© the mcgraw-hill companies, inc., 2008 mcgraw-hill/irwin financial & managerial accounting the...
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© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Financial & Managerial Accounting
Financial & Managerial Accounting
The Basis for Business DecisionsFOURTEENTH EDITION
Williams Haka Bettner Carcello
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
PROCESS COSTING
Chapter
18
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Learning ObjectiveLearning Objective
LO1
To distinguish productionprocedures that match
with process costing fromthose that correspondwith job order costing.
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Job Order Costing
Custom orders
Unique products
Low production volume
High product flexibility
Low to medium standardization of labor and material
Process Costing
Repetitive operations
Identical products
High production volume
Low product flexibility
High standardization of labor and material
Production of Goods and Services and Costing Systems
Production of Goods and Services and Costing Systems
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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.
Process CostingProcess Costing
Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill
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Learning ObjectiveLearning Objective
LO2
To account for the physicalflows and related cost
flows when usingprocess costing.
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DirectMaterials
FinishedGoods
Cost per unit for
each job
DirectLabor
FactoryOverhead
Jobs
The Work in Process account consists of
individual jobs in job costing.
Tracking the Physical Flow and Related Production Costs
Tracking the Physical Flow and Related Production Costs
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DirectMaterials
FinishedGoods
Direct Labor and Factory Overhead
(Conversion)
Processes
The Work in Process account consists of specific processes in
process costing.
Cost per unit
processed
Tracking the Physical Flow and Related Production Costs
Tracking the Physical Flow and Related Production Costs
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Same objective: to determine the cost of products
Same inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
Tracking the Physical Flow and Related Production Costs
Tracking the Physical Flow and Related Production Costs
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Work in Process
Assembly
Labor
Materials
Indirect
FinishedGoods
Conversion Costs
Direct
Deliveredto
Customers
Work in Process
Packaging
Understanding Cost FlowsUnderstanding Cost Flows
Factory Overhead
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Costs are accumulated for a period of time by process or department.
Costs are accumulated for a period of time by process or department.
Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
Understanding Cost FlowsUnderstanding Cost Flows
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Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
Unit cost is computed by dividing the accumulated costs by the number of
units produced in the period.
If partially complete units remain in process, we must use equivalent units
as the divisor to obtain unit costs.
If partially complete units remain in process, we must use equivalent units
as the divisor to obtain unit costs.
Understanding Cost FlowsUnderstanding Cost Flows
Costs are accumulated for a period of time by process or department.
Costs are accumulated for a period of time by process or department.
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Learning ObjectiveLearning Objective
LO3
To demonstrate how tocalculate equivalent units.
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Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.
Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.
Two one-half full pitchers are equivalent to one full pitcher.
+ = 1
Process Costing andEquivalent Units
Process Costing andEquivalent Units
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For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
Process Costing andEquivalent Units
Process Costing andEquivalent Units
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
For the current period, PencilCo 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 PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
10,000 units + (5,000 units × .30) = 11,500 equivalent units
Process Costing andEquivalent Units
Process Costing andEquivalent Units
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Learning ObjectiveLearning Objective
LO4
To use the costs of resourcesconsumed to calculate the
cost per equivalent unitof production.
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Cost perequivalent
unit
= Product costs for the periodEquivalent units for the period
Cost per Equivalent UnitCost per Equivalent Unit
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Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Cost per Equivalent UnitCost per Equivalent Unit
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Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Cost per Equivalent UnitCost per Equivalent Unit
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Equivalent units may be different for material and
conversion at different stages of a process.
Equivalent units may be different for material and
conversion at different stages of a process.
At completion of Stage 1 of the process,material is 40% complete, but conversion
is only 25% complete.
At completion of Stage 1 of the process,material is 40% complete, but conversion
is only 25% complete.
Stage 1
40% ofMaterial
25% ofConversion
Process Costing andEquivalent Units
Process Costing andEquivalent Units
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Stage 2
25% ofConversion
60% ofMaterial
Stage 1
40% ofMaterial
25% ofConversion
+
+
=
=
100%
50%
Process Costing andEquivalent Units
Process Costing andEquivalent Units
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Stage 3
50% ofConversion
The process is now complete. The process is now complete.
Stage 2
25% ofConversion
60% ofMaterial
Stage 1
40% ofMaterial
25% ofConversion
Process Costing andEquivalent Units
Process Costing andEquivalent Units
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Owl Inc. uses FIFO process costing in its Fabrication
Department where a product called Strata is made.
Process CostingProcess Costing
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Process CostingProcess Costing
Owl Inc Fabrication Department Data For AprilBeginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 25%
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Owl Inc Fabrication Department Data For AprilBeginning Inventory:
Units of product 30,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 40%
Units started in April 90,000
Units transferred from fabrication to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct material 100%
Percentage of completion - conversion 25%
Material is added at thebeginning of the process soit is always 100% complete.
Process CostingProcess Costing
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April Fabrication Department Physical Flow
Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000
Units accounted for as:Units transferred from Fabrication to Mixing 100,000 Ending inventory 20,000 Total number of units 120,000
Physical Flow of Units Physical Flow of Units
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Fabrication DepartmentDirect Material Equivalent Units of Production - April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
Computing EquivalentUnits of Production
Computing EquivalentUnits of Production
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Fabrication DepartmentDirect Material Equivalent Units of Production - April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
Since materials are added at the beginning of the process, no additional materials are necessary to complete the
beginning inventory.
