Costing Systems: Job Order and Process Costing

1
Chapter 17

• Costing SystemsJob Orderand Process Costing

2
Product Cost Information and the Management
Process

• Objective 1
• Discuss the role that information about costs
  plays in the management process, and explain why
  unit cost is important.

3
Planning

• Manufacturing companies
• Develop budgets
• Establish product prices
• Plan production volumes

• Service organizations
• Develop budgets
• Establish prices
• Set sales goals
• Determine human resource needs

4
Performing Phase in a Manufacturing Environment

• Make decisions about
• Whether to drop a product line
• Adding a production shift
• Outsourcing manufacture of a subassembly
• Bidding on a special order
• Negotiating a selling price

5
Performing Phase in a Service Organization

• Make decisions about
• Bidding on jobs
• Dropping a current service
• Outsourcing a task
• Adding staff
• Negotiating a price

6
Evaluating
Manufacturing Companies
Service Companies

• To determine the source of a quality problem,
  managers study
• The design
• Materials purchasing
• Manufacturing processes
• Once the problem is identified, changes can be
  made to ensure the products quality

• To determine the source of increased operating
  costs, managers may break the unit cost of a
  service into its components
• This will help determine where costs can be cut
  or how the service can be performed more
  efficiently

7
Communicating
Manufacturing Companies
Service Companies

• Use product unit costs to determine inventory
  balances for the organization's balance sheet and
  the cost of goods sold for its income statement

• Use unit costs of services to determine cost of
  sales for the income statement

• Managers in both environments prepare performance
  evaluation reports
• Compare actual unit costs and targeted costs, as
  well as actual and targeted nonfinancial measures
  of performance
• Analyze the data in the performance evaluation
  reports to determine whether they are achieving
  cost goals for their products or services

8
Stop Review

• Q. How do managers in a manufacturing company use
  cost information in the planning stage of the
  management process?

A. Managers use cost information to develop
budgets, establish product prices, and plan
production volumes.
9
Job Order Versus Process Costing

• Objective 2
• Distinguish between the two basic types of
  product costing systems, and identify the
  information each provides.

10
Product Costing System

• Set of procedures used to account for an
  organizations product costs

• Provides timely and accurate unit cost
  information for
• Pricing
• Cost planning and control
• Inventory valuation
• Financial statement preparation

11
Two Basic Types of Product Costing Systems

• Job Order Costing

Process Costing
12
Job Order Costing System
The costs of direct materials, direct labor, and
overhead are traced to and assigned to a specific
job order or batch of products
Uses a single Work in Process Inventory account
Costs are traced using a subsidiary ledger of job
order cost cards
13
Job Order Cost Card
A document on which all costs incurred in the
production of a particular job order are recorded

• These costs are used to measure the cost of each
  completed unit

14
Process Costing System

• Uses several Work in Process Inventory
  accountsone for each process, department, or
  work cell

• Costs of direct materials, direct labor, and
  overhead are first traced to processes,
  departments, or work cells
• Costs are then assigned to the products
  manufactured by these processes, departments, or
  work cells during a specific period

15
Characteristics of Job Order Costing and Process
Costing Systems
16
Job Order Versus Process Costing

• Few production processes are a perfect match for
  either system
• The typical product costing system is a hybrid of
  both job order costing and process costing

17
Stop Review E2

• What are the main differences between a job order
  costing system and a process costing system?

• A. Job order costing system
• Used by companies that produce unique or
  special-order items
• Uses a single Work in Process Inventory account
• Process costing system
• Used by companies that produce large amounts of
  similar products or liquid products that have
  long, continuous production runs
• Uses several Work in Process Inventory accounts

18
The Job Order Costing System

• Objective 3
• Explain cost flow in a job order costing system,
  prepare a job order cost card, and compute
  product unit cost.

