Process Costing Systems PDF

8 Process-Costing Systems McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reser 8-2 Learning Objective 1 8-3 Process Costing Production environment  Ho...

8 Process-Costing Systems McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reser 8-2 Learning Objective 1 8-3 Process Costing Production environment  Homogenous units  Mass produced  Automated  Continuous flow 8-4 Process Costing Production environment Costing procedure  Homogenous units Costs are recorded  Mass produced for a department.  Automated  Department costs are  Continuous flow assigned equally to units produced. 8-5 Learning Objective 2 8-6 Why Process Costing Is Useful To help To evaluate set prices products How are unit costs used? To evaluate To determine production balance sheet efficiency inventory 8-7 Process Costing – The Cost Inputs Direct Materials Direct labor costs are usually small Dollar Amount Manufacturing in comparison to Overhead other product costs in process Direct cost systems. Labor (high level of automation) Type of Product Cost 8-8 Process Costing – Conversion Costs Direct Materials Direct labor costs Conversion are usually small Dollar Amount in comparison to other product costs in process cost systems. (high level of automation) Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called conversion. 8-9 Comparing Job Costing and Process Costing Job costing Process costing  Costs accumulated by the  Costs accumulated by job. department or process.  Work in process has a job  Work in process has a cost record for each job. production report for each batch of products.  Many unique, high cost jobs.  A few identical, low cost products.  Jobs built to customer order.  Units continuously produced for inventory in automated process. 8-10 Comparing Job Costing and Process Costing Work in process contains individual Direct jobs in a Materials job cost system. Direct Labor Finished Jobs Goods Manufacturing Cost of Overhead Goods Sold 8-11 Comparing Job Costing and Process Costing Work in process contains homogenous Direct products in a process Materials cost system. Direct Labor Finished & Overhead Products Goods (Conversion) Cost of Goods Sold 8-12 Comparing Job Costing and Process Costing Sameobjective: Same objective: determine determine thecost the costof ofproducts products Same Same Inventory Inventory accounts: accounts: rawraw materials, materials, work work in in process, process, and and finished finished goods goods Same Same overhead overhead assignment assignment method: method: predetermined predetermined rate rate times times actual actual activity activity 8-13 Learning Objective 3 8-14 Department With No Beginning or Ending WIP Inventory Same objective:ordetermine No beginning ending the Work incost of products Process Inventory Same Common Inventorywhen a company accounts: is raw materials, successful at just-in-time work in process, production and finished goods CostSame per overhead assignment Manufacturing method: costs for a period = predetermined rate times actual activity unit Units produced for the period 8-15 Department With No Beginning or Ending WIP Inventory Spirit Beverages produces a sport drink. During October, the Blending Department had the following manufacturing costs: Direct materials $16,000 Conversion costs 5,600 Total costs to be assigned $21,600 Spirit started and completed 8,000 four-bottle packages during October. Spirit had no beginning work in process inventory. Compute the manufacturing unit costs for October. Direct materials $16,000 ÷ 8,000 units = $ 2.00 Conversion costs 5,600 ÷ 8,000 units = $ 0.70 Mfg. cost per completed unit $21,600 ÷ 8,000 units = $ 2.70 8-16 Department With Ending WIP Inventory Same objective: determine No beginning theWork in products cost of Process Inventory Ending Work in Process Same Inventory Inventory accounts: consists raw materials, of incomplete units atand work in process, the finished end of the period. goods Same overhead We must assignment now deal method: with the concept predetermined rate times of equivalent actual activity units. 