Chapter 4 Process Costing and Hybrid Product Costing

Learning Objective 1 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc.

Comparison of Job-Order Costing and Process Costing Job-order Costing F Used for production of small, identical, low cost items. F Mass produced in automated continuous production process. F Costs cannot be directly traced to each unit of product. 3

Comparison of Job-Order Costing and Process Costing Job-order Costing Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill 4

Comparison of Job-Order Costing and Process Costing Job-order costing Process costing – Costs accumulated by the job. – Costs accumulated by department or process. – Work in process has a job-cost sheet for each job. – Work in process has a production report for each batch of products. – Many unique, high cost jobs. – A few identical, low cost products. – Jobs built to customer order. – Units continuously produced for inventory in automated process. 5

Differences Between Job-Order and Process Costing The work-in-process account consists of individual jobs in a job-order cost system. Direct Material Direct Labor Manufacturing Overhead Jobs Finished Goods Cost of Goods Sold 6

Differences Between Job-Order and Process Costing Direct Material Direct Labor & Overhead (Conversion) The work-in-process account consists of individual products in a process cost system. Products When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead. Finished Goods Cost of Goods Sold 7

Learning Objective 2 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc.

Process Cost Flows 9

Process Cost Flows 10

Learning Objective 3 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc.

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. 12

Equivalent Units Example Two one-half completed products are equivalent to one completed product. + = l So, 10, 000 units 70 percent complete are equivalent to 7, 000 complete units. 13

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 14

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 units + (5, 000 units ×. 30) b. 11, 500 = 11, 500 equivalent units c. 13, 500 d. 15, 000 15

Equivalent Units Question 2 If Jones incurred $27, 600 in production costs for the 11, 500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1. 84 b. $2. 40 c. $2. 76 d. $2. 90 16

Equivalent Units Question 2 If Jones incurred $27, 600 in production costs for the 11, 500 equivalent units. What was Jones’s cost per equivalent unit for the period? a. $1. 84 b. $2. 40 $27, 600 ÷ 11, 500 equivalent units c. $2. 76 = $2. 40 per equivalent unit d. $2. 90 17

Calculating and Using Equivalent Units of Production To calculate the direct materials and conversion costs per equivalent unit for the period: Materials cost per equivalent unit Conversion cost per equivalent unit = = Materials cost for the period Materials equivalent units for the period Conversion cost for the period Conversion equivalent units for the period 18

Departmental Production Report Ê Analysis of Ë Calculation physical flow of units. of equivalent units. Production Report Ì Computation of unit costs. Í Analysis of total costs. 19

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. The FIFO method is a more complex method and is rarely used in practice. 20

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, let’s prepare a production report for the Cutting Department. 21

Production Report Example Work in process, March 1: 20, 000 units Materials: 100% complete. Conversion: 10% complete. Cost $ 50, 000 7, 200 Units started into production in March: Units completed and transferred out in March: 30, 000 units 40, 000 units Work in process, March 31: Materials 100% complete. Conversion 50% complete. 10, 000 units Costs incurred during March Materials cost Conversion costs: Direct labor Applied manufacturing overhead Total conversion costs Total costs to account for 90, 000 $ 86, 000 107, 500 193, 500 $ 340, 700 22

Production Report Example Ê Analysis of Physical Flow of Units 23

Production Report Example ËCalculation of Equivalent Units 50% of 10, 000 units Beginning inventory % is not used in weighted-average method. 24

Production Report Example ËCalculation of Equivalent Units 100% of 10, 000 units, all material added at beginning 25

Learning Objective 4 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc.

Production Report Example Ì Computation of unit costs $140, 000 ÷ 50, 000 equivalent units $2. 80 + $4. 46 $200, 700 ÷ 45, 000 equivalent units 27

Learning Objective 5 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc.

Production Report Example Í Analysis of total costs 29

Production Report Example Í Analysis of total costs 30

Production Report Example Í Analysis of total costs All costs accounted for 31

Learning Objective 6 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc.

33

Actual Costing Actual costs of manufacturing overhead are entered in Work-in. Process Inventory vs. Normal Costing Manufacturing overhead is applied to Work-in. Process Inventory using a predetermined overhead rate 34

Departmental Production Report Ê Analysis of physical flow of units. Ë Calculation of equivalent units. Ì Computation of unit costs. Í Analysis of total costs. 35

Learning Objective 7 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc.

Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Process Costing 37

Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Material Costs charged to batches as in job-order costing. Process Costing Conversion costs assigned to batches as in process costing. 38

End of Chapter 4 I’m ready to process some leisure time. 39