ProcessCosting Systems

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• Process-CostingSystems

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Process Costing

• Production environment
• Homogenous units
• Mass produced
• Automated
• Continuous flow

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Process Costing

• Costing procedure
• Costs are recorded for a department.
• Department costs are assigned equally to units
  produced.

• Production environment
• Homogenous units
• Mass produced
• Automated
• Continuous flow

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Process Costing
To evaluateproducts
To helpset prices
To determinebalance sheetinventory
To evaluateproductionefficiency
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Process Costing
DirectMaterials
Direct labor costsare usually smallin
comparison toother product costs in processcost
systems.(high level of automation)
ManufacturingOverhead
Dollar Amount
DirectLabor
Type of Product Cost
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Process Costing
DirectMaterials
Direct labor costsare usually smallin
comparison toother product costs in processcost
systems.(high level of automation)
Conversion
Dollar Amount
Type of Product Cost
So, direct labor and manufacturing overhead are
oftencombined into one product cost called
conversion.
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Comparing Job Costingand Process Costing

• Job costing
• Costs accumulated by the job.
• Work in process has a job cost record for each
  job.
• Many unique, high cost jobs.
• Jobs built to customer order.

• Process costing
• Costs accumulated by department or process.
• Work in process has a production report for each
  batch of products.
• A few identical, low cost products.
• Units continuously produced for inventory in
  automated process.

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Comparing Job Costingand Process Costing
Work in process contains individual jobs in a
job cost system.
Direct Materials
FinishedGoods
Direct Labor
Jobs
ManufacturingOverhead
Cost of GoodsSold
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Comparing Job Costingand Process Costing
Work in process contains homogenous products in a
process cost system.
Direct Materials
FinishedGoods
Direct Labor Overhead(Conversion)
Products
Cost of GoodsSold
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Comparing Job Costingand Process Costing
Same objective determine the cost of products
Same objective determine the cost of products
Same Inventory accounts raw materials, work in
process, and finished goods
Same Inventory accounts raw materials, work in
process, and finished goods
Same overhead assignment methodpredetermined
rate times actual activity
Same overhead assignment methodpredetermined
rate times actual activity
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Department With No Beginning or Ending WIP
Inventory
Same objective determine the cost of products
No beginning or endingWork in Process Inventory
Common when a company issuccessful at
just-in-time production
Same Inventory accounts raw materials, work in
process, and finished goods
Same overhead assignment methodpredetermined
rate times actual activity
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Department With No Beginning or Ending WIP
Inventory

• Spirit Beverages produces a sport drink. During
  October, the Blending Department had the
  following manufacturing costs
• 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.

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Department With Ending WIP Inventory
Same objective determine the cost of products
No beginning Work in Process Inventory
Same Inventory accounts raw materials, work in
process, and finished goods
Ending Work in Process Inventory consistsof
incomplete units at the end of the period.
Same overhead assignment methodpredetermined
rate times actual activity
We must now deal with the conceptof equivalent
units.
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Department With Ending WIP Inventory
Same objective determine the cost of products
We must now deal with the conceptof equivalent
units.
Equivalent units is a concept expressing
partially complete units as a smaller numberof
fully complete units.
Same Inventory accounts raw materials, work in
process, and finished goods
Same overhead assignment methodpredetermined
rate times actual activity
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Equivalent Units Example
Two one-half filled cups areequivalent to one
full cup.
So, 10,000 units 70 percent completeare
equivalent to 7,000 complete units.
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Assigning Costs to Products
Lets look at the five-step process for assigning
costs to units produced, followed by an example
using the five steps.
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Assigning Costs to Products The Five-step
Process

• Summarize the flow of physical units (number of
  units completed and number of units remaining in
  process).
• Compute the number of equivalent units produced.
• Summarize the total costs to be accounted for
  (costs in beginning work in process inventory and
  the costs incurred in the current period).
• Compute costs per equivalent unit.
• Assign unit costs from ? to units completed and
  to units in ending work-in-process inventory.

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Department With Ending WIP Inventory

• Spirit incurred the following manufacturing
  costs in October (same data as before)
• 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 assigncosts to
  units produced in October.

