Managerial accounting 5th jiambalvo ch03

Cost Flows through Departments Cost Flows through Departments  Manufacturing operations typically pass through two or more departments  Costs are accumulated in each department  Ea

Prepared by

Debby Bloom-Hill

CHAPTER 3

Process Costing

Difference Between Job-Order and Process Costing Systems

Difference Between Job-Order and Process Costing Systems

 Job-Order Costing

 Each unique product or batch is

considered a job for which cost

information is needed

 Necessary to trace manufacturing

costs to specific jobs

 When completed, cost of job is

removed from Work in Process and

included in Finished Goods

Difference Between Job-Order and Process Costing Systems

Difference Between Job-Order and Process Costing Systems

 When completed, number of units

completed times average cost

determines cost to be moved from

WIP to Finished Goods

Which of the following characteristics are

associated with a process costing system?

a Heterogeneous products

b Homogeneous products

Answer: b

Which of the following characteristics

are associated with a process costing

Which of the following characteristics

are associated with a process costing

system?

a Costs are traced to jobs

b Costs are traced to processing

departments

Answer: b

 Job order costing requires tracing costs

to jobs

 Process costing is associated with

tracing costs to departments

Test Your Knowledge 3

An example of a business requiring a process costing system would be

a(n):

a Custom cabinet shop

b Antique furniture restorer

c Soap manufacturer

d Automobile repair shop

Answer: c

A soap manufacturer produces many

Test Your Knowledge 4

Job-Order Costing System

Process Costing System

Cost Flows through

Departments

Cost Flows through

Departments

 Manufacturing operations typically

pass through two or more departments

 Costs are accumulated in each

department

 Easy to identify when materials are

added

 Harder to identify when labor and

overhead are added

 Often grouped together as conversion costs

 Assumed to be added evenly throughout the process

The costs in a process costing system are traced to:

a Specific jobs

b Specific customers

c Specific company administrators

d Specific production departments

Answer: d

Specific production departments

Test Your Knowledge 5

Cost Flows through

Accounts

Cost Flows through

Accounts

 The product costs accumulated in

process are the same as in job-order

costing

 Direct materials

 Direct labor

 Manufacturing overhead

 A processing department might have

transferred in costs from another department

 Each processing department

accumulates product cost in a separate Work in Process account

Cost Flows through

Accounts

Cost Flows through

Accounts

 Direct Material

 Suppose that $142,000 of direct

materials are used

Cost Flows through

Accounts

Cost Flows through

Accounts

 Direct Labor

 Suppose that $62,200 of direct labor

costs are incurred

Cost Flows through

Accounts

Cost Flows through

Accounts

 Manufacturing Overhead

 A company may use either actual

overhead costs or a predetermined

overhead rate to assign overhead to

Cost Flows through

Accounts

Cost Flows through

Accounts

 Manufacturing Overhead

 Suppose manufacturing overhead is

applied at a rate of $3 per direct labor

Cost Flows through

 Related costs are transferred as well

 Suppose the Mixing Department

completed units with a cost of $360,000

(date) Work in Process, Packaging 360,000

Work in Process, Mixing 360,000

Flow of Costs Between Processing Departments

Flow of Costs Between Processing Departments

Calculating Unit Cost

 Equivalent Units

 Partially completed units are converted to

a comparable number of completed units, called equivalent units

 Multiply the number of units by the percent complete to calculate the equivalent units

 100 units that are 50% complete are equivalent to 50 complete units (100 x 50%)

 Equivalent units may be different for

material and conversion costs if materials and conversion costs enter production at

different times.

Equivalent Units – Material

and Conversion Costs

Equivalent Units – Material

and Conversion Costs

Calculating Equivalent

Units

Calculating Equivalent

Units

 Equivalent units are normally

calculated for materials and

conversion costs

 The equivalent units produced is the

sum of the units finished and the

units in ending work in process

 Units finished are always 100%

complete in terms of materials and conversion costs

 Multiply the number of units in ending work in process by the corresponding

At Rainier Chemical, conversion costs (labor

and overhead) enter evenly throughout the

production process At the end of the year,

200 units in work in process are 80 percent

complete With respect to conversion costs,

how many equivalent units are in work in

Test Your Knowledge 6

Learning objective 3: Calculate the cost per equivalent unit

 Beginning Work in Process 500 units

1 Calculate equivalent units for materials

Test Your Knowledge 7

Units finished 2,500 X 100% 2,500

Ending Work in Process 300 X 85% 255

Equivalent Units - Materials 2,755

 Beginning Work in Process 500 units

2 Calculate equivalent units conversion

Test Your Knowledge 8

Units finished 2,500 X 100% 2,500

Ending Work in Process 300 X 50% 150

2,650

Equivalent Units - Conversion Costs

Calculating Unit Cost

 Cost Per Equivalent Unit

 The average unit cost in a process costing system is referred to as cost per

equivalent unit

 The numerator represents the total cost

for which a processing department must account in each period

 Divide by the units completed plus the

equivalent units in ending Work in

Process

Calculating Cost per

Equivalent Unit

Calculating Cost per

Equivalent Unit

 Consider cost per equivalent unit

calculations for the mixing department

 Beginning Work in Process inventory:

