Systems Design: Process Costing

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Systems DesignProcess Costing
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Process Costing
To helpset prices
To evaluateproducts
To determinebalance sheetinventory
To evaluateproductionefficiency
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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
Work inProcess
Direct Labor
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 Inventory accounts raw materials, work in
process, and finished goods
Same overhead assignment methodpredetermined
rate times actual activity
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Assigning Costs to Products All Units Fully
Completed
No beginning or endingWork in Process Inventory
Common when a company issuccessful at
just-in-time production
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Assigning Costs to Products Some Units Not
Fully Completed
Same objective determine the cost of products
No beginning Work in Process Inventory
Ending Work in Process Inventory consistsof
units started during the period, butincomplete
at the end of the period.
Same Inventory accounts raw materials, work in
process, and finished goods
Same overhead assignment methodpredetermined
rate times actual activity
We must now deal with the conceptof equivalent
units.
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Assigning Costs to Products Some Units Not
Fully Completed
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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Process Cost Flows
Work in Process Department A
Raw Materials

• DirectMaterials

• DirectMaterials

• Purchases

• Indirect Materials

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• Indirect Materials

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Process Cost Flows
Work in Process Department A
Wages Payable

• Direct Materials

• Direct Labor

• Direct Labor

• IndirectLabor

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• Direct Labor

• IndirectMaterials

• IndirectLabor

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Process Cost Flows
Work in Process Department A
Wages Payable

• Direct Materials

• Direct Labor

• Direct Labor

• IndirectLabor

• AppliedOverhead

Work in Process Department B
Manufacturing Overhead
Actual
Applied

• Direct Materials

• OtherOverhead

• OverheadApplied to Work inProcess

• Direct Labor

• IndirectMaterials

• AppliedOverhead

• IndirectLabor

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Process Cost Flows
Work in Process Department B
Work in ProcessDepartment A

• Direct Materials

Transferred to Dept. B

• Direct Materials

• Direct Labor

• Direct Labor

• AppliedOverhead

• AppliedOverhead

• Transferred from Dept. A

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Process Cost Flows
Work in Process Department B
Finished Goods

• Direct Materials

• Cost of GoodsManufactured

• Cost of Goods Manufactured

• Cost of GoodsSold

• Direct Labor

• AppliedOverhead

• Transferred from Dept. A

Cost of Goods Sold

• Cost of GoodsSold

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Production Report
Shows the flowof units and coststhrough work
inprocess
Provides costinformation forfinancial
statements
Becomes thejob cost sheetin processcosting
Helps managerscontrol theirdepartments
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Production Report

• A quantity schedule showing the flow of units and
  the computation of equivalent units.

• A computation ofcost per equivalent unit.

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Production Report

• A reconciliation of cost flows for the
  period, including
• Total cost for units completed and
  transferred from the processing department.
• Total cost for partially completed units
  remaining in work in process.

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Equivalent Units of Production

• Equivalent units are partially complete and are
  part of work in process inventory. Partially
  completed products are expressed in terms of a
  smaller number of fully completed units.

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Equivalent Units of Production
Two half completed products are equivalent to one
completed product.


So, 10,000 units 70 percent completeare
equivalent to 7,000 complete units.
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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.

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Assigning Costs UsingWeighted-Average Costing
Beginning Inventory250 units
1,250 units
1,100 unitscompleted
1,000 unitsstarted
EndingInventory150 units
Now lets examine the five-step process.
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Weighted Average Example
Materials
1,000 Units Started
EndingWork in Process150 Units100 Complete
BeginningWork in Process250 Units100 Complete
850 Units Startedand Completed
1,100 Units Completed
150 100
150 Equivalent Units
1,250 Equivalent units of production
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Weighted Average Example
Conversion
1,000 Units Started
BeginningWork in Process250 Units80 Complete
Work to Complete Process20 250 Units
EndingWork in Process150 Units33 1/3 Complete
850 Units Startedand Completed
1,100 Units Completed
150 .333
50 Equivalent Units
1,150 Equivalent units of production
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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 see an example.

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Costs Transferred infrom Prior Departments

• Complete the five-step process for Ace CD Inc.
  to assign costs to units completed and to units
  left in process for June.

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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 15,000 units
40 of 15,000 units
Transferred-in units are 100 complete
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Costs Transferred infrom Prior Departments