8-17 Department With Ending WIP Inventory Samenow We must objective: determine deal with the concept theequivalent of cost of products units. Equivalent Same unitsaccounts: Inventory is a concept expressing raw materials, partially complete units as a smaller number work in ofprocess, and finished fully complete units. goods CostSame per overhead assignment method: Manufacturing costs for a period equivalent = predetermined rate times actual activity Equivalent units for the period unit 8-18 Equivalent Units Example Two one-half filled cups are equivalent to one full cup. + = So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. 8-19 Assigning Costs to Products Let’s look at the five-step process for assigning costs to units produced, followed by an example using the five steps. 8-20 Assigning Costs to Products – The Five-step Process  Summarize Summarizethetheflow flow of ofphysical physicalunits units(number (numberof of units unitscompleted completedandandnumber numberof ofunits unitsremaining remaininginin process). process).  Compute Computethethenumber numberof ofequivalent equivalentunits unitsproduced. produced.  Summarize Summarizethethetotal totalcosts coststotobe beaccounted accountedforfor (costs (costsin inbeginning beginningwork workininprocess processinventory inventoryand and the thecosts costsincurred incurredininthe thecurrent currentperiod). period).  Compute Computecosts costsper perequivalent equivalentunit. unit.  Assign Assignunit unitcosts costsfrom from totounits unitscompleted completedandandtoto units unitsin inending endingwork-in-process work-in-processinventory. inventory. 8-21 Department With Ending WIP Inventory Spirit incurred the following manufacturing costs in October (same data as before): Direct materials $16,000 Conversion costs 5,600 Total costs to be assigned $21,600 Spirit started 8,000 units and completed 6,000 units in October. Spirit had no beginning work in process inventory. All direct materials had been added to each unit still in process, but only 20 percent of conversion costs had been incurred for the 2,000 units still in process. Complete the five-step process to assign costs to units produced in October. 8-22 Department With Ending WIP Inventory – Equivalent Units Step 1 Step 2 Physical Equivalent Units Flow of Units in October Units Material Conversion Units to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000 Units accounted for Completed and transferred out 6,000 ? ? Ending work in process inventory 2,000 ? ? Total units accounted for 8,000 ? ? 8-23 Department With Ending WIP Inventory – Equivalent Units Step 1 Step 2 Physical Equivalent Units Flow of Units in October Units Material Conversion Units to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000 Units accounted for Completed and transferred out 6,000 6,000 6,000 Ending work in process inventory 2,000 ? ? Total units accounted for 8,000 ? ? Units completed and transferred are 100% complete for both material and conversion. 8-24 Department With Ending WIP Inventory – Equivalent Units Step 1 Step 2 Physical Equivalent Units Flow of Units in October Units Material Conversion Units to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000 Units accounted for Completed and transferred out 6,000 6,000 6,000 Ending work in process inventory 2,000 2,000 ? Total units accounted for 8,000 8,000 ? All material had been added to units remaining in process. 8-25 Department With Ending WIP Inventory – Equivalent Units Step 1 Step 2 Physical Equivalent Units Flow of Units in October Units Material Conversion Units to account for Beginning work in process inventory 0 Units started this period 8,000 Total units to account for 8,000 Units accounted for Completed and transferred out 6,000 6,000 6,000 Ending work in process inventory 2,000 2,000 400 Total units accounted for 8,000 8,000 6,400 20% of 2,000 units 8-26 Department With Ending WIP Inventory – Assigning Costs Flow of Costs in October Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for $ 16,000 $ 5,600 $ 21,600 Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) ? ? ? Costs accounted for (Step 5) Costs transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ? 8-27 Department With Ending WIP Inventory – Assigning Costs Flow of Costs in October Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for $ 16,000 $ 5,600 $ 21,600 Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) $ 2.00 $ 0.875 $ 2.875 Costs accounted for (Step 5) Costs transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ? $16,000 ÷ 8,000 equivalent units $5,600 ÷ 6,400 equivalent units 8-28 Department With Ending WIP Inventory – Assigning Costs Flow of Costs in October Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for $ 16,000 $ 5,600 $ 21,600 Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) $ 2.00 $ 0.875 $ 2.875 Costs accounted for (Step 5) Costs transferred $ 12,000 $ 5,250 $ 17,250 Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ? 