garrison lecture chapter 4

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Process CostingChapter 4

4-2

Similarities Between Job-Order and Process Costing

•Both systems assign material, labor, and overhead costs to products and they provide a mechanism for computing unit product costs.

•Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.

•The flow of costs through the manufacturing accounts is basically the same in both systems.

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Differences Between Job-Order and Process Costing

Process costing:

1.Is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs having different production requirements are worked on each period.

2.Systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.

3.Systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.

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Process costing is used for products that are:a. Different and produced continuously.b. Similar and produced continuously.c. Individual units produced to customer specifications.d. Purchased from vendors.

Quick Check

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Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors.

Quick Check

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Processing DepartmentsAny unit in an organization where materials, labor, or overhead are added to the product.

The activities performed in a processingdepartment are performed uniformly on allunits of production. Furthermore, the output ofa processing department must be homogeneous. Products in a process costing environment typically flow in a sequence from one department to another.

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Learning Objective 1

Record the flow of materials, labor, and overhead through a

process costing system.

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The Flow of Materials, Labor, and Overhead Costs

FinishedGoods

Cost of GoodsSold

Work inProcess

Direct Materials

Direct Labor

Manufacturing Overhead

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The Flow of Costs in a Job-Order Costing System

FinishedGoods

Cost of GoodsSold

Direct Labor

Manufacturing Overhead

JobsJobs

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct

Materials

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The Flow of Costs in a Processing Costing System

FinishedGoods

Cost of GoodsSold

Direct Labor

Manufacturing Overhead

ProcessingDepartment

Costs are traced and applied to departments

in a process cost system.

Direct Materials

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T-Account and Journal Entry Views of Process Cost Flows

For purposes of this example, assume there are two processing departments –

Departments A and B. We will use T-accounts and journal entries.

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Raw Materials

Process Cost Flows: The Flow of Raw Materials (in T-account form)

Work in Process Department B

Work in Process Department A

•DirectMaterials

•Direct Materials

•Direct Materials

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Process Cost Flows: The Flow of Raw Materials (in journal entry form)

Work in Process - Department A XXXXXWork in Process - Department B XXXXX

Raw Materials XXXXX

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Process Cost Flows: The Flow of Labor Costs (in T-account form)

Work in Process Department B

Work in Process Department A

Salaries and Wages Payable

•Direct Materials

•Direct Materials

•Direct Labor

•Direct Labor •Direct

Labor

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Process Costing: The Flow of Labor Costs (in journal entry form)

Work in Process - Department A XXXXXWork in Process - Department B XXXXX

Salaries and Wages Payable XXXXX

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Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form)

Work in Process Department B

Work in Process Department A

Manufacturing Overhead

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•Direct Labor

•Direct Materials

•Direct Labor

•Direct Materials

•Actual Overhead

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Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form)

Work in Process - Department A XXXXXWork in Process - Department B XXXXX

Manufacturing Overhead XXXXX

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Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in T-account form)

Work in Process Department B

Work in ProcessDepartment A

•Direct Materials

•Direct Labor

•AppliedOverhead

•Direct Materials

•Direct Labor

•AppliedOverhead

Transferred to Dept. B

•Transferred from Dept. A

DepartmentA

DepartmentB

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Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form)

Work in Process - Department B XXXXXWork in Process - Department A XXXXX

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Finished Goods

Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in T-account form)

Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of Goods

Manufactured

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Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form)

Finished Goods XXXXXWork in Process - Department B XXXXX

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Finished Goods

Cost of Goods Sold

Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form)

Work in Process Department B

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of GoodsSold

•Cost of GoodsSold

•Cost of Goods

Manufactured

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Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form)

Cost of Goods Sold XXXXXFinished Goods XXXXX

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Equivalent Units of Production

Equivalent units are the product of the number of partially completed

units and the percentage completion

of those units.

These partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to

that output.