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Department With Ending WIP Inventory Equivalent
Units
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Department With Ending WIP Inventory Equivalent
Units
Units completed and transferred are 100complete
for both material and conversion.
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Department With Ending WIP Inventory Equivalent
Units
All material had been added to units remaining
in process.
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Department With Ending WIP Inventory Equivalent
Units
20 of 2,000 units
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Department With Ending WIP Inventory Assigning
Costs
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Department With Ending WIP Inventory Assigning
Costs
16,000 8,000 equivalent units
5,600 6,400 equivalent units
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Department With Ending WIP Inventory Assigning
Costs
6,000 equivalent units _at_ 2.00
6,000 equivalent units _at_ 0.875
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Department With Ending WIP Inventory Assigning
Costs
2,000 equivalent units _at_ 2.00
400 equivalent units _at_ 0.875
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Department with Beginning Ending WIP Inventory
When there is Beginning WIP, the determination of
equivalent units becomes somewhat more
complicated.
Primary question to be answered Which units were
completed first during the period? (How you
answer this question will affect the Total EU for
the period.)
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Department with Beginning Ending WIP Inventory
Weighted Average vs. FIFO
Weighted-Average All units and costs are
considered together to determine average cost per
EU, regardless of whether the costs were incurred
last period or currently.
FIFO Costs are accounted for by layer. Cost per
EU for this period is computed separately from
the Cost per EU for last period.
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Department with Beginning Ending WIP Inventory
Weighted Average vs. FIFO
Weighted-Average All units and costs are
considered together to determine average cost per
EU, regardless of whether the costs were incurred
last period or currently.
Weighted-Average is the most commonly used method.
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Assigning Costs UsingWeighted-Average Costing

• The 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 in beginning
  inventory with units and costs in the current
  period.
• The FIFO method is covered in Appendix A.

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Beginning and Ending InventoryWeighted-Average
Costing

• Spirit had the following cost andunit data
  for December
• Complete the five-step process to assign costs
  to unitscompleted and to units left in process
  for December.

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Beginning and Ending InventoryWeighted-Average
Costing
First lets look at a flow chart showing the
blending of units in beginning work in process
inventory with units started during the month.
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Beginning and Ending InventoryWeighted-Average
Costing
Beginning Inventory2,000 units
14,000 units
10,000 unitscompleted
12,000 unitsstarted
EndingInventory4,000 units
Now lets examine the five-step process.
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Beginning and Ending InventoryWeighted-Average
Costing
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Beginning and Ending InventoryWeighted-Average
Costing
Units completed and transferred are 100complete
for both material and conversion.
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Beginning and Ending InventoryWeighted-Average
Costing
25 of 4,000 units
60 of 4,000 units
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Beginning and Ending InventoryWeighted-Average
Costing
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Beginning and Ending InventoryWeighted-Average
Costing
22,000 11,000 equivalent units
8,000 12,400 equivalent units
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Beginning and Ending InventoryWeighted-Average
Costing
10,000 equivalent units _at_ 2.00
10,000 equivalent units _at_ 0.6452
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Beginning and Ending InventoryWeighted-Average
Costing
1,000 equivalent units _at_ 2.00
2,400 equivalent units _at_ 0.6452
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Costs Transferred infrom Prior Departments

• Multiple departments in a process result in units
  and costs that are transferred from a prior
  department to the current department.
• These transferred-in costs are treated exactly
  like a direct material that is added at the
  beginning of a production process.
• Lets revisit Spirit. with the addition of
  transferred-in units and costs. We will use the
  December information and the weighted-average
  method.

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Costs Transferred infrom Prior Departments

• Complete the five-step process for Spirit to
  assign costs tounits completed and to units left
  in process for December.

