Process Costing
Objectives
—
Compare job order and process costing
—
Talk about costs to account for
—
Understand the concept of equivalent units
Types of Product-Costing Systems
Process
Costing
Job-Order
Costing
• Used for production of small,
identical, low cost items.
• Used for production of large,
unique, high-cost items.
• Mass produced, automated
continuous production
process.
• Built to order rather than mass
produced.
• Costs cannot be directly
traced to each unit of
product.
• Many costs can be directly traced
to each job.
Accumulating Costs Job-Order Costing System
Direct
Materials
Direct Labor
Job No. 1
Job No. 2
Finished
Goods
Manufacturing
Overhead
Job No. 3
Cost of
Goods
Sold
Assigning Costs - Process Costing
Work-in-Process
Direct
Materials
Process A
Direct Labor
Process B
Manufacturing
Overhead
Assembly
Finished
Goods
Account
Cost of
Goods
Sold
Account
Commonalities: Job Order & Process
The same purpose - assign manufacturing costs to Cost of Goods
Sold, inventories, and products
Both systems use the same basic
manufacturing accounts
The flow of costs through each
system is similar
Differences – Job Order & Process
The flow of units in a process system is
more or less continuous and units are
indistinguishable from one another
Costs are accumulated by department
(activity) rather than by job. A firm is likely
to have more than one Work-in-Process
(subsidiary) inventory account.
Process Costing
Dollar Amount
Direct
Material
Manufacturing
Overhead
Direct
Labor
Type of Product Cost
Direct-labor costs
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)
Process Costing
Direct
Material
Conversion
Dollar Amount
Direct-labor costs
are usually small
in comparison to
other product
costs in process
cost systems.
(high level of
automation)
Type of Product Cost
So, direct labor and manufacturing overhead are often
combined into one product cost called conversion.
Process Costing - 5 Key Steps
Step 1 -- Summarize the flow of physical units -- where are the
costs?
Step 2 -- Calculate output in terms of Equivalent Units
Step 3 -- Summarize total costs to account for which are the costs
charged (debited) to WIP
Step 4 -- Calculate equivalent unit costs
Step 5 -- Apply/assign costs to units completed and to units in the
ending WIP
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.
Step 1 and Step 2 -- Equivalent Units
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.
Step 1 and Step 2: In Pictures
Two one-half completed products are
equivalent to one completed product.
+
=
So, 10,000 units 80 percent complete
are equivalent to ? complete units.
Equivalent Units Question 1
During the current period, Regina 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 Regina have
for the period?
a.
b.
c.
d.
10,000
11,500
13,500
15,000
Calculating and Using Equivalent Units of
Production
To calculate the cost per
equivalent unit for the period:
Cost per
equivalent
unit
=
Costs for the period
Equivalent units for the period
Equivalent Units Question 2
Regina incurred $27,600 in production costs for the
11,500 equivalent units. What was Regina’s cost per
equivalent unit for the period?
a.
b.
c.
d.
$1.84
$2.40
$2.76
$2.90
A Process Costing Example
MVP Sports Equipment Company makes baseball gloves in
two departments, Cutting and Stitching.
MVP uses the weighted-average process costing method.
Material is added at the beginning of the Cutting Department,
and conversion costs are incurred uniformly throughout the
process.
Production Report
Work in process, March 1: 20,000 units
Materials:
100% complete.
Conversion:
10% complete.
Units started into production in March:
Units completed and transferred out in March:
Work in process, March 31:
Materials
100% complete.
Conversion
50% complete.
Costs incurred during March
Materials cost
Conversion cost
Cost
$ 50,000
7,200
30,000 units
40,000 units
10,000 units
$ 90,000
193,500
(1) Analysis of Physical Flow of Units
Physical
Units
Work in process, March 1
Units started during March
Total units to account for
20,000
30,000
50,000
Units completed and transferred out during March
Work in process, March 31
Total units accounted for
40,000
10,000
50,000
(2) Calculation of Equivalent Units
Physical
Units
Conversion
Percentage
Complete
Work in process, March 1
Units started during March
Total units to account for
20,000
30,000
50,000
10%
Units completed and transferred
Work in process, March 31
Total units accounted for
Total equivalent units
40,000
10,000
50,000
100%
50%
Equivalent Units
Direct
Material Conversion
100% of 10,000 units, all
material added at beginning
40,000
10,000
40,000
5,000
50,000
45,000
(2) Calculation of Equivalent Units (con’t)
Physical
Units
Conversion
Percentage
Complete
Work in process, March 1
Units started during March
Total units to account for
20,000
30,000
50,000
10%
Units completed and transferred
Work in process, March 31
Total units accounted for
Total equivalent units
40,000
10,000
50,000
100%
50%
Equivalent Units
Direct
Material Conversion
50% of 10,000 units
40,000
10,000
40,000
5,000
50,000
45,000
Beginning inventory % is not used in weighted-average method.