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Equivalent Units – The Basic IdeaTwo half completed products are

equivalent to one complete product.

So, 10,000 units 70% completeare equivalent to 7,000 complete units.

+ = 1

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For the current period, Jones 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 Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

Quick Check

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For the current period, Jones 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 Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000

10,000 units + (5,000 units × 0.30) = 11,500 equivalent units

Quick Check

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Calculating Equivalent UnitsEquivalent units can be calculated

two ways:

The First-In, First-Out Method – FIFO is covered in the appendix to this chapter.

The Weighted-Average Method – This method will be covered in the main portion of the chapter.

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Learning Objective 2

Compute the equivalent units of production using the weighted-

average method.

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Equivalent Units of ProductionWeighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in prior or current periods.

2. Blends together units and costs from prior and current periods.

3. Determines equivalent units of production for a department by adding together the number of units transferred out plus the equivalent units in ending Work in Process Inventory.

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Treatment of Direct Labor

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials

Type of Product Cost

Dol

lar A

mou

nt

DirectLabor

ManufacturingOverhead

4-32

Treatment of Direct Labor

Type of Product Cost

Dol

lar A

mou

nt

Conversion Direct labor and manufacturing

overhead may be combined into

one classification of product

cost called conversion costs.

DirectMaterials

DirectLabor

DirectLabor

ManufacturingOverhead

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Weighted-Average – An Example Smith Company reported the following activity in the Assembly Department for the month of June:

Percent CompletedUnits 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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Weighted-Average – An ExampleThe first step in calculating the equivalent units is to identify

the units completed and transferred out of Assembly Department in June (5,400 units)

Materials Conversion

Units completed and transferredout of the Department in June 5,400 5,400

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Weighted-Average – An ExampleThe second step is to identify the equivalent units of production in

ending work in process with respect to materials for the month (540 units) and adding this to the 5,400 units from step one.

Materials Conversion

Units completed and transferredout of the Department in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540

Equivalent units of Production inthe Department during June 5,940

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Weighted-Average – An Example

Materials Conversion

Units completed and transferredout of the Department in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540 900 units × 30% 270

Equivalent units of Production inthe Department during June 5,940 5,670

The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month

(270 units) and adding this to the 5,400 units from step one.

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Materials Conversion

Units completed and transferredout of the Department in June 5,400 5,400 Work in process, June 30:

900 units × 60% 540 900 units × 30% 270

Equivalent units of Production inthe Department 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 – An 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 – An Example

Materials

5,400 Units Completed 540 Equivalent Units 900 × 60%5,940 Equivalent units of production

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6,000 Units Started

5,400 Units Completed

5,100 Units Started5,100 Units Startedand Completedand Completed

270 Equivalent Units 900 × 30%

5,670 Equivalent units of production

BeginningWork in Process

300 Units20% Complete

EndingWork in Process

900 Units30% Complete

Weighted-Average – An Example

Conversion

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Learning Objective 3

Compute the cost per equivalent unit using the

weighted-average method.

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Compute and Apply CostsBeginning Work in Process Inventory: 400 units

Materials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

Production started during June 6,000 unitsProduction completed during June 5,400 units

Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130

Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete

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Compute and Apply CostsThe formula for computing the cost per equivalent

unit is:

Cost perequivalent

unit

=

Cost of beginningWork in Process

Inventory Cost added during

the periodEquivalent units of production

+

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Here is a schedule with the cost and equivalent unit information.

Compute and Apply Costs

TotalCost Materials Conversion

Cost to be accounted for: Work in process, June 1 10,039$ 6,119$ 3,920$ Cost added in Assembly 199,751 118,621 81,130 Total cost 209,790$ 124,740$ 85,050$

Equivalent units 5,940 5,670

4-44

TotalCost Materials Conversion

Cost to be accounted for: Work in process, June 1 10,039$ 6,119$ 3,920$ Cost added in Assembly 199,751 118,621 81,130 Total cost 209,790$ 124,740$ 85,050$

Equivalent units 5,940 5,670 Cost per equivalent unit 21.00$ 15.00$

Compute and Apply Costs Here is a schedule with the cost and equivalent

unit information.$124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00$85,050 ÷ 5,670 units = $15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00

4-45

Learning Objective 4

Assign costs to units using the weighted-

average method.