6,000 equivalent units @ $2.00 6,000 equivalent units @ $0.875 8-29 Department With Ending WIP Inventory – Assigning Costs Flow of Costs in October Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 0 $ 0 $ 0 Current period costs 16,000 5,600 21,600 Total costs to account for $ 16,000 $ 5,600 $ 21,600 Equivalent Units 8,000 6,400 Costs per equivalent unit (Step 4) $ 2.00 $ 0.875 $ 2.875 Costs accounted for (Step 5) Costs transferred $ 12,000 $ 5,250 $ 17,250 Cost of ending work in process inventory 4,000 350 4,350 Total costs accounted for $ 16,000 $ 5,600 $ 21,600 2,000 equivalent units @ $2.00 400 equivalent units @ $0.875 8-30 Learning Objective 4 8-31 Department with Beginning & Ending WIP Inventory When When there there is is Beginning Beginning WIP, WIP, the the determination determination ofof equivalent equivalent units units becomes becomes somewhat somewhat moremore complicated. complicated. Primary Primaryquestion questiontotobebeanswered: answered: Which Whichunits unitswere werecompleted completedfirst first during duringthe theperiod? period? (How (Howyou youanswer answerthis thisquestion questionwill will affect affectthe theTotal TotalEU EUfor forthe theperiod.) period.) 8-32 Department with Beginning & Ending WIP Inventory Weighted Weighted Average Average vs. vs. FIFO FIFO Weighted- Weighted- Average Average FIFO All FIFO Allunits unitsand andcosts costs Costs Costsareareaccounted accounted are areconsidered considered for together forby bylayer. layer.Cost Costper per togetherto todetermine determine EU EUfor forthis thisperiod periodis is average averagecost costper perEU, EU, computed regardless computedseparately separately regardlessofof from fromthe theCost Costper perEUEU whether whetherthe thecosts costs for were forlast lastperiod. period. wereincurred incurredlast last period periodor orcurrently. currently. 8-33 Department with Beginning & Ending WIP Inventory Weighted Weighted Average Average vs. vs. FIFO FIFO Weighted- Weighted- Average Weighted- Weighted- Average All Allunits unitsand andcosts costs Average Average is is are areconsidered together considered togetherto todetermine determine the the most most average averagecost costper perEU, EU, commonly commonly regardless regardlessofof whether whetherthe thecosts costs used used were wereincurred period incurredlast last method. method. periodor orcurrently. currently. 8-34 Assigning Costs Using Weighted-Average Costing The The weighted weighted average average method method......   Makes Makesno nodistinction distinctionbetween betweenwork workdone donein inthe theprior priorperiod period and andwork workdone donein inthe thecurrent currentperiod. period.  Blends  Blendstogether togetherunits unitsand andcosts costsin inbeginning beginninginventory inventorywith with units unitsand andcosts costsin inthe thecurrent currentperiod. period. The The FIFO FIFO method method isis covered covered in in Appendix Appendix A. A. Let’s revisit Spirit in December where we have a beginning inventory from the previous month. 8-35 Beginning and Ending Inventory Weighted-Average Costing Spirit had the following cost and unit data for December: Percentage Complete Total Costs Units Materials Conversion Materials Conversion Beginning WIP inventory 2,000 40% 80% $ 2,000 $ 1,000 Costs incurred in Dec. 20,000 7,000 Units Started in Dec. 12,000 Units completed 10,000 100% 100% Ending WIP inventory 4,000 25% 60% Complete the five-step process to assign costs to units completed and to units left in process for December. 8-36 Beginning and Ending Inventory Weighted-Average Costing First let’s look at a flow chart showing the blending of units in beginning work in process inventory with units started during the month. 8-37 Beginning and Ending Inventory Weighted-Average Costing Beginning Inventory 2,000 units 10,000 units 14,000 units completed 12,000 units started Ending Inventory 4,000 units Now let’s examine the five-step process. 