead
•Transferred
from Dept. A
•Cost of
Goods
Sold
•Cost of
Goods
Sold
•Cost of
Goods
Manufactured

Equivalent Units of Production
Equivalent units are partially complete
and are part of work in process
inventory. Partially completed
products are expressed in terms of a
smaller number of fully completed
units.

Two half completed products are
equivalent to one completed product.
So, 10,000 units 70 percent complete
are equivalent to 7,000 complete units.
+ = 1

For the current period, Jones 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
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check 

For the current period, Jones 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
Jones have 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 

Calculating and Using
To calculate the cost per
equivalent unit for the period:
Cost per
equivalent
unit
=
Costs for the period
Equivalent units of production
for the period

Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent unit
for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Quick Check 

Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent unit
for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Quick Check 

Equivalent Units of Production –
Weighted Average Method
The weighted average method . . .
 Makes no distinction between work done in prior
and current period.
 Blends together units and costs from prior
period and current period.
Let’s see how this works!

Weighted Average Example
Smith Company reported the following activity
in Department A for 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%

Equivalent units are calculated as follows:
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400

Work in process, June 30:
900 units × 60% 540
Equivalent units of Production in
Department A during June 5,940

900 units × 60% 540
900 units × 30% 270
Department A during June 5,940 5,670

900 units × 60% 540
900 units × 30% 270
Department A during June 5,940 5,670
Equivalent units of production always equals:
+ Equivalent units remaining in work in process

Beginning
Work in Process
300 Units
40% Complete
Ending
Work in Process
900 Units
60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Started
and Completed
Materials
540 Equivalent Units 900 × 60%
5,940 Equivalent units
of production

6,000 Units Started
5,100 Units Started
and Completed
270 Equivalent Units 900 × 30%
5,670 Equivalent units
of production
Beginning
Work in Process
300 Units
20% Complete
Ending
Work in Process
900 Units
30% Complete
Conversion

Production Report
Production
Report
Helps managers
control their
departments
Provides cost
information for
financial
statements
Shows the flow
of units and costs
through work in
process
Becomes the
job cost sheet
in process
costing

Production Report
A computation of
cost per equivalent unit.
Section 1
Section 2
Section 3
Production Report
A quantity schedule
showing the flow of units
and the computation of
equivalent units.

Production Report
 A reconciliation of cost
flows for the period,
including:
Total cost for units
completed and
transferred from the
processing department.
Total cost for partially
completed units
remaining in work in
process.
Section 1
Section 2
Section 3
Production Report

Double Diamond Skis uses process costing to
determine unit costs in its Shaping and Milling
Department.
Double Diamond uses the weighted average
cost procedure.
Using the following information for the month of
May, let’s prepare a production report for
Shaping and Milling.
Production Report Example

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

Section 1: Quantity Schedule with Equivalent Units
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800

Total units 5,200
Equivalent units
Materials 40% complete 160
5,200 4,960

Total units 5,200
Equivalent units
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900

Section 2: Compute cost per equivalent unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175
$ 9,600
$ 5,575
$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675
$ 378,200
$ 356,475
$
Equivalent units 4,960 4,900
Cost per equivalent unit

Total
$ 9,600
$ 5,575
$
Total cost 734,675
$ 378,200
$ 356,475
$
Cost per equivalent unit 76.25
$
$378,200 ÷ 4,960 units = $76.25

Total
$ 9,600
$ 5,575
$
Total cost 734,675
$ 378,200
$ 356,475
$
Cost per equivalent unit 76.25
$ 72.75
$
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
$356,475 ÷ 4,900 units = $72.75

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

Transferred out during May 715,200
$ 4,800 4,800
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
4,800 units @ $149.00

Transferred out during May 715,200
$ 4,800 4,800
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475
Total cost accounted for 734,675
$
160 units @ $76.25
All costs
accounted for
100 units @ $72.75

Trends in Process Operations
Process
design Just-in-
time
production
Robotics &
Automation
Services
Customer
orientation
Continuous
Processing
© McGraw-Hill Education 20-49
Learning Objective P4: Record the transfer of goods across departments, to Finished Goods Inventory,
and to Cost of Goods Sold.

ACN3101 TOPIC 9 211224.ppt

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