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Applying Costs

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out

4-47

Applying Costs

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out

4-48

Applying Costs

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out

4-49

Computing the Cost of Units Transferred Out

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out

4-50

Computing the Cost of Units Transferred Out

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400 Cost per equivalent unit 21.00$ 15.00$

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out

4-51

Computing the Cost of Units Transferred Out

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Units completed and transferred out:Units transferred 5,400 5,400 Cost per equivalent unit 21.00$ 15.00$ Cost of units transferred out 113,400$ 81,000$ 194,400$

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out

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Learning Objective 5

Prepare a cost reconciliation report.

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Reconciling Costs

Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$

Assembly DepartmentCost Reconciliation

4-54

Reconciling Costs

Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$

Cost accounted for as follows: Cost of ending Work in Process Inventory 15,390$ Cost of units transferred out 194,400 Total cost accounted for 209,790$

Assembly DepartmentCost Reconciliation

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Operation CostingOperation cost is a hybrid of job-order and

process costing because it possesses attributes of both approaches.

Operation costing is commonly used when

batches of many different products pass

through the same processing department.

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End of Chapter 4

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

FIFO MethodAppendix 4A

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FIFO vs. Weighted-Average Method

The FIFO method (generally considered more accurate than the weighted-average method) differs

from the weighted-average method in two ways:

1.1. The computation of equivalent units.The computation of equivalent units.

2.2. The way in which the costs of beginning The way in which the costs of beginning inventory are treated.inventory are treated.

4-59

Learning Objective 6

Compute the equivalent units of production

using the FIFO method.

4-60

Equivalent Units – FIFO MethodLet’s revisit the Smith Company example. Here is information concerning the Assembly Department

for the month of June.Percent Completed

Units Materials ConversionWork 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%

4-61

Equivalent Units – FIFO MethodStep 1: Determine equivalent units needed to complete

beginning Work in Process Inventory.

Materials Conversion

To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180 Conversion: 300 units × (100% - 20%) 240

4-62

Equivalent Units – FIFO MethodStep 2: Determine units started and completed during

the period.

Materials Conversion

To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180 Conversion: 300 units × (100% - 20%) 240

Units started and completed during June 5,100 5,100

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Equivalent Units – FIFO MethodStep 3: Add the equivalent units in ending Work in

Process Inventory.

Materials Conversion

To complete beginning Work in Process: Materials: 300 units × (100% - 40%) 180 Conversion: 300 units × (100% - 20%) 240

Units started and completed during June 5,100 5,100 Ending Work in Process Materials: 900 units × 60% complete 540 Conversion: 900 units × 30% complete 270

Equivalent units of production 5,820 5,610

4-64

BeginningWork in Process

300 Units40% Complete

EndingWork in Process

900 Units60% Complete

6,000 Units Started

5,100 Units Startedand Completed

FIFO ExampleMaterialsMaterials

5,100 Units Completed 540 Equivalent Units 900 × 60%

5,820 Equivalent units of production

180 Equivalent Units300 × 60%

4-65

BeginningWork in Process

300 Units20% Complete

EndingWork in Process

900 Units30% Complete

6,000 Units Started

5,100 Units Startedand Completed

FIFO ExampleConversionConversion

5,100 Units Completed 270 Equivalent Units 900 × 30%

5,610 Equivalent units of production

240 Equivalent Units300 × 80%

4-66

Equivalent Units:Weighted-Average vs. FIFO

Materials ConversionEquivalent units - weighted-average method 5,940 5,670Less equivalent units in beginning inventory: 300 units × 40% 120 300 units × 20% 60 Equivalent units - FIFO method 5,820 5,610

As shown below, the equivalent units in beginning inventory are subtracted from the equivalent units of production per the weighted-average method to obtain the equivalent units of

production under the FIFO method.