19
The Job Order Costing System

• Traces the costs of a specific order or batch of
  products to
• Provide timely, accurate cost information
• Facilitate smooth and continuous flow of that
  information

The core of a job order costing system is the job
order cost cards and subsidiary ledgers
20
Cost Flow in a Job Order Costing System for a
Manufacturing Company
Augusta, Inc. builds customized and
general-purpose golf carts

• Direct materials costs
• Cart frame
• Wheels
• Upholstered seats
• Windshield
• Motor
• Rechargeable battery
• Direct labor costs
• Wages of two production workers

• Overhead costs
• Indirect materials cost for
• Upholstery zippers
• Cloth straps
• Wheel lubricants
• Screws and fasteners
• Silicon
• Indirect labor costs for
• Moving and inspection
• Depreciation on plant and equipment
• Utilities, insurance, and property taxes

21
Cost Flow in a Job Order Costing System for a
Manufacturing Company (contd)
Augusta, Inc. builds customized and
general-purpose golf carts
Three inventory accounts are used. All have
subsidiary ledgers backing up their totals.

• Materials Inventory
• Materials Ledger
• Work In Process Inventory
• Job Order Cost Cards
• Finished Goods Inventory
• Finished Goods Ledger

22
Augusta Inc.Purchase of Materials
General Ledger

• Purchased cart frames costing 572 and wheels
  costing 340, for a total purchase of 912

Materials Inventory
Beg. Bal. 1,230
(1) Purchases 912
This purchase increases the balances in the
Materials Inventory account and the corresponding
accounts in the materials ledger.
Materials Ledger
Beg. Bal. 830
(1) Purchases 572
Beg. Bal. 370
(1) Purchases 340
23
Augusta Inc.Purchase of Indirect Materials
General Ledger

• Purchased indirect materials costing 82

Beg. Bal. 1,230
(1) Purchases 912
(2) Purchases 82
This purchase also increases the balance in the
Materials Inventory account, as well as the
balance in the Indirect Materials account in the
materials ledger.
Materials Ledger
Beg. Bal. 830
(1) Purchases 572
Beg. Bal. 370
(1) Purchases 340
Beg. Bal. 30
(2) Purchases 82
24
Augusta Inc.Materials Into Production
General Ledger

• Production requested cart frames costing 1,240
  and wheels costing 640, totaling 1,880

Materials Inventory
Work in Process Inventory
Beg. Bal. 1,230
Beg. Bal. 400
(1) Purchases 912
(2) Purchases 82
The Materials Inventory account is decreased
(along with the appropriate Materials ledger
accounts) and the Work in Process Inventory
account is increased by 1,880.
Materials Ledger
Beg. Bal. 830
(1) Purchases 572
Beg. Bal. 370
(1) Purchases 340
25
Augusta Inc.Indirect Materials into Production
Materials Inventory
General Ledger

• Production also requested 96 of indirect
  materials.

Beg. Bal. 1,230
DM (3) 1,880
(1) Purchases 912
(2) Purchases 82
Overhead
Materials Ledger
Beg. Bal. 30
(2) Purchases 82
26
Augusta Inc.Payroll
General Ledger

• Production employees earned 2,400 of wages
  during the period.

2,400
Beg. Bal. 400
1,880
The Factory Payroll account is increased and the
Wages Payable account (not shown) is also
increased.
27
Augusta Inc.Overhead Transactions
General Ledger
2,400
Beg. Bal. 400
1,640 DL (4)
1,880
760 IL (5)
1,640
Overhead
96 (5) IL 760
The Overhead account is increased.
28
Augusta Inc.Apply Overhead
General Ledger
Work in Process Inventory
2,400
Beg. Bal. 400
1,640 DL (4)
1,880
760 IL (5)
1,640
Overhead
96 (5) IL 760
The Overhead account is decreased and the Work in
Process Inventory account is increased by 1,394.
(6) Other 295
(7) Depr 240
29
Augusta Inc.Completed Units
Work in Process Inventory

• Job CC was completed and moved to the finished
  goods storeroom. Its completed cost was 3,880.

Beg. Bal.
1,880
1,640
1,394
The Work in Process Inventory account is
decreased and the Finished Goods Inventory
account is increased.
The finished goods ledger is decreased by the
cost of the unit sold.
30
Augusta Inc.Sold Units
Finished Goods Inventory

• One general-purpose golf cart was sold. Two units
  were completed in Job CC. The cost of each was
  1,940.

