CHAPTER 4 Process Costing and Hybrid Product-Costing Systems Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Comparison of Job-Order Costing and Process Costing Process Process Costing Costing Job-order Costing Used for production of small, identical, low cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product. 4-2 Comparison of Job-Order Costing and Process Costing Process Process Costing Costing Job-order Costing Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill 4-3 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 4-4 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 4-5 Process Cost Flows Work-in-Process Inventory Direct material Direct labor Applied manufacturing overhead One Production Department Finished Goods Inventory Cost of goods completed and transferred to finished goods Cost of Goods Sold Cost of goods sold during current period 4-6 Process Cost Flows Two Sequential Production Departments Work-in-Process Inventory Work-in-Process Inventory Production Department A Production Department B Cost of goods completed Direct material Direct labor in department A and Cost of goods completed Applied manufacturing transferred to and transferred to overhead department B finished goods Direct material Direct labor Applied manufacturing overhead Finished Goods Inventory Cost of Goods Sold Cost of goods sold during current period 4-7 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. 4-8 Equivalent Units Example Two half completed products are equivalent to one completed product. + = l So, 10,000 units that are 70% complete are equivalent to 7,000 complete units. 4-9 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 4-10 Departmental Production Report Analysis of physical flow of units. Calculation of equivalent units. Production Report Computation of unit costs. Analysis of total costs. 4-11 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. 4-12 Production Report Example MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. MVP uses weighted-average process costing. Material is added at the beginning of the Cutting Department, while 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. 4-13 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 Conversion 10,000 units 100% complete. 50% complete. 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 4-14 Production Report Example 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 4-15 Production Report Example 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 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. 4-16 Production Report Example 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 4-17 Production Report Example Computation of unit costs Direct Material Work in Process, March 1 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 45,000 4.46 Total $ 57,200 283,500 $ 340,700 $ 7.26 $2.80 + $4.46 $200,700 ÷ 45,000 equivalent units 4-18 Production Report Example Analysis of total costs Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Convserion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for $ 290,400 $ 28,000 22,300 50,300 $ 340,700 4-19 Production Report Example Analysis of total costs Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Convserion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for $ 290,400 $ 28,000 22,300 50,300 $ 340,700 4-20 Production Report Example Analysis of total costs Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Convserion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for $ 290,400 $ 28,000 22,300 All costs accounted for 50,300 $ 340,700 4-21 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 4-22 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 are charged to batches as in job-order costing. Process Costing Conversion costs are assigned to batches as in process costing. 4-23 End of Chapter 4 I’m ready to process some leisure time. 4-24