Cornerstones of Managerial
Accounting 2e
Chapter Six
Process Costing
Mowen/Hansen
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license.
1
Characteristics of Process
Manufacturing
Process costing works well whenever
relatively homogeneous products pass
through a series of processes and they
receive similar amounts of manufacturing
costs.
Example industries:
Chemicals
Tire
manufacturers
Food
Large
manufacturing
plants
2
Types of Processes
Sequential processing
Requires that units pass through one process
before they can be worked on in later
processes.
In each department materials, labor, and
overhead may be added. After
completing one process, the partially
completed goods are transferred to the
next department.
3
Types of Processes
Parallel processing
Partially completed units can be worked on
simultaneously in different processes and then
brought together in a final process for
completion.
4
Raw Materials Cost Flow
The manufacturing cost flows are
generally the same as those for a joborder system.
Raw Materials
Materials
+
purchases
As raw materials
are purchased, the
cost of these
materials flow into
a raw materials
account.
5
Cost Flows into Work in Process
Work in Process
+ Materials
+ Direct Labor
+ Overhead
Materials, labor
and overhead flow
into the Work in
Process account
6
Cost Flows into Finished Goods
Work in Process
+ Materials
+ Direct Labor
+ Overhead
Finished Goods
Completed
Goods
+ Completed
Goods
Completed goods are
transferred out of Work in
Process and into Finished
Goods
7
Cost Flows into Cost of Goods Sold
Finished Goods
+ Completed
Goods
Cost of Goods
Sold
Sold Goods
+ Sold Goods
Goods that are sold are
transferred out of Finished
Goods and into Cost of
Goods Sold
8
Transferred-In Costs
Transferred-In Costs are costs
transferred from a prior process to a
subsequent process.
From the viewpoint of the subsequent
process, transferred-in costs are a type of
raw material cost.
9
Production Report
Summarizes the manufacturing activity of a
process department for a given period of time.
Two sections:
Unit Information
section
Cost Information
section
10
Production Report
Two sections:
Unit Information
section
Units to
Account For
Cost Information
section
Units
Accounted For
Unit Information Section
has two major subdivisions
11
Production Report
Two sections:
Unit Information
section
Cost Information
section
Costs to
Account For
Costs
Accounted For
Cost Information Section
also has two major
subdivisions
12
Production Report
Computing unit cost is a key part of the
production report.
Unit Cost is needed to:
•
Compute the cost of goods transferred
out of a department
•
Value ending work-in-process inventory
This is not easy. It is
difficult to define the
number of units produced.
13
Equivalent Units Example
Assume that Department A had the following
data for October:
Units in beginning work in process
Units completed
Units in ending work in process
(25% complete)
Total manufacturing costs
--1,000
600
$11,500
What is the output for this
department? 1000 units?
1600 units?
14
Equivalent Units Example
Assume that Department A had the following
data for October:
Units in beginning work in process
Units completed
Units in ending work in process
(25% complete)
Total manufacturing costs
--1,000
600
$11,500
If we say 1000, we ignore
the ending work in process.
15
Equivalent Units Example
Assume that Department A had the following
data for October:
Units in beginning work in process
--1,000
Units completed
Units in ending work in process (25% complete)
Total manufacturing costs
600
$11,500
1600? Then we ignore the fact that the
units in ending work in process are only
partially completed
16
Equivalent Units of Output
•
What are equivalent units?
◦
•
The total number of complete units that could
have been produced given the total manufacturing
effort used during the period
Dilemma
◦
Some units are physically complete
∙
Called Units Completed
∙
When complete, units are transferred out
◦
Some units are not complete
∙
Remain in Work in Process
∙
Degree of completion must be determined
17
Beginning Work-In-Process Inventory
•
Work done on these beginning inventory units
◦
Represents prior period costs
◦
How should these costs figure into the computation
of current period unit costs?
•
Two methods:
◦
Weighted Average Method
◦
FIFO Method
18
Weighted Average Method
•
Combines
◦
Beginning inventory costs
◦
Current-period costs
•
Calculates Unit Cost for the period
◦
•
By averaging
Unit cost is used to compute costs for:
◦
Goods transferred-out
◦
Goods remaining in work-in-process
19
FIFO Method
Separates work and costs for the
equivalent units in beginning inventory
from work and costs of the equivalent
units produced during the current period.
Only current work and costs are
used to calculate this period’s
unit cost.
20
Preparing a Weighted Average
Production Report
Step #1 Physical Flow Analysis
•
Trace the physical units of production
◦
Two amounts are computed
∙
Units Started and Completed
∙
Units Started
21
Preparing a Weighted Average
Production Report
Step #2 Calculation of Equivalent Units
•
Adding together
◦
Units Completed
◦
Units in Ending Work in Process x Fraction Complete
•
Beginning inventory
◦
Included in the units completed
◦
Treats beginning inventory as if it was started and
completed the current period
22
Preparing a Weighted Average
Production Report
Step #3 Computation of Unit Cost
•
Manufacturing Costs ÷ Equivalent Units
◦
Costs include:
∙
Prior period costs associated with beginning
work in process
∙
Current period manufacturing costs
23
Preparing a Weighted Average
Production Report
Step #4 Valuation of Inventories
•
Computing cost of goods transferred out
◦
•
Multiplying
∙
Unit cost (computed in step #3)
∙
Units completed (computed in step #1)
Computing cost of ending work in process
◦
Multiplying
∙
Unit cost (computed in step #3)
∙
Equivalent units (computed in step #2)
24
Preparing a Weighted Average
Production Report
Step #5 Cost Reconciliation
•
Checks to see if
◦
Costs to account for
∙
Beginning Work in Process + Costs incurred during the
period
◦
Equal
◦
Costs assigned to inventory
∙
Transferred Out + Ending Work In Process
25
Evaluation of the Weighted
Average Method
Major benefit of this method is the simplicity.
Main disadvantage is reduced accuracy in
computing unit costs.
If greater accuracy is
desired, a company should
use the FIFO method to
determine unit costs.
26
Nonuniform Application of
Manufacturing Inputs
•
In the prior example
◦
•
Materials, labor and overhead were applied
uniformly throughout the process
But often material is not added uniformly
◦
Instead it is added at the beginning and end
of the process
This leads to separate
completion percentages for
materials and conversion
costs.
27
Nonuniform Application of
Manufacturing Inputs
Separate equivalent units, unit
costs and category costs are
computed for materials and
conversion costs.
Cornerstone 6-7 will walk
us through this.
28
Multiple Departments
Some departments receive partially
completed goods from prior departments.
Usual approach is to treat transferred-in
goods as a separate material category.
Cost of this material is the
cost of the goods transferred
out as computed in the prior
department.
29