3,880
1,940 sold (10)
sold (10) 1,940
The Finished Goods Inventory is decreased and
Cost of Goods Sold is increased by 1,940
Finished Goods Ledger
Job CC
Job CC Prev bal. 400 Direct
materials 1,038 Direct labor
1,320 Overhead 1,122 Completed
Cost 3,880
Beg. Bal.
Completed 3,880
Sold (10) 1,940
31
Augusta Inc.Reconcile Overhead Costs
To prepare financial statements at the end of the
period, actual and applied overhead must be
reconciled.

• The Overhead account is closed by transferring
  the balance to the Cost of Goods Sold account.

Overhead
96
Applied
760
1,394
Other 295
Depreciation 240
(10) Sold 1,940
32
Augusta Inc.End of Period Balances
Work in Process Inventory
Materials Inventory
3,880
Sold (10) 1,940
(10) Sold 1,940
Adj. 3 (11)
Beg. Bal. 1,230
Beg. Bal.
Beg. Bal. 400
1,880
Requests D.M. (3)
(1) Purchases 912
1,880
3,880
Req. D.M.
Completed (9)
I.M. (3) 96
(2) Purchases 82
D.L. (4) 1,640
End. Bal. 1,937
End. Bal. 1,940
O.H. (8) 1,394
End. Bal. 248
End. Bal. 1,434
2,400
D.L. (4) 1,640
I.L. (5) 760
End of period account balances are determined for
permanent accounts.
Overhead
(3) I.M. 96
Applied (8) 1,394
(5) I.L. 760
(6) Other 295
(7) Depreciation 240
1,394
1,391
(11) To close 3

Job Order Cost Cards
Finished Goods Ledger
Job CC
Beg. Bal. 830
Used 1,240 (3)
Sold 1,940 (10)
Beg. Bal.
Costs from the previous period 400
(1) Purchases 572
3,880
Direct materials 1,038
End. Bal. 162
Direct labor
1,320
End. Bal. 1,940
Overhead 1,122
Completed cost 3,880
Beg. Bal. 370
Used 640 (3)
(1) Purchases 340
These balances will now be carried over to the
beginning of the next accounting period.
Job JB
End. Bal. 70
Direct materials 842
Direct labor
320
Overhead 272
Beg. Bal. 30
Used 96 (3)
(2) Purchases 82
End. Bal.
1,434
End. Bal. 16
33
Job Order Costing in a Service Organization

• Job costs include labor, materials and supplies,
  and service overhead

34
Stop Review E5, E8, P1, P2

• Q. What accounts are increased and decreased
  when materials are requested for the
  production process?

A. Materials Inventory is decreased and Work
in Process Inventory is increased
35
Stop Review E5, E8 , P1, P2

• Q. Why must overhead costs be reconciled at
  the end of the accounting period?

A. The balance of the Cost of Goods Sold
account must reflect actual product costs,
which includes actual overhead costs, not
applied overhead costs.
36
The Process Costing System

• Objective 4
• Explain product flow and cost flow in a process
  costing system.

37
Patterns of Product Flows and Cost Flows
Products flow in a first-in, first-out (FIFO)
fashion through several processes, departments,
or work cells

• Steps describing the production flow during the
  manufacture of computer chips
• Producing the silicon wafer
• Fabricating the chips
• Final testing, assembly, and packaging of the
  chips

38
Patterns of Product Flows and Cost Flows (contd)

• Costs are accumulated as the product passes
  through each manufacturing process, department,
  or work cell and passed on to the next
  manufacturing process, department, or work cell
• At the end of every accounting period, the system
  generates a process cost report

39
Cost Flows Through the Work in Process Inventory
Accounts
Work in Process Inventory accounts are the focal
point of process costing

• As products flow through the Work in Process
  Inventory accounts for each process, department,
  or work cell, the costs associated with them flow
  to the Work in Process Inventory account of that
  process, department, or work cell

40
Cost Flows Through the Work in Process Inventory
Accounts (contd)
Mixing Department
Cookie dough is prepared
Costs of cookie dough accumulate

• Cookie dough is prepared in the Mixing
  Department, where the costs of direct materials,
  direct labor, and overhead incurred accumulate

41
Cost Flows Through the Work in Process Inventory
Accounts (contd)
Baking Department
Mixing Department
Cookies are baked
Cookie dough is prepared
Costs of cookie dough Baking costs accumulate
Costs of cookie dough accumulate