8-38 Beginning and Ending Inventory Weighted-Average Costing Step 1 Step 2 Physical Equivalent Units Flow of Units in December Units Material Conversion Units to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000 Units accounted for Completed and transferred out 10,000 ? ? Ending work in process inventory 4,000 ? ? Total units accounted for 14,000 ? ? 8-39 Beginning and Ending Inventory Weighted-Average Costing Step 1 Step 2 Physical Equivalent Units Flow of Units in December Units Material Conversion Units to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000 Units accounted for Completed and transferred out 10,000 10,000 10,000 Ending work in process inventory 4,000 ? ? Total units accounted for 14,000 ? ? Units completed and transferred are 100% complete for both material and conversion. 8-40 Beginning and Ending Inventory Weighted-Average Costing Step 1 Step 2 Physical Equivalent Units Flow of Units in December Units Material Conversion Units to account for Beginning work in process inventory 2,000 Units started this period 12,000 Total units to account for 14,000 Units accounted for Completed and transferred out 10,000 10,000 10,000 Ending work in process inventory 4,000 1,000 2,400 Total units accounted for 14,000 11,000 12,400 25% of 4,000 units 60% of 4,000 units 8-41 Beginning and Ending Inventory Weighted-Average Costing Flow of Costs in December Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 2,000 $ 1,000 $ 3,000 Current period costs 20,000 7,000 27,000 Total costs to account for $ 22,000 $ 8,000 $ 30,000 Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) ? ? ? Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ? 8-42 Beginning and Ending Inventory Weighted-Average Costing Flow of Costs in December Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 2,000 $ 1,000 $ 3,000 Current period costs 20,000 7,000 27,000 Total costs to account for $ 22,000 $ 8,000 $ 30,000 Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) $ 2.00 $ 0.6452 $ 2.6452 Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ? $22,000 ÷ 11,000 equivalent units $8,000 ÷ 12,400 equivalent units 8-43 Beginning and Ending Inventory Weighted-Average Costing Flow of Costs in December Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 2,000 $ 1,000 $ 3,000 Current period costs 20,000 7,000 27,000 Total costs to account for $ 22,000 $ 8,000 $ 30,000 Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) $ 2.00 $ 0.6452 $ 2.6452 Costs accounted for (Step 5) Costs assigned to units transferred $ 20,000 $ 6,452 $ 26,452 Cost of ending work in process inventory ? ? ? Total costs accounted for ? ? ? 10,000 equivalent units @ $2.00 10,000 equivalent units @ $0.6452 8-44 Beginning and Ending Inventory Weighted-Average Costing Flow of Costs in December Material Conversion Total Costs to account for (Step 3) Costs in beginning work in process inventory $ 2,000 $ 1,000 $ 3,000 Current period costs 20,000 7,000 27,000 Total costs to account for $ 22,000 $ 8,000 $ 30,000 Equivalent units 11,000 12,400 Costs per equivalent unit (Step 4) $ 2.00 $ 0.6452 $ 2.6452 Costs accounted for (Step 5) Costs assigned to units transferred $ 20,000 $ 6,452 $ 26,452 Cost of ending work in process inventory 2,000 1,548 3,548 Total costs accounted for $ 22,000 $ 8,000 $ 30,000 1,000 equivalent units @ $2.00 2,400 equivalent units @ $0.6452 8-45 Learning Objective 5 8-46 Costs Transferred in from Prior Departments  Multiple  Multipledepartments departmentsin inaaprocess processresult resultin inunits unitsand and costs coststhat thatare aretransferred transferredfrom fromaaprior priordepartment departmentto to the thecurrent currentdepartment. department.  These  Thesetransferred-in transferred-incosts costsare aretreated treatedexactly exactlylike likeaa direct directmaterial materialthat thatisisadded addedat atthe thebeginning beginningof ofaa production productionprocess. process.  Let’s  Let’srevisit revisitSpirit. Spirit.with withthe theaddition additionof oftransferred-in transferred-in units unitsand andcosts. costs. WeWewill willuse usethe theDecember December information informationandandthe theweighted-average weighted-averagemethod. method. 