Process Costing and Hybrid Product Costing Systems

1
4
Chapter Four Part 1

• Process Costing and Hybrid Product-Costing
  Systems

2
Comparison of Job-Order Costing and Process
Costing
3
Comparison of Job-Order Costing and Process
Costing
4
Comparison of Job-Order Costing and Process
Costing

• Job-order costing
• Costs accumulated by the job.
• Work in process has a job-cost sheet 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.

5
Process Costing
DirectMaterial
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.
6
Differences Between Job-Order and Process Costing
The work-in-process account consists of
individual jobs in a job-order cost system.
Direct Material
FinishedGoods
Direct Labor
Jobs
ManufacturingOverhead
Cost of GoodsSold
7
Differences Between Job-Order and Process Costing
The work-in-process account consists of
individual products in a process cost system.
Direct Material
FinishedGoods
Direct Labor Overhead(Conversion)
Products
Cost of GoodsSold
When direct labor is a relatively small amount
compared to material and overhead, it is often
combined with overhead.
8
Question
In process costing, can you use the following
formula to determine the per-unit product
cost? Per-unit cost Total production cost
Total number of units
9
Equivalent Units A Key Concept

• Costs are accumulated for a period of time for
  products in work-in-process inventory.
• Products in work-in-process inventory at the
  beginning and end of the period are only
  partially complete.
• Equivalent units is a concept expressing these
  partially completed products as a smaller number
  of fully completed products.

10
Equivalent Units Example
Two one-half completed products are equivalent to
one completed product.
So, 10,000 units 70 percent completeare
equivalent to 7,000 complete units.
11
Equivalent Units Question 1
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How many
equivalent units of production did Jones have for
the period? a. 10,000 b. 11,500 c.
13,500 d. 15,000
12
Equivalent Units Question 1
For the current period, Jones started 15,000
units and completed 10,000 units, leaving 5,000
units in process 30 percent complete. How many
equivalent units of production did Jones have for
the period? a. 10,000 b. 11,500 c.
13,500 d. 15,000
10,000 units (5,000 units .30) 11,500
equivalent units
13
Equivalent Units Question 2
For the current period, Abitibi- Price started
2,000 rolls of paper. Each of the rolls is 65
complete with respect to conversion and 100
complete with respect to materials. What are the
equivalent units for conversion and direct
materials?
14
Equivalent Units Question 2
2,000 x 65 1,300 equivalent units of
conversion activity 2,000 x 100 2,000
equivalent units of direct material
15
Calculating and Using Equivalent Units of
Production

• To calculate the cost perequivalent unit for the
  period

Cost perequivalent unit
Costs for the periodEquivalent units for the
period

16
Equivalent Units Question 3
If Jones incurred 27,600 inproduction costs
for the 11,500 equivalent units. What was
Joness cost per equivalent unit for the
period? a. 1.84 b. 2.40 c. 2.76 d. 2.90
17
Equivalent Units Question 2
If Jones incurred 27,600 inproduction costs
for the 11,500 equivalent units. What was
Joness cost per equivalent unit for the
period? a. 1.84 b. 2.40 c. 2.76 d. 2.90
18
Equivalent Units Question 4
If Abitibi-Price incurred 26,000 for
conversion (DL MOH) and 100,000 for direct
materials, what are the equivalent unit costs?
19
Equivalent Units Question 4
26,000 20 per equivalent unit for
conversion 1,300 100,000 50 per
equivalent unit for direct material
2,000
20
Departmental Production Report
21
Equivalent Units of Production Weighted-Average
Method

• 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 from the prior
  period and the current period.

22
Production Report Example
At this point, we need to look at an example to
illustrate the departmental production report.
23
Production Report Example

• MVP Sports Equipment Company makes baseball
  gloves in two departments, Cutting and Stitching.
  
• MVP uses the weighted-average cost procedure.
• Material is added at the beginning of the Cutting
  Department, and conversion is incurred uniformly
  throughout the process.
• Using the following information for the month of
  March, lets prepare a production report for the
  Cutting Department.

24
Production Report Example(page 141 text)
Exh. 4-4
Cost

• Work in process, March 1 20,000 units
• Materials 100 complete.
  50,000
• Conversion 10 complete.
  7,200
• Units started into production in March 30,000
  units
• Units completed and transferred out in
  March 40,000 units
• Work in process, March 31 10,000 units
• Materials 100 complete.
• Conversion 50 complete.
• Costs incurred during March
• Materials cost 90,000
• Conversion cost 193,500

25
Production Report Example
Exh. 4-5

• STEP 1 Analysis of Physical Flow of Units

26
Production Report Example
Exh. 4-6

• STEP 2 Calculation of Equivalent Units

27
Production Report Example
Exh. 4-6

• STEP 2 (cont) Calculation of Equivalent Units

100 of 10,000 units, allmaterial added at
beginning
28
Production Report Example
Exh. 4-7

• STEP 3 Computation of unit costs

29
Production Report Example
Exh. 4-8

• STEP 4 Analysis of total costs

30
Process CostingTypical Accounting Entries
Lets look at the accounting journal entries for
a process cost system. Well omit the numbers
so that we can focus on accounts.
31
Process CostingTypical Accounting Entries
32
Process CostingTypical Accounting Entries
33
Process CostingTypical Accounting Entries
34
Process CostingTypical Accounting Entries
35
Process CostingTypical Accounting Entries
36
Process CostingTypical Accounting Entries
37
End of Chapter 4
Thursday 4-31