• Cookie dough is transferred to the Baking
  Department
• The costs accumulated in the Mixing Department
  Work in Process Inventory account are transferred
  to the Baking Department Work in Process
  Inventory account
• Costs incurred to bake the cookies are
  accumulated in the Baking Department Work in
  Process Inventory account

42
Packaging Department
Baking Department
Mixing Department
Cookies are packaged
Cookies are baked
Cookie dough is prepared
Costs of cookie dough baking Packaging
costs accumulate
Costs of cookie dough Baking costs accumulate
Costs of cookie dough accumulate

• The baked cookies are transferred to the
  Packaging Department
• The costs accumulated in the Baking Department
  Work in Process Inventory account are transferred
  to the Packaging Department Work in Process
  Inventory account
• Costs incurred to package the cookies are
  accumulated in the Packaging Department Work in
  Process Inventory account

43
Mixing Department
Baking Department
Packaging Department
Cookie dough is prepared
Cookies are baked
Cookies are packaged
Cookies are moved to finished goods storeroom
Costs of cookie dough accumulate
Costs of cookie dough Baking costs accumulate
Costs of cookie dough baking Packaging
costs accumulate
Total costs of cookies are transferred to
Finished Goods Inventory

• The packaged cookies are transferred to the
  finished goods storeroom
• The costs accumulated in the Packaging Department
  Work in Process Inventory account are transferred
  to the Finished Goods Inventory account
• When the cookies are sold, their costs will be
  transferred to the Cost of Goods Sold account

44
Stop Review

• Q. Which accounts are the focal point of a
  process costing system?

A. As products flow through the Work in Process
Inventory accounts for each process, department,
or work cell, the costs associated with them flow
to the Work in Process Inventory account of that
process, department, or work cell.
45
Computing Equivalent Production

• Objective 5
• Define equivalent production, and compute
  equivalent units.

46
Equivalent Production
A measure that applies a percentage-of-completion
factor to partially completed units to calculate
the equivalent number of whole units produced in
an accounting period

• Also called equivalent units
• Computed for each type of input
• Direct materials
• Direct labor
• Overhead

47
Computation of Equivalent Production
Sum of 1. Total units started and completed
during the period 2. Amount representing the work
done on partially completed products (In both the
beginning and ending work in process inventories)
Equivalent production must be computed separately
for each type of input because of differences in
the ways the costs are incurred
48
Computation of Equivalent Units
Equivalent production must be computed separately
for each type of input because of differences in
the ways the costs are incurred
49
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed.
Equivalent units in regard to conversion costs
0.5 (1 x 50)
One soft drink was started during Week 1 and was
50 percent completed (and still in production)
when Week 2 started.
Direct materials were all added during Week 1, so
there were no equivalent units in regard to
direct materials during Week 2.
The soft drink was 50 percent completed during
Week 1, so the other 50 percent of conversion
costs were incurred during Week 2.
50
Computing Equivalent Production (contd)
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed.
Three soft drinks were started and completed
during Week 2.
Because direct materials are added at the
beginning of production, all direct materials for
these drinks were added during Week 2.
Equivalent units in regard to direct materials
3 (3 x 100).
51
Computing Equivalent Production (contd)
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed.
Three soft drinks were started and completed
during Week 2.
The soft drinks were started and completed during
Week 2, so 100 percent of conversion costs were
incurred during Week 2.
Equivalent units in regard to conversion costs
3 (3 x 100).
52
Computing Equivalent Production (contd)
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed.
One soft drink was started during Week 2 and was
75 completed (and still in production) when Week
2 ended.
Direct materials were all added during Week 2, so
direct materials were 100 during Week 2.
Equivalent units in regard to direct materials
1 (1 x 100).
53
Computing Equivalent Production (contd)
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed.
One soft drink was started during Week 2 and was
75 completed (and still in production) when Week
2 ended.
Because 75 of this soft drink was completed
during Week 2, 75 of conversion costs were
incurred during Week 2.
Equivalent units in regard to conversion costs
0.75 (1 x 75).
54
Computing Equivalent Production
Soda Products Company makes bottled soft drinks.
The company started Week 2 with one
half-completed drink in process. During Week 2,
it started and completed three drinks, and at the
end of Week 2, it had one drink that was
three-quarters completed.
Total equivalent units 4
4.25
55
Stop Review E11

• Q. What is equivalent production?

