Chapter 03 PP

8/2/2019 Chapter 03 PP

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Chapter Three

Process Costing


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Objectives1. Describe how products flow through departments

and how costs flow through accounts in process

costing.2. Discuss the concept of an equivalent unit.

3. Calculate the cost per equivalent unit.

4. Calculate the cost of goods completed and the

ending Work in Process balance in a processingdepartment.

5. Describe a production cost report.

6. Describe process costing for multiple departments.


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Difference Between Job-Order

and Process Costing Systems

Job-Order Costing Systems assign coststo heterogeneous jobs.

Process Costing Systems spread totalmanufacturing costs over total,homogenous, units produced.
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Difference Between Job-Order

and Process Costing Systems


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Product and Cost Flows

1. Product Flows Through Departments (p 82)

2. Cost Flows Through Accounts (p 85)

3. Conversion direct + manufacturingCosts labor overhead=


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Product Flows Through

Departments


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Cost Flows Through Accounts


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Calculating Unit CostTo compute unit costs it is first necessaryto compute Equivalent Units.
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How Equivalent Units are

Calculated


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Cost Per Equivalent UnitWeighted average unit cost in a ProcessCosting System is calculated as follows:

Cost Per Equivalent Unit=

Cost in BWIP + Costs incurred currently

Units completed + Equivalent units in EWIP


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Calculating and Applying Cost Per

Equivalent Unit: Mixing Department ExampleUnits:

BWIP:10,000 gallons, 80% complete labor/overhead

Started:70,000 gallons, 60,000 of these completed

EWIP:20,000 gallons, 50% complete.

No spoilage or missing units.

Costs:

BWIP:$18,000 material, $7,800 labor, $23,400 overhead

Added:$142,000 of material, $62,200 labor

Overhead: applied at a predetermined rate of $3 per dollar oflabor or $186,600.


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Calculating and Applying Cost PerEquivalent Unit: Mixing Department

Example

Calculate: Cost per equivalent unit.

Answer: $6

Solution:

Material: $160,000/80,000=$2

Labor: $ 70,000/70,000=$1

Overhead: $210,000/70,000=$3

Total Costs/Unit: =$6

C l l ti d A l i C t


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Calculating and Applying CostPer Equivalent Unit: Mixing

Department Example

C l l ti d A l i C t


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Calculating and Applying CostPer Equivalent Unit: Mixing

Department Example


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Production Cost ReportProduction Cost Report Contains:

1. Reconciliation of units.

2. Reconciliation of costs.

3. Details of the cost per equivalent unitcalculations.
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Reconciliation of UnitsBWIP + the number of units started = thenumber of units completed EWIP.


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Reconciliation of CostsBWIP + costs added = costs transferredout + EWIP.


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Basic Steps in Process

Costing: A Summary1. Account for the number of physical

units.

2. Calculate the cost per equivalent unitfor material, labor and overhead.

3. Assign cost to items completed and

items in EWIP.4. Account for the amount of product cost

(reconciling costs and units identifiesspoilage or missing units).


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Dealing With Transferred-In

Costs1. Process Costing Systems generally use

several processes; not just one.

2. The costs from the previous processes arecalled Transferred-In costs . They areincluded in the current process, so theproduct accumulates cost or value as it flows

through to finished goods inventory3. Transferred-In costs are treated just like

other product costs (l.e. material, labor andoverhead).


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Process Costing and

Incremental Analysis1. Decisions are based on costing

information obtained through Process

Costing Systems.2. Incremental Analysis is frequently

used to make these decisions.

3. In incremental analysis we need to

identify the extra cost of furtherprocessing to the extra benefit, and bewary of including allocated sunk costs.


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Quick Review Question #11. The best example of a business

requiring a process costing system

would be a(n);

a. Soap manufacturer.

b. Automobile repair shop.

c. Custom cabinet shop.d. Antique furniture restorer.


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Quick Review Answer #11. The best example of a business

requiring a process costing system

would be a(n);

a. Soap manufacturer.

b. Automobile repair shop.

c. Custom cabinet shop.d. Antique furniture restorer.


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Quick Review Question #22. Costs in a process costing system are

ultimately traced to

a. Specific processes.

b. Specific customers.

c. Specific jobs.

d. Specific production personnel.


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Quick Review Answer #22. Costs in a process costing system are

ultimately traced to

a. Specific processes.

b. Specific customers.

c. Specific jobs.

d. Specific production personnel.


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Quick Review Question #33. BWIP consisted of 2,500 units, 100%

complete for materials and 60% for

conversion costs. 8,000 additionalunits were started. 9,000 units werecompleted and transferred out. Howmany physical units are in EWIP?

a. 1,500.b. 10,500.

c. 14,500.

d. 0.


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Quick Review Question #44. Using question #3 data, assume

ending inventory was 100% complete

for materials and 80% complete forconversion costs? Calculateequivalent units of production formaterials and conversion costs.

a. 6,500 & 6,500b. 8,000 & 6,500

c. 8,000 & 8,700

d. 9,000 & 8,700


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Chapter 03 PP

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