18-1 copyright houghton mifflin company. all rights reserved. chapter 18 costing systems: process...

18-18-11Copyright Houghton Mifflin Company. All rights reserved.

Chapter 18Chapter 18Costing Systems:Costing Systems:Process CostingProcess Costing

Belverd E. Needles, Jr.Belverd E. Needles, Jr.

Marian PowersMarian Powers

Sherry K. MillsSherry K. Mills

Henry R. AndersonHenry R. Anderson- - - - - - - - - - -- - - - - - - - - - -

Multimedia Slides by:Multimedia Slides by:

Dr. Paul J. RobertsonDr. Paul J. RobertsonNew Mexico State UniversityNew Mexico State University

Steve LeaskSteve LeaskNew Mexico State UniversityNew Mexico State University


Patterns of Product FlowsPatterns of Product Flows

OBJECTIVE 2OBJECTIVE 2

Relate the patterns of product Relate the patterns of product flows in a process costing flows in a process costing environment to the process cost environment to the process cost flow approaches.flow approaches.


Product FlowsProduct Flows» During production in a process During production in a process

costing environment, products flow costing environment, products flow through several departments or through several departments or processes.processes.

» A company may use a number of A company may use a number of separate processes to manufacture separate processes to manufacture many different components, which many different components, which will become direct materials.will become direct materials.


Cost Flow ApproachesCost Flow Approaches» In process costing, costs are In process costing, costs are

accumulated by department and are accumulated by department and are passed to each subsequent passed to each subsequent department as the product is made.department as the product is made.

» The accumulated costs may be The accumulated costs may be assigned to products using either assigned to products using either the FIFO costing approach or the the FIFO costing approach or the average costing approach.average costing approach.


Cost Flows Through the Cost Flows Through the Work in Process Work in Process

Inventory AccountsInventory Accounts


Explain the role of the Work in Explain the role of the Work in

Process Inventory account(s) in Process Inventory account(s) in

a process costing system.a process costing system.


Cost FlowsCost Flows

» The main difference between job The main difference between job

order costing and process costing order costing and process costing

is the way in which costs are is the way in which costs are

assigned to products.assigned to products.


Cost FlowsCost Flows

» In a job order costing system, costs In a job order costing system, costs

are traced to specific jobs and are traced to specific jobs and

products.products.

» In a process costing system, an In a process costing system, an

averaging technique is used.averaging technique is used.


Process Costing SystemProcess Costing System» All products worked on during a All products worked on during a

specific time period are used for specific time period are used for computing unit cost.computing unit cost. Total costs of direct materials, direct Total costs of direct materials, direct

labor, and manufacturing overhead labor, and manufacturing overhead accumulated in the Work in Process accumulated in the Work in Process Inventory account are divided by the Inventory account are divided by the equivalent units for products worked on equivalent units for products worked on during the period.during the period.


Work in Process InventoryWork in Process Inventory

» There is one Work in Process There is one Work in Process

Inventory account for each Inventory account for each

process or department in the process or department in the

production process.production process.


The Process Cost ReportThe Process Cost Report

» The process cost report consists of The process cost report consists of three schedules:three schedules:

1. The schedule of equivalent production.1. The schedule of equivalent production.

2. The unit cost analysis schedule.2. The unit cost analysis schedule.

3. The cost summary schedule.3. The cost summary schedule.

» A process cost report helps A process cost report helps managers track and analyze costs managers track and analyze costs in a process costing system.in a process costing system.


Equivalent ProductionEquivalent Production

» Equivalent production is a measure Equivalent production is a measure

of the number of equivalent whole of the number of equivalent whole

units produced in a period of time.units produced in a period of time.


Equivalent UnitsEquivalent Units» Equivalent units under the FIFO Equivalent units under the FIFO

costing approach are the sum of costing approach are the sum of several elements.several elements. Units started and completed during the Units started and completed during the

period.period.

Units in ending work in process times Units in ending work in process times their percentage of completion.their percentage of completion.

Units in beginning work in process (one Units in beginning work in process (one minus their percentage of completion).minus their percentage of completion).


Computation of Computation of Equivalent UnitsEquivalent Units

.5 .5 .25.75

A E

Equivalent production forconversion costs for