A. A measure that applies a percentage-of-completi
on factor to partially completed units to
calculate the equivalent number of whole units
produced in an accounting period
56
Preparing a Process Cost Report Using the FIFO
Costing Method

• Objective 6
• Prepare a process cost report using the FIFO
  costing method.

57
Process Cost Report

• A report that managers use to track and analyze
  costs for a process, department, or work cell in
  a process costing system

58
Preparing a Process Cost Report Using the FIFO
Costing Method

• Five steps
• Account for the physical flow of products
• Compute equivalent production
• Accumulate and analyze all costs charged to the
  Work in Process Inventory accounts of each
  production process, department, or work cell
• Compute the cost per equivalent unit for direct
  materials and conversion costs
• Assign costs to products transferred out of the
  area and to those remaining behind in ending work
  in process inventory

59
Accounting for Units
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete.
Step 1 - Account for physical units
These 63,700 units are the actual physical units
that the manager is responsible for during the
period.
60
Beginning Inventory
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete.
Step 2 - Account for equivalent units
0
0
Because all materials are added at the beginning
of the production process, the units in beginning
inventory were already 100 complete in regard to
direct materials
61
Accounting for Equivalent Units
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete.
Step 2 - Account for equivalent units
Units accounted for in Step 2 must equal the
units accounted for in Step 1
62
Beginning Inventory
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete.
Step 2 - Account for equivalent units
0
0
2,480
They were 60 complete in regard to conversion
costs therefore, the remaining 40 of conversion
costs were incurred during the current month
(6,200 x 40 2,480)
63
Units Started and Completed During the Period
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete
Step 2 - Account for equivalent units
0
0
2,480
40
52,500
100
52,500
100
5,000
100
2,250
45
These units were 45 complete in regard to
conversion costs by the end of the period (5,000
x 45)
64
Ending Inventory
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete.
Step 2 - Account for equivalent units
0
0
2,480
40
52,500
100
52,500
100
5,000
100
All direct materials were added to the units in
ending inventory when the units went into
production during the month
65
Ending Inventory
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete.
Step 2 - Account for equivalent units
0
0
2,480
40
52,500
100
52,500
100
5,000
100
2,250
45
These units were 45 complete in regard to
conversion costs by the end of the period (5,000
x 45)
66
Totals
For the accounting period of February, Soda
Products Company had beginning work in process
inventory consisting of 6,200 units, 60
complete. These units were completed and 57,500
more were started into production. Of the 57,500
started, 52,500 were completed. The other 5,000
remained in ending work in process inventory and
were 45 complete.
Step 2 - Account for equivalent units
40
0
0
2,480
52,500
100
52,500
100
5,000
100
2,250
45
57,500
57,230
Total equivalent units for direct materials and
conversion costs will be used in Step 4
67
Accounting for Costs
During the accounting period of February, Soda
Products Company had costs from beginning
inventory of 20,150 for direct materials and
21,390 for conversion costs. Current period
costs include 189,750 for direct materials and
320,488 for conversion costs.
Step 3 - Account for costs
Only the Total Costs column is totaled
Current costs for direct materials and conversion
costs will be used in Step 4
68
Accounting for Costs
For the accounting period of February, Soda
Products Companys equivalent units of production
totaled 57,500 for direct materials and 57,230
for conversion costs. Current period costs
totaled 189,750 for direct materials and
320,488 for conversion costs.
Step 4 Compute cost per equivalent unit
Costs attached to beginning inventory are not
included in these computations because the FIFO
costing method uses separate costing analyses for
each accounting period.
69
Assigning Costs
Step 5 Assign costs to cost of goods
manufactured and ending inventory

• Use information from Steps 2 through 4 to assign
  costs
• Step 2
• Equivalent units for direct materials
• Equivalent units for conversion costs
• Step 3
• Total costs of beginning inventory
• The total costs assigned to units completed and
  transferred out and to ending inventory in Step 5
  must equal the total costs in Step 3
• Step 4
• Cost per equivalent unit for direct materials
• Cost per equivalent unit for conversion costs