Computing EquivalentUnits of Production
Computing EquivalentUnits of Production
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Fabrication DepartmentDirect Material Equivalent Units of Production - April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 100% 20,000
Total units 120,000 90,000
} 100,000
100,000 units completed and transferred.
Computing EquivalentUnits of Production
Computing EquivalentUnits of Production
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Fabrication Department Conversion Equivalent Units of Production - April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 60% 18,000
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 25% 5,000
Total units 120,000 93,000
Computing EquivalentUnits of Production
Computing EquivalentUnits of Production
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Fabrication Department Conversion Equivalent Units of Production - April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 60% 18,000
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 25% 5,000
Total units 120,000 93,000
Since conversion is 40 percent complete in the beginning inventory,
60 percent of the work must be completed in April.
Computing EquivalentUnits of Production
Computing EquivalentUnits of Production
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Fabrication Department Conversion Equivalent Units of Production - April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 60% 18,000
Goods started and completed 70,000 100% 70,000
Ending work in process 20,000 25% 5,000
Total units 120,000 93,000
} 100,000Transferred
Computing EquivalentUnits of Production
Computing EquivalentUnits of Production
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Summary of Fabrication DepartmentEquivalent Units of Production - April
DirectActivities during April Material ConversionUnits from beginning inventory
processed in current period 0 18,000
Units started and completedin current period 70,000 70,000
Units in ending inventory at end of current period 20,000 5,000
Equivalent units of productionfor period 90,000 93,000
Computing EquivalentUnits of Production
Computing EquivalentUnits of Production
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Fabrication DepartmentApril Work in Process Costs
Beginning work in process 22,380$ Costs added in April: Direct material 45,000 Conversion 55,800 Total costs to account for 123,180$
Process Costing andEquivalent Units
Process Costing andEquivalent Units
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Fabrication DepartmentCost Per Equivalent Unit - April
Materials ConversionTotal cost of resource for
April 45,000$ 55,800$
Equivalent units of productionin April ÷ 90,000 ÷ 93,000
Cost per equivalent unit forApril = 0.50$ = 0.60$
Direct
Cost per Equivalent UnitCost per Equivalent Unit
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Learning ObjectiveLearning Objective
LO5
To use the cost perequivalent unit to
assign costs to thework completed
during the period.
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Fabrication Department Work in ProcessCost Summary for April
Cost of completed unitsFrom beginning work in process
April 1 balance 22,380$ Costs to complete April 1 inventory
Direct materialConversion
Started and completed Total completed and transferred
Cost of Completed UnitsCost of Completed Units
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Cost of Completed UnitsCost of Completed Units
Fabrication Department Work in ProcessCost Summary for April
Cost of completed unitsFrom beginning work in process
April 1 balance 22,380$ Costs to complete April 1 inventory
Direct material 0$ Conversion (18,000 × $0.60) 10,800 10,800
Started and completed Total completed and transferred
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Fabrication Department Work in ProcessCost Summary for April
Cost of completed unitsFrom beginning work in process
April 1 balance 22,380$ Costs to complete April 1 inventory
Direct material 0$ Conversion (18,000 × $0.60) 10,800 10,800
Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$
$0.50 + $0.60 = $1.10
Cost of Completed UnitsCost of Completed Units
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Learning ObjectiveLearning Objective
LO6
To create a process costingproduction report and
use the report fordecision making.
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We will account for all costs incurred
by assigning unit costs to the: A. 100,000 units completed and
transferred.
B. 20,000 units remaining in ending work in process inventory.
We will account for all costs incurred
by assigning unit costs to the: A. 100,000 units completed and
transferred.
B. 20,000 units remaining in ending work in process inventory.
Tracking Costs Using a Process Costing Production Report
Tracking Costs Using a Process Costing Production Report
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Fabrication Department Work in ProcessCost Summary for April
Cost of completed unitsFrom beginning work in process
April 1 balance 22,380$ Costs to complete April 1 inventory
Direct material 0$ Conversion (18,000 × $0.60) 10,800 10,800
Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$
Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion
Total cost accounted for
Tracking Costs Using a Process Costing Production Report
Tracking Costs Using a Process Costing Production Report
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Fabrication Department Work in ProcessCost Summary for April
Cost of completed unitsFrom beginning work in process
April 1 balance 22,380$ Costs to complete April 1 inventory
Direct material 0$ Conversion (18,000 × $0.60) 10,800 10,800
Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$
Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion (5,000 × $0.60) 3,000 13,000
Total cost accounted for 123,180$
Tracking Costs Using a Process Costing Production Report
Tracking Costs Using a Process Costing Production Report
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Fabrication Department Work in ProcessCost Summary for April
Cost of completed unitsFrom beginning work in process
April 1 balance 22,380$ Costs to complete April 1 inventory
Direct material 0$ Conversion (18,000 × $0.60) 10,800 10,800
Started and completed (70,000 × $1.10) 77,000 Total completed and transferred (100,000 units) 110,180$
Cost of ending work in processDirect material (20,000 × $0.50) 10,000$ Conversion (5,000 × $0.60) 3,000 13,000
Total cost accounted for 123,180$
All costs accounted for
Tracking Costs Using a Process Costing Production Report
Tracking Costs Using a Process Costing Production Report
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Ethics, Fraud, andCorporate Governance
Ethics, Fraud, andCorporate Governance
Overstating equivalent units of resources in ending inventory will
understate cost of goods sold, and thereby overstate income.
Equivalent units of production can be overstated by inflating the application
of direct labor and overhead (conversion costs) to work in process.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
End of Chapter 18End of Chapter 18
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