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Costs Transferred infrom Prior Departments
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Costs Transferred infrom Prior Departments
100 complete for material,conversion, and
transferred-in units.
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Costs Transferred infrom Prior Departments
60 of 4,000 units
25 of 4,000 units
Transferred-in units are 100 complete
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Costs Transferred infrom Prior Departments
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Costs Transferred infrom Prior Departments
22,000 11,000 equivalent units
57,000 14,000 equivalent units
8,000 12,400 equivalent units
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Costs Transferred infrom Prior Departments
10,000 equivalent units _at_ 2.00
10,000 equivalent units _at_ 4.0714
10,000 equivalent units _at_ 0.6452
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Costs Transferred infrom Prior Departments
1,000 equivalent units _at_ 2.00
4,000 equivalent units _at_ 4.0714
2,400 equivalent units _at_ 0.6452
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Accounting for Spoilage Costs
Spoilage represents the amount of resources that
go into the process, but DO NOT result in
finished product. Managers face key problems
related to spoilage 1. Identifying whether it
exists. 2. Determining whether it can be
eliminated. 3. Deciding whether eliminating it is
worthwhile. 4. Determining the cost of spoilage.
The 5-step approach discussed earlier canbe
modified by including spoilage
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Accounting for Spoilage Costs
Normal spoilage occurs as a part of the regular
operationsof an efficient process.
Abnormal spoilage is the result of unusual
operating problems.Abnormal spoilage is in
addition to normal spoilage,and is recorded as a
loss of the period.
We will illustrate the spoilage using the
December data forSpirit Beverages, but without
the transferred-in costs.
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Accounting for Spoilage Costs
Spoilage is found at an inspection when 20 of
the materialhas been added and the conversion is
50 complete.
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Accounting for Spoilage Costs
Beginning Inventory2,000 units
14,000 units
10,000 unitscompleted
12,000 unitsstarted
Spoilage500 units
EndingInventory3,500 units
Complete the five-step process to assign costs to
unitscompleted and to units left in process for
December.
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Accounting for Spoilage Costs
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Accounting for Spoilage Costs
Units completed and transferred are 100complete
for both material and conversion.
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Accounting for Spoilage Costs
50 of 500 units
20 of 500 units
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Accounting for Spoilage Costs
25 of 3,500 units
60 of 3,500 units
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Accounting for Spoilage Costs
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Accounting for Spoilage Costs
22,000 10,975 equivalent units
8,000 12,350 equivalent units
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Accounting for Spoilage Costs
10,000 equivalent units _at_ 2.0046
10,000 equivalent units _at_ 0.6478
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Accounting for Spoilage Costs
100 equivalent units _at_ 2.0046
250 equivalent units _at_ 0.6478
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Accounting for Spoilage Costs
875 equivalent units _at_ 2.0046
2,100 equivalent units _at_ 0.6478
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Process Cost Flows
Lets conclude our discussion of process costing
by examining the cost flows in a two- department
process, A and B. We will use T-accounts and
start with materials.
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Process Cost Flows
Materials Inventory
WIP Dept. A

• Direct Materials

• DirectMaterials

• Purchases

WIP Dept. B
Factory Overhead

• Direct Materials

• Other Overhead

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Process Cost Flows
Materials Inventory
WIP Dept. A

• Direct Materials

• DirectMaterials

• Purchases

• Indirect Materials

WIP Dept. B
Factory Overhead

• Direct Materials

• Other Overhead

• Indirect Materials

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Process Cost Flows
Next lets add labor and manufacturing overhead
to the process cost flows. Are you with me?
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Process Cost Flows
Wages Payable
WIP Dept. A

• Direct Materials

• Indirect Labor

WIP Dept. B
Factory Overhead

• Direct Materials

• Other Overhead

• Indirect Materials

• IndirectLabor

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Process Cost Flows
Wages Payable
WIP Dept. A

• Direct Materials

• Indirect Labor

• DirectLabor

• Conversion

WIP Dept. B
Factory Overhead

• Direct Materials

• OverheadApplied to Work inProcess

• Other Overhead

• Conversion

• Indirect Materials

• IndirectLabor

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Process Cost Flows
Next lets transfer work from Department A to
Department B. Are you ready?
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Process Cost Flows
WIP Dept. A

• Direct Materials

• Transferred to Dept. B

• Conversion

WIP Dept. B

• Direct Materials

• Conversion

• Transferred from Dept. A

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Process Cost Flows
Now lets complete the goods in Department B and
sell them. Still with me?
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Process Cost Flows
Finished Goods
WIP Dept. B

• Direct Materials

• Cost of GoodsMfd.

• Cost of Goods Mfd.

• Conversion

• Transferred from Dept. A

Cost of Goods Sold
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Process Cost Flows
Finished Goods
WIP Dept. B

• Direct Materials

• Cost of GoodsMfd.

• Cost of GoodsSold

• Cost of Goods Mfd.

• Conversion

• Transferred from Dept. A

Cost of Goods Sold

• Cost of GoodsSold

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End of Chapter 8