4-1
Systems Design:Process Costing
Chapter 4
I Made R. Natawidnyana, Ak., CPMA
Job-orderCosting
ProcessCosting
F Many units of a single, homogeneous productflow evenly through a continuous productionprocess.
F One unit of product is indistinguishable from anyother unit of product.
F Each unit of product is assigned the sameaverage cost.
Types of Costing Systems Used to Determine Product Costs
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Types of Costing Systems Used to Determine Product Costs
Job-orderCosting
ProcessCosting
Typical process cost applications:
v Petrochemical refinery
v Paint manufacturer
v Paper mill
I Made R. Natawidnyana, Ak., CPMA
Job order costing
l Many jobs are worked during the period.
l Costs are accumulated by individual jobs.
l Job cost sheet is the key document.
l Unit cost computed by job.
Process costing
l A single product is produced for a long period of time.
l Costs are accumulated by departments.
l Department production report is key document.
l Unit costs are computed by department.
Differences Between Job-Order and Process Costing
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I Made R. Natawidnyana, Ak., CPMA
Process Costing
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
DirectMaterials
Type of Product Cost
Do
llar
Am
ou
nt
DirectLabor
Conversion
I Made R. Natawidnyana, Ak., CPMA
Process Costing
Type of Product Cost
Do
llar
Am
ou
nt Conversion
So, direct labor and manufacturing overhead are oftencombined into one product cost called conversion.
Direct labor costsmay be small
in comparison toother product
costs in processcost systems.
DirectMaterials
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I Made R. Natawidnyana, Ak., CPMA
Comparing Job-Orderand Process Costing
FinishedGoods
Cost of GoodsSold
Work inProcess
Direct Materials
Direct Labor
ManufacturingOverhead
I Made R. Natawidnyana, Ak., CPMA
Comparing Job-Orderand Process Costing
FinishedGoods
Cost of GoodsSold
Direct Labor
ManufacturingOverhead
Jobs
Costs are traced andapplied to individualjobs in a job-order
cost system.Direct
Materials
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I Made R. Natawidnyana, Ak., CPMA
Comparing Job-Orderand Process Costing
FinishedGoods
Cost of GoodsSold
Direct Labor
ManufacturingOverhead
ProcessingDepartment
Costs are traced and applied to departments
in a process cost system.
Direct Materials
I Made R. Natawidnyana, Ak., CPMA
Process Cost Flows
Let’s look at cost flows in a process cost system with
Departments A and B.We will use
T-accounts andstart with materials.
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I Made R. Natawidnyana, Ak., CPMA
Raw Materials•Purchases •Direct
Materials
Process Cost Flows
•IndirectMaterials
•DirectMaterials
Work in ProcessDepartment B
Work in ProcessDepartment A
•OtherOverhead
Manufacturing Overhead
Actual Applied
•IndirectMaterials
•DirectMaterials•Direct Labor
I Made R. Natawidnyana, Ak., CPMA
Process Cost Flows
Work in ProcessDepartment B
•DirectLabor
Work in ProcessDepartment A
•OtherOverhead
Manufacturing Overhead
Actual Applied
•IndirectMaterials•Indirect
Labor
Wages Payable
•DirectLabor
•IndirectLabor
•DirectMaterials
•Direct Labor
•DirectMaterials
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I Made R. Natawidnyana, Ak., CPMA
Process Cost Flows
Work in ProcessDepartment B
Work in ProcessDepartment A
•OverheadApplied to
Work inProcess
•AppliedOverhead
•AppliedOverhead
•OtherOverhead
Manufacturing Overhead
Actual Applied
•IndirectMaterials•Indirect
Labor
•DirectLabor
•DirectMaterials
•Direct Labor
•DirectMaterials
I Made R. Natawidnyana, Ak., CPMA
Process Cost Flows
Next, transfer workfrom Department Ato Department B.
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I Made R. Natawidnyana, Ak., CPMA
Process Cost Flows
Work in Process Department B
Work in ProcessDepartment A
•DirectMaterials•DirectLabor
•AppliedOverhead
•DirectMaterials•DirectLabor
•AppliedOverhead
Transferredto Dept. B
•Transferredfrom Dept. A
I Made R. Natawidnyana, Ak., CPMA
Process Cost Flows
Now let’s completethe goods in
Department Band sell them.
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I Made R. Natawidnyana, Ak., CPMA
Finished Goods
Cost of Goods Sold
Process Cost Flows
Work in ProcessDepartment B
•Cost ofGoods
Manufactured
•DirectMaterials•DirectLabor
•AppliedOverhead
•Transferredfrom Dept. A
•Cost ofGoodsSold
•Cost ofGoodsSold
•Cost ofGoods
Manufactured
I Made R. Natawidnyana, Ak., CPMA
Equivalent Units of Production
Equivalent units are partially completeand are part of work in process inventory. Partially completed
products are expressed in terms of a smaller number of fully completed
units.
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I Made R. Natawidnyana, Ak., CPMA
Equivalent Units of Production
Two half completed products are equivalent to one completed product.
So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.
+ = 1
I Made R. Natawidnyana, Ak., CPMA
Calculating and Using Equivalent Units of Production
To calculate the cost perequivalent unit for the period:
Cost perequivalent
unit=
Costs for the period
Equivalent units of production
for the period
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I Made R. Natawidnyana, Ak., CPMA
Equivalent Units of Production –Weighted Average Method
The weighted average method . . .
l Makes no distinction between work done in prior and current period.
l Blends together units and costs from prior period and current period.
Let’s see how this works!