8-47 Costs Transferred in from Prior Departments Complete the five-step process for Spirit to assign costs to units completed and to units left in process for December. Percentage Complete Flow of units in December Units Materials Conversion Trans-in Beginning WIP inventory 2,000 40% 80% 100% Transferred-in during Dec. 12,000 Units completed 10,000 100% 100% 100% Ending WIP inventory 4,000 25% 60% 100% Total Costs Flow of costs in December Units Materials Conversion Trans-in Costs incurred in Dec. $ 20,000 $ 7,000 $ 52,000 Beginning WIP inventory 2,000 2,000 1,000 5,000 Transferred-in during Dec. 12,000 Units completed 10,000 Ending WIP inventory 4,000 8-48 Costs Transferred in from Prior Departments Step 1 Step 2 Physical Equivalent Units Flow of Units in December Units Material Conversion Trans-in Units to account for Beginning WIP inventory 2,000 Units transferred in during Dec. 12,000 Total units to account for 14,000 Units accounted for Completed and transferred out 10,000 ? ? ? Ending WIP inventory 4,000 ? ? ? Total units accounted for 14,000 ? ? ? 8-49 Costs Transferred in from Prior Departments Step 1 Step 2 Physical Equivalent Units Flow of Units in December Units Material Conversion Trans-in Units to account for Beginning WIP inventory 2,000 Units transferred in during Dec. 12,000 Total units to account for 14,000 Units accounted for Completed and transferred out 10,000 10,000 10,000 10,000 Ending WIP inventory 4,000 ? ? ? Total units accounted for 14,000 ? ? ? 100% complete for material, conversion, and transferred-in units. 8-50 Costs Transferred in from Prior Departments Step 1 Step 2 Physical Equivalent Units Flow of Units in December Units Material Conversion Trans-in Units to account for Beginning WIP inventory 2,000 Units transferred in during Dec. 12,000 Total units to account for 14,000 Units accounted for Completed and transferred out 10,000 10,000 10,000 10,000 Ending WIP inventory 4,000 1,000 2,400 4,000 Total units accounted for 14,000 11,000 12,400 14,000 60% of 4,000 units 25% of 4,000 units Transferred-in units are 100% complete 8-51 Costs Transferred in from Prior Departments Flow of Costs in December Material Conversion Trans-in Total Costs to account for (Step 3) Costs in beginning WIP inventory $ 2,000 $ 1,000 $ 5,000 $ 8,000 Current period costs 20,000 7,000 52,000 79,000 Total costs to account for $ 22,000 $ 8,000 $ 57,000 $ 87,000 Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) ? ? ? ? Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? ? Cost of ending WIP inventory ? ? ? ? Total costs accounted for ? ? ? ? 8-52 Costs Transferred in from Prior Departments Flow of Costs in December Material Conversion Trans-in Total Costs to account for (Step 3) Costs in beginning WIP inventory $ 2,000 $ 1,000 $ 5,000 $ 8,000 Current period costs 20,000 7,000 52,000 79,000 Total costs to account for $ 22,000 $ 8,000 $ 57,000 $ 87,000 Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) $ 2.00 $ 0.6452 $ 4.0714 $ 6.7166 Costs accounted for (Step 5) Costs assigned to units transferred ? ? ? ? Cost of ending WIP inventory ? ? ? ? Total costs accounted for ? ? ? ? $22,000 ÷ 11,000 equivalent units $57,000 ÷ 14,000 equivalent units $8,000 ÷ 12,400 equivalent units 8-53 Costs Transferred in from Prior Departments Flow of Costs in December Material Conversion Trans-in Total Costs to account for (Step 3) Costs in beginning WIP inventory $ 2,000 $ 1,000 $ 5,000 $ 8,000 Current period costs 20,000 7,000 52,000 79,000 Total costs to account for $ 22,000 $ 8,000 $ 57,000 $ 87,000 Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) $ 2.00 $ 0.6452 $ 4.0714 $ 6.7166 Costs accounted for (Step 5) Costs assigned to units transferred $ 20,000 $ 6,452 $ 40,714 $ 67,166 Cost of ending WIP inventory ? ? ? ? Total costs accounted for ? ? ? ? 10,000 equivalent units @ $2.00 10,000 equivalent units @ $4.0714 10,000 equivalent units @ $0.6452 8-54 Costs Transferred in from Prior Departments Flow of Costs in December Material Conversion Trans-in Total Costs to account for (Step 3) Costs in beginning WIP inventory $ 2,000 $ 1,000 $ 5,000 $ 8,000 Current period costs 20,000 7,000 52,000 79,000 Total costs to account for $ 22,000 $ 8,000 $ 57,000 $ 87,000 Equivalent units 11,000 12,400 14,000 Costs per equivalent unit (Step 4) $ 2.00 $ 0.6452 $ 4.0714 $ 6.7166 Costs accounted for (Step 5) Costs assigned to units transferred $ 20,000 $ 6,452 $ 40,714 $ 67,166 Cost of ending WIP inventory 2,000 1,548 16,286 19,834 Total costs accounted for $ 22,000 $ 8,000 $ 57,000 $ 87,000 1,000 equivalent units @ $2.00 4,000 equivalent units @ $4.0714 2,400 equivalent units @ $0.6452