(3) Computation of total costs to account for
Direct
Material
Work in Process, March 1
Costs incurred during March
Total costs to account for
$ 50,000
90,000
$ 140,000
Conversion
$
7,200
193,500
$ 200,700
Total
$ 57,200
283,500
$ 340,700
(4) Computation of unit costs
Direct
Material
Work in Process, March1
Costs incurred during March
Total costs to account for
$ 50,000
90,000
$ 140,000
Equivalent units
Cost per equivalent unit
50,000
$
2.80
Conversion
$
7,200
193,500
$ 200,700
$
$140,000 ÷ 50,000 equivalent units
$200,700 ÷ 45,000 equivalent units
45,000
4.46
Total
$ 57,200
283,500
$ 340,700
$
7.26
$2.80 + $4.46
(5) Analysis of total costs
Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit
$ 290,400
(5) Analysis of total costs
Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit
$ 290,400
Costs remaining in work-in-process on March 31
Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit
Total cost of March 31 work in process
Total costs accounted for
22,300
All costs
accounted for
50,300
$ 340,700
Equivalent Units Practice
The following data are from Energy Resource’s Amarillo Plant:
WIP, November 1
DM
100% complete
CC
25% complete
2,000,000 gallons
Units started during November
950,000 gallons
WIP, November 30
240,000 gallons
DM
100% complete
CC
80% complete
Calculate the equivalent unit amounts necessary to determine per unit
costs.
Process Costing
Physical
Units
Beginning WIP
Total units started
Units to account for
Comp &
Transferred Out
Ending WIP
Units to account for
% comp
w/r/t CC
Equivalent Units
Direct
Conversion
Materials
Costs
Process Costing
Physical
Units
Beginning WIP
Total units started
Units to account for
Comp &
Transferred Out
Ending WIP
Units to account for
% comp
w/r/t CC
Equivalent Units
Direct
Conversion
Materials
Costs
Process Costing Practice
Centura completed and transferred 900,000 units to finished goods during
1999. WIP as of December 31, 1999, had 300,000 units that were 50%
complete w/r/t CC and 100% w/r/t DM. Finished goods inventory
consisted of 200,000 units. Materials are added at the beginning of
production and overhead is applied at a rate of 60% of direct labor costs.
There was no finished goods inventory on January 1, 1999. Their
inventory cost records provide the following information:
WIP 1/1/1999 (80% complete w/r/t CC)
Units started in production
Direct materials cost
Direct labor cost
Units
200,000
1,000,000
Costs
Materials
Labor
$200,000
$315,000
$1,300,000
$1,995,000
Process Costing
Physical
Units
Beginning WIP
Total units started
Units to account for
Comp &
Transferred Out
Ending WIP
Units to account for
% comp
w/r/t CC
Equivalent Units
Direct
Conversion
Materials
Costs
Process Costing in Subsequent
Production Departments
An added complication in process costing system is that
production often takes place in more than one department.
In the previous example, only costs and units in the MVP’s
Cutting Department were taken into consideration.
Now let’s work with the Cutting and Stitching Department.
Subsequent Departments
Work In Process Inventory:
Cutting Department
Direct
material
Conversion:
Direct labor
Manufacturing
overhead
Cost of goods
completed and
transferred
out
Work In Process Inventory:
Stitching Department
Transferredin costs
Direct
material
Conversion:
Direct labor
Manufacturing
overhead
Cost of goods
completed and
transferred
out
MVP Sports - Additional Facts
In Stitching, DM are added at the end of production process.
40,000 units from Cutting are transferred in to Stitching during March
10,000 units are in Stitching’s Beginning WIP (March 1)
30,000 units are transferred to Finished Goods in March
With respect to Stitching’s Ending WIP (March 31)
Transferred In: 100% complete
Direct Material: None
Conversion: 90% complete
Transferred-In Costs
The costs assigned to the units completed in each
department and transferred to the next department’s
work in process inventory account.
Equivalent Units for Stitching
Step 1
Physical
Units
% comp w/r/t
conversion
Step 2
Equivalent Units
Transferred
In
DM
CC