I Made R. Natawidnyana, Ak., CPMA
Weighted Average Example
Smith Company reported the following activity in Department A for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400
of Department A during June
Work in process, June 30 900 60% 30%
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I Made R. Natawidnyana, Ak., CPMA
Equivalent units are calculated as follows:
Weighted Average Example
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
I Made R. Natawidnyana, Ak., CPMA
Equivalent units are calculated as follows:
Weighted Average Example
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
Equivalent units of Production in
Department A during June 5,940
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I Made R. Natawidnyana, Ak., CPMA
Equivalent units are calculated as follows:
Weighted Average Example
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
I Made R. Natawidnyana, Ak., CPMA
Materials Conversion
Units completed and transferred
out of Department A in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
Department A during June 5,940 5,670
Equivalent units of production always equals:
Units completed and transferred
+ Equivalent units remaining in work in process
Weighted Average Example
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BeginningWork in Process
300 Units40% Complete
EndingWork in Process
900 Units60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
Weighted Average Example
Materials
5,400 Units Completed540 Equivalent Units 900 × 60%
5,940 Equivalent unitsof production
I Made R. Natawidnyana, Ak., CPMA
6,000 Units Started
5,400 Units Completed
5,100 Units Startedand Completed
270 Equivalent Units 900 × 30%
5,670 Equivalent unitsof production
BeginningWork in Process
300 Units20% Complete
EndingWork in Process
900 Units30% Complete
Weighted Average Example
Conversion
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I Made R. Natawidnyana, Ak., CPMA
Production Report
ProductionReport
Helps managerscontrol theirdepartments
Provides costinformation for
financialstatements
Shows the flowof units and coststhrough work in
process
Becomes thejob cost sheet
in processcosting
I Made R. Natawidnyana, Ak., CPMA
Production Report
çA computation ofcost per equivalent unit.
Section 1
Section 2
Section 3
Production ReportåA quantity schedule
showing the flow of units and the computation of
equivalent units.
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I Made R. Natawidnyana, Ak., CPMA
Production Report
é A reconciliation of cost flows for the period,including:
vTotal cost for unitscompleted andtransferred from theprocessing department.
vTotal cost for partiallycompleted unitsremaining in work inprocess.
Section 1
Section 2
Section 3
Production Report
I Made R. Natawidnyana, Ak., CPMA
Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.
Double Diamond uses the weighted averagecost procedure.
Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.
Production Report Example
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I Made R. Natawidnyana, Ak., CPMA
Work in process, May 1: 200 units
Materials: 55% complete. $ 9,600
Conversion: 30% complete. 5,575
Production started during May: 5,000 units
Production completed during May: 4,800 units
Costs added to production in May
Materials cost $ 368,600
Conversion cost 350,900
Work in process, May 31: 400 units
Materials 40% complete.
Conversion 25% complete.
Production Report Example
I Made R. Natawidnyana, Ak., CPMA
Section 1: Quantity Schedule with Equivalent Units
Production Report Example
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
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I Made R. Natawidnyana, Ak., CPMA
Production Report Example
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
5,200 4,960
Section 1: Quantity Schedule with Equivalent Units
I Made R. Natawidnyana, Ak., CPMA
Production Report Example
Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200
Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900
Section 1: Quantity Schedule with Equivalent Units
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Section 2: Compute cost per equivalent unit
Production Report Example
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$ 9,600$ 5,575$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit
I Made R. Natawidnyana, Ak., CPMA
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$ 9,600$ 5,575$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.25$
Production Report Example
Section 2: Compute cost per equivalent unit
$378,200 ÷ 4,960 units = $76.25
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Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 15,175$ 9,600$ 5,575$
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.25$ 72.75$
Total cost per equivalent unit = $76.25 + $72.75 = $149.00
Production Report Example
$356,475 ÷ 4,900 units = $72.75
Section 2: Compute cost per equivalent unit
I Made R. Natawidnyana, Ak., CPMA
Section 3: Cost Reconciliation
Production Report Example
Total Equivalent Units
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
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Total Equivalent Units
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 715,200$ 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for
4,800 units @ $149.00
Production Report Example
Section 3: Cost Reconciliation
I Made R. Natawidnyana, Ak., CPMA
Total Equivalent Units
Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 715,200$ 4,800 4,800
Work in process, May 31:
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475
Total cost accounted for 734,675$
160 units @ $76.25
Production Report Example
Section 3: Cost Reconciliation
All costs accounted for
100 units @ $72.75
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Operation Costing
Operation costing employs some aspectsof both job-order and process costing.
Conversion costsassigned to batches
as in process costing.
Material Costs Chargedto batches as in
job-order costing.
Job-orderCosting
ProcessCosting
Operation Costing(Products produced in batches)
I Made R. Natawidnyana, Ak., CPMA
I’m going to end this chapter and process some leisure time, unless
you want to see some journal entries.
Do You Want to SeeJournal Entries?
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I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
Let’s look at the accounting journal entries for a process cost system. We’ll omit the
numbers so that we can focus on concepts.
I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
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I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Raw Materials XXXXX
To record the use of direct material.
I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
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I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department A XXXXX
Work in Process - Department B XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Work in Process - Department B XXXXX
Work in Process - Department A XXXXX
To record the transfer of goods from
Department A to Department B.
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I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Finished Goods XXXXX
Work in Process - Department B XXXXX
To record the completion of goods
and their transfer from Department B
to finished goods inventory.
I Made R. Natawidnyana, Ak., CPMA
Process CostingTypical Accounting Entries
GENERAL JOURNAL Page 4
Date Description
Post.
Ref. Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.
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I Made R. Natawidnyana, Ak., CPMA
End of Chapter 4
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