70
Cost of Goods Manufactured and Transferred Out
Step 5 Assign costs to cost of goods
manufactured and ending inventory
This amount is calculated in Step 3 in the Total
Costs column for beginning inventory.
71
Cost of Goods Manufactured and Transferred Out
(contd)
Step 5 Assign costs to cost of goods
manufactured and ending inventory
Current costs to complete
The 2,480 equivalent units were calculated in
Step 2 in the Equivalent Units/Conversion Costs
column for beginning inventory.
The 5.60 cost per equivalent unit for conversion
costs was calculated in Step 4.
72
Units Started and Completed This Period
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
The 52,500 equivalent units were calculated in
Step 2 in the Equivalent Units/Direct Materials
column for units started and completed during the
period.
The 3.30 and 5.60 costs per equivalent unit for
direct materials and conversion costs,
respectively, were calculated in Step 4.
73
Cost of Goods Manufactured and Transferred Out
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
467,250


(52,500 x 5.60)
(52,500 x 3.30)
Cost of goods manufactured
74
Ending Inventory
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
467,250


(52,500 x 5.60)
(52,500 x 3.30)
522,678
Cost of goods manufactured
Ending inventory
The 5,000 and 2,250 equivalent units were
calculated in Step 2 in the Equivalent
Units/Direct Materials and Conversion Costs
columns, respectively, for ending inventory.
The 3.30 and 5.60 costs per equivalent unit for
direct materials and conversion costs,
respectively, were calculated in Step 4.
75
Total Costs
Step 5 Assign costs to cost of goods
manufactured and ending inventory
13,888


Current costs to complete
0
(2,480 x 5.60)
Units started and completed this period
467,250


(52,500 x 5.60)
(52,500 x 3.30)
522,678
Cost of goods manufactured
29,100


(5,000 x 3.30)
(2,250 x 5.60)
Ending inventory
Total costs
If differences occur due to rounding in Step 4,
adjust the total costs transferred out for any
rounding difference so that the total costs in
Steps 3 and 5 are equal.
Remember that the total costs in Steps 3 and 5
must always be the same.
76
Recap of Work in Process Inventory Account
77
Process Costing for Two or More Production
Departments

• More than one production department
• Must have a Work in Process Inventory account for
  each department
• Costs are accumulated in each department and
  transferred to the next department as the product
  flows from one department to the next

78
Stop Review E14

• Q. How is the cost per equivalent unit computed?

A. For either direct materials or conversion
costs, divide the current period costs by the
number of equivalent units.
79
Using Information About Product Cost to Evaluate
Performance

• Objective 7
• Evaluate operating performance using information
  about product cost.

80
Using Product Costing Information

• To evaluate
• Cost trends of a product or product line
• Units produced per time period
• Materials usage per unit produced
• Labor cost per unit produced
• Special needs of customers
• Cost-effectiveness of changing to a more advanced
  production process

81
Cost and Usage Trends

• Identify areas of rising costs and
• Find areas in which cost-effectiveness has
  improved
• Evaluate operating efficiency
• Managers track direct materials usage and labor
  cost per unit to determine optimal resource usage

82
Trends in Sales

• Tracking size, cost, and type of products ordered
  by customers
• Helps managers anticipate customers needs and
  improve customer relations

83
Stop Review

• Q. Why would managers want to analyze cost trends
  of a product?

A. Cost trends developed over a period of time
help managers identify areas of rising costs or
areas in which cost-effectiveness has improved.
The factors causing the changes can then be
identified for purposes of improving
cost-effectiveness.
84
Chapter Review

• Discuss the role that information about costs
  plays in the management process, and explain why
  unit cost is important.
• Distinguish between the two basic types of
  product costing systems, and identify the
  information each provides.
• Explain cost flow in a job order costing system,
  prepare a job order cost card, and compute
  product unit cost.

85
Chapter Review (contd)

• 4. Explain product flow and cost flow in a
  process costing system.
• Define equivalent production, and compute
  equivalent units.
• Prepare a process cost report using the FIFO
  costing method.
• Evaluate operating performance using information
  about product cost.