Cornerstones of cost management 3rd edition hansen mowen chapter 6

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PROCESS COSTING

CHAPTER 6

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© 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

CHAPTER 6 OBJECTIVES

1 Describe the basic characteristics of

process costing, including cost flows,

journal entries, and the cost of production report

2 Describe process costing for settings

without work-in-process inventories

3 Describe process costing for settings with

ending work-in-process inventories

4 Prepare a departmental production report

using the FIFO method

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CHAPTER 6 OBJECTIVES

using the weighted average method

with transferred-in goods and changes in output measures

7 Describe the basic features of operation

costing

8 Explain how spoilage is treated in a

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BASIC OPERATIONAL AND COST CONCEPTS

• A process system is characterized by a

large number of homogeneous products

passing through a series of processes

• Each process is responsible for one or more

operations that bring a product one step closer

to completion

• A process is a series of activities that are linked to

perform a specific objective

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• Each process may require materials labor

and overhead inputs

• Upon completion of a particular process,

the partially completed goods are

transferred to another process

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EXHIBIT 6.1—AN OPERATIONAL PROCESS

SYSTEM: ANTIHISTAMINE MANUFACTURING

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Cost Flows

• Cost flows for a process-costing system are basically

similar to those of a job-order costing system

• There are two key differences

• First, a job-order costing system accumulates

production costs by job, and a process-costing system

accumulates production costs by process

• Second, for manufacturing firms, the job-order costing

system uses a single work-in-process (WIP) account,

while the process-costing system has a WIP account

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EXHIBIT 6.2—COMPARISON OF COST

ACCUMULATION METHODS

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EXHIBIT 6.2—COMPARISON OF COST

ACCUMULATION METHODS (CONTINUED)

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EXHIBIT 6.3—PROCESS COST FLOWS ILLUSTRATED

USING T-ACCOUNTS: NO ENDING WIP

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The Production Report

• A document that summarizes the manufacturing

activity that takes place in a process department

for a given period of time

• Divided into a unit information section and a cost

information section

Unit Information section

1 Units to account for

Cost Information section

1 Costs to account for

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EXHIBIT 6.4—BASIC FEATURES OF A

PROCESS-COSTING SYSTEM

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Unit Costs

• First, measure the manufacturing costs for a

process department for a given period of time

• Second, measure the output of the process

department for the same period of time

• Finally, the unit cost for a process is computed by

dividing the costs of the period by the output of the period

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PROCESS COSTING WITH NO

WORK-IN-PROCESS INVENTORIES

• Services that are homogeneous and

repetitively produced can use the

process-costing approach

• Examples: check processing in a bank,

changing oil, checking baggage, pressing

shirts, etc.

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PROCESS COSTING WITH NO

JIT Manufacturing Firms

• Emphasizes continuous improvement and the

elimination of waste

• Strive to minimize inventories and reduce

work-in-process inventories to insignificant levels

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PROCESS COSTING WITH ENDING

Physical Flow and Equivalent Units

• Equivalent units of output are the complete units

that could have been produced given the total

amount of productive effort expended for the

period under consideration

• Every transferred-out unit is an equivalent unit

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Physical Flow and Equivalent Units

• First two steps in building a production report for

process costing

1 Preparation of a physical flow schedule, which

provides an analysis of the physical flow units

2 Calculation of the period’s equivalent units

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Calculating Unit Costs, Assigning Costs

to Inventories, and Reconciliation

• The final three steps needed for a production

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FIFO COSTING METHOD

• Equivalent units and manufacturing costs

in beginning work in process are excluded

from the current period unit cost

calculation

• Recognizes that the work and costs

carried over from the prior period

legitimately belong to that period

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EXHIBIT 6.5—PRODUCTION REPORT:

BLENDING DEPARTMENT

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BLENDING DEPARTMENT (CONTINUED)

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WEIGHTED AVERAGE COSTING METHOD

• The weighted average costing method

picks up beginning inventory costs and the accompanying equivalent output and

treats them as if they belong to the

current period

• Prior period output and manufacturing

costs found in beginning work in process

are merged with the current period output

and manufacturing costs

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BLENDING DEPARTMENT

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WEIGHTED AVERAGE COSTING METHOD

FIFO Compared with Weighted Average

• Differ on two key dimensions

1 How output is computed

2 What costs are used for calculating the period’s

unit cost

• The two methods use different total costs and

different measures of output

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TREATMENT OF TRANSFERRED-IN GOODS

• The cost of this material is the cost of the goods

transferred out computed in the prior department

• The units started in the subsequent department

correspond to the units transferred out from the

prior department

• The units of the transferring department may be

measured differently than the units of the

receiving department

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EXHIBIT 6.7—PRODUCTION AND COST

DATA: ENCAPSULATING DEPARTMENT

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Step 1: Physical Flow Schedule

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EXHIBIT 6.8—EQUIVALENT UNITS OF PRODUCTION:

WEIGHTED AVERAGE METHOD Step 2: Calculation of Equivalent Units

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Step 3: Computation of Unit Costs

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Step 4: Valuation of Inventories

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ENCAPSULATING DEPARTMENT

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ENCAPSULATING DEPARTMENT

(CONTINUED)

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