Systems Design: Process Costing

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Systems DesignProcess Costing
Chapter4
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Types of Costing Systems Used to Determine
Product Costs
Job-orderCosting
ProcessCosting

• Many units of a single, homogeneous product
  flow evenly through a continuous production
  process.
• One unit of product is indistinguishable from
  any other unit of product..
• Each unit of product is assigned the same
  average cost.

• Typical process cost applications
• Petrochemical refinery
• Paint manufacturer
• Paper mill

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Differences Between Job-Order and Process Costing

• Job order costing
• Many jobs are worked during the period.
• Costs are accumulated by individual jobs.
• Job cost sheet is the key document.
• Unit cost computed by job.

• Process costing
• A single product is produced for a long period of
  time.
• Costs are accumulated by departments.
• Department production report is key document.
• Unit costs are computed by department.

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Sequential Processing Departments
Start
Processing Department 1
Partially completed goods
Partially completed goods
Completed goods
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Parallel Processing Departments
Start
Processing Department 1
Partially completed goods
Partially completed goods
Completed goods
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Flow of Materials, Labor and Overhead Costs
Processing Department
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Flow of Materials, Labor and Overhead Costs
Work in Process Mixing Department
Raw Materials
DirectMaterial
Purchases
Indirect Material
Work in Process Finishing Department
Manufacturing Overhead
Actual
Applied
OtherOverhead
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Flow of Materials, Labor and Overhead Costs
Work in Process Mixing Department
Wages Payable
Direct Material
Direct Labor
IndirectLabor
Work in Process Finishing Department
Manufacturing Overhead
Actual
Applied
Direct Material
OtherOverhead
Indirect Material
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Flow of Materials, Labor and Overhead Costs
Work in Process Mixing Department
Wages Payable
Direct Material
Direct Labor
Direct Labor
IndirectLabor
Work in Process Finishing Department
Manufacturing Overhead
Actual
Applied
Direct Material
OtherOverhead
Direct Labor
Indirect Material
IndirectLabor
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Flow of Materials, Labor and Overhead Costs
Now, lets transfer the partially completed goods
fromMixing DepartmenttoFinishing Department.
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Flow of Materials, Labor and Overhead Costs
Work in Process Finishing Department
Work in Process Mixing Department
Direct Material
Direct Material
Direct Labor
Direct Labor
AppliedOverhead
AppliedOverhead
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Flow of Materials, Labor and Overhead Costs
The goods have been completed in the Finishing
Department and will be transferred to Finished
Goods Inventory when they are ready to be sold.
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Flow of Materials, Labor and Overhead Costs
Work in Process Finishing Department
Finished Goods
Direct Material
Direct Labor
AppliedOverhead
Transferred from Dept. A
Cost of Goods Sold
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Materials, Labor, and Overhead Cost Entries
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Flow of Materials, Labor and Overhead Costs
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Flow of Materials, Labor and Overhead Costs
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Flow of Materials, Labor and Overhead Costs
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Flow of Materials, Labor and Overhead Costs
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Flow of Materials, Labor and Overhead Costs
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Equivalent Units of Production

• Equivalent units are partially complete and are
  part of work in process inventory. It is the
  concept of expressing partially completed
  products as a smaller number of fully completed
  units.

Two one-half completed products are equivalent to
one completed product. So, 10,000 units 70
complete are equivalent to 7,000 complete units.
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Quick ?
For the current period, Matrix 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 Matrix have
for the period? a. 10,000 b. 11,500
c. 13,500 d. 15,000
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Quick ?
For the current period, Matrix 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 Matrix 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
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Equivalent Units of Production

• To calculate the cost perequivalent unit for the
  period

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Quick ?
Now assume that Matrix incurred 27,600 in
production costs for the 11,500 equivalent units
of production. What was Matrixs cost per
equivalent unit for the period? a. 1.84 b. 2.4
0 c. 2.76 d. 2.90
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Quick ?
Now assume that Matrix incurred 27,600 in
production costs for the 11,500 equivalent units
of production. What was Matrixs cost per
equivalent unit for the period? a. 1.84 b. 2.4
0 c. 2.76 d. 2.90
27,600 11,500 equivalent units 2.40 per
equivalent unit
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Weighted Average Method
Under the weighted-average method equivalent
units will always be calculated as follows
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Weighted Average Method

• Matrix, Inc. reported the following activity in
  Mixing Department for the month of June

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Weighted Average Method

• Equivalent units are calculated as follows

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Weighted Average Method

• Equivalent units are calculated as follows

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Weighted Average Method
Equivalent units of production always equals
Units completed and transferred
Equivalent units remaining in work in process

• Equivalent units are calculated as follows

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Weighted Average Method
Materials
6,000 Units Started
EndingWork in Process900 Units60 Complete
BeginningWork in Process300 Units40 Complete
5,100 Units Startedand Completed
5,400 Units Completed
5,400 Units Completed
900 60
540 Equivalent Units
5,940 Equivalent units of production
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Weighted Average Method
Conversion
6,000 Units Started
EndingWork in Process900 Units30 Complete
BeginningWork in Process300 Units40 Complete
5,100 Units Startedand Completed
5,400 Units Completed
900 30
270 Equivalent Units
5,670 Equivalent units of production
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Production Report
Production Report
Section 1
Section 2
Section 3
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Production Report Example

• Double Diamond Skis uses process costing to
  determine unit costs in its Shaping and Milling
  Department.
• Double Diamond uses the weighted average cost
  procedure.
• Using the following information for the month of
  May, lets prepare a production report for
  Shaping and Milling.

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Production Report Example
Cost

• Work in process, May 1 200 units
• Materials 50 complete. 3,000
• Conversion 30 complete. 1,000
• Units started into production in May 5,000
• Units completed and transferred out in May 4,800
• Costs added to production in May
• Materials cost 74,000
• Conversion cost 70,000
• Work in process, May 31 400 units
• Materials 40 complete.
• Conversion 25 complete.

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Production Report Example
Step? Quantity Schedule with Equivalent Units
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Production Report Example
Step? Quantity Schedule with Equivalent Units
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Production Report Example
Section? Compute cost per equivalent unit
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Production Report Example
Section? Compute cost per equivalent unit
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Production Report Example
Section? Compute cost per equivalent unit
71,000 4,900 units 14.490 (rounded)
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Production Report Example
Section ? Cost Reconciliation
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Production Report Example
Section ? Cost Reconciliation
4,800 units _at_ 30.014
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Production Report Example
Section ? Cost Reconciliation
160 units _at_ 15.524
100 units _at_ 14.49
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End of Chapter 4