10,000 gallons that are 80% complete

 Direct material costs = $18,000

 Direct labor =$7,80

 Overhead = $23,400

 70,000 gallons started, 60,000 gallons

completed

 Direct material costs = $142,000

 Direct labor cost = $62,200

 Overhead cost = $186,600

Cost per EU – Mixing

Department

Cost per EU – Mixing

Department

At Rainier Chemical, labor cost in Work in Process at

the start of April was $50,000 and $450,000 of labor

was incurred during the month 200 units are in WIP at the end of April and they are 80% complete with respect

to labor 840 units were completed during the month What is the cost per equivalent unit for labor?

Total labor cost = $50,000 + $450,000 = $500,000

Equivalent units = 840 units + 200 units * 80% = 1,000 units

Cost per equivalent unit = $500,000 / 1,000 = $500

Test Your Knowledge 9

Costs Transferred Out

 60,000 gallons completed by the Mixing

Ending Work in Process

Summary of Cost Activity –

Mixing Department

Summary of Cost Activity –

Mixing Department

Production Cost Report

 An end of the month report for a

process costing system

 Provides a reconciliation of units

 Provides a reconciliation of costs

 Provides the details of the cost per

equivalent unit calculations

 The reconciliations help ensure

that mistakes are not made in

calculations

Production Cost Report

Reconciliation of Units

Production Cost Report

Reconciliation of Costs

Basic Steps in Process

Costing

Basic Steps in Process

Costing

number of units The number

of units at the start of the period plus the number of units started during the

period should equal the number of units completed plus the number of units in ending Work in Process

Basic Steps in Process

Costing

Basic Steps in Process

Costing

Step 2: Calculate the cost per equivalent unit

for material, labor, and overhead

Remember that cost (numerator in the calculation) includes both beginning cost and cost incurred during the

period The number of equivalent units (denominator) includes the number of units completed and the number of equivalent units in ending Work in Process

Cost per equivalent unit =

(cost in beginning WIP + costs added) (units completed + EU of ending WIP)

Basic Steps in Process

Costing

Basic Steps in Process

Costing

and items in ending Work in Process The cost of items completed is simply the product of the total cost per equivalent unit and the number of units

completed The cost of items in Work in Process is the sum of the products of equivalent units in

process and cost per equivalent unit for material, labor, and

overhead

Basic Steps in Process

Costing

Basic Steps in Process

Costing

product cost The cost of beginning inventory plus the cost incurred during the

period should equal the amount of cost assigned to completed items plus the amount of cost assigned to items in ending Work in

Process

Dealing with Transferred-In

Cost

Dealing with Transferred-In

Cost

 Packaging Department summary

 Beginning Work in Process 15,000

gallons 50% through packaging

operation

 Costs in WIP: materials $10,500, labor

$4,500, $9,000 overhead, $92,250 transferred in

 Units transferred in 60,000 gallons with

$360,000 transferred in cost

 Costs added: Materials $49,500, labor

$27,900, $55,800 overhead

 Ending Work in Process 5,000 gallons

40% through packaging operation

Production Cost Report – Packaging Department

Production Cost Report – Packaging Department

Production Cost Report – Packaging Department

Production Cost Report – Packaging Department

Production Cost Report – Packaging Department

Production Cost Report – Packaging Department

The packaging department at Rainier Chemical had no beginning Work in Process at the start of April During April, the department received $300,000 of transferred-

in cost During April, the department completed 600

units and 200 were in Work in Process

With respect to transferred-in cost, the 200 units in

Work in Process are:

a Equivalent to 200 completed units

b Equivalent to 0 completed units

c Equivalent to 100 completed units

d Identical to the equivalent units for conversion

costs

Answer: a

Test Your Knowledge 10

Process Costing and Incremental Analysis

Process Costing and Incremental Analysis

 Whenever we make a decision, we need

to perform incremental analysis

 We need to determine the change in

revenue and the change is cost,

assuming a particular alternative is selected

 If the net change is positive, the decision alternative is “good” since it will have a positive impact on firm profit

 If the net change is negative, the decision alternative is “bad” in that it will have a negative impact on firm

profit

Process Costing and Incremental Analysis

Process Costing and Incremental Analysis

 When using process costing

information to make a decision, we

have to be careful to recognize that

the cost per unit is the average of fixed and variable costs

 It does not measure the change in cost associated from producing an

additional unit

 Generally, total fixed costs do not

change when one additional unit is produced

Process Costing and Incremental Analysis

Process Costing and Incremental Analysis

 A company has no beginning or ending Work

in Process

 Variable costs are materials and labor

 Fixed cost is manufacturing overhead

 Cost summary:

Process Costing and Incremental Analysis

Process Costing and Incremental Analysis

 Decreasing price to $2.90 will increase

You Get What You Measure

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