4-67

Learning Objective 7

Compute the cost per equivalent unit using the

FIFO method.

4-68

Beginning work in process: 400 units Materials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

Production started during June 6,000 unitsProduction completed during June 5,400 units

Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130

Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete

Cost per Equivalent Unit - FIFOLet’s revisit the Smith Company Assembly Department for the month of June to prepare our production report.

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Cost per Equivalent Unit - FIFOThe formula for computing the cost per equivalent

unit under FIFO method is:

4-70

Cost per Equivalent Unit - FIFOTotalCost Materials Conversion

Cost added in June 199,751$ 118,621$ 81,130$ Equivalent units 5,820 5,610 Cost per equivalent unit 20.3816$ 14.4617$

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

$118,621 ÷ 5,820 $81,130 ÷ 5,610

4-71

Learning Objective 8

Assign costs to units using the FIFO method.

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Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270

Assembly DepartmentCost of Ending WIP Inventory

Applying Costs - FIFOStep 1: Record the equivalent units of production in ending Work

in Process Inventory.

900 units × 60% 900 units × 30%

4-73

Applying Costs - FIFOStep 2: Record the cost per equivalent unit.

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$

Assembly DepartmentCost of Ending WIP Inventory

4-74

Materials Conversion TotalEnding WIP inventory:Equivalent units 540 270 Cost per equivalent unit 20.3816$ 14.4617$ Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$

Assembly DepartmentCost of Ending WIP Inventory

Applying Costs - FIFOStep 3: Compute the cost of ending Work in Process Inventory.

540 × $20.3816 270 × 14.4617

4-75

Cost of Units Transferred OutStep 1: Record the cost in beginning Work in Process Inventory.

Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$

Assembly DepartmentCost of Units Transferred Out in June

4-76

Cost of Units Transferred OutStep 2: Compute the cost to complete the units in beginning

Work in Process Inventory.

Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$

Assembly DepartmentCost of Units Transferred Out in June

4-77

Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this

period.

Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$

Assembly DepartmentCost of Units Transferred Out in June

4-78

Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.

Materials Conversion TotalCost of Units Transferred Out: Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$ Cost to complete beginning WIP Equivalent units to complete 180 240 Cost per equivalent unit 20.3816$ 14.4617$ Cost to complete beginning WIP 3,669$ 3,471$ 7,140 Cost of units started and completed: Units started and completed 5,100 5,100 Cost per equivalent unit 20.3816$ 14.4617$ Cost of units started and completed 103,946$ 73,755$ 177,701 Cost of Units Transferred Out 194,880$

Assembly DepartmentCost of Units Transferred Out in June

4-79

Learning Objective 9

Prepare a cost reconciliation report

using the FIFO method..

Prepare a cost reconciliation report

using the FIFO method.

4-80

Reconciling Costs

Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$

Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911$ Cost of units transferred out 194,880 Total cost accounted for* 209,791$

Assembly DepartmentCost Reconciliation for June

4-81

Reconciling Costs

Costs to be accounted for: Cost of beginning Work in Process Inventory 10,039$ Costs added to production during the period 199,751 Total cost to be accounted for 209,790$

Cost accounted for as follows: Cost of ending Work in Process Inventory 14,911$ Cost of units transferred out 194,880 Total cost accounted for* 209,791$

Assembly DepartmentCost Reconciliation for June

* $1 rounding error.

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A Comparison of Costing MethodsIn a lean production environment, FIFO and

weighted-average methods yield similar unit costs.

When considering cost control, FIFO is superior to weighted-average because it

does not mix costs of the current period with costs of the prior period.

4-83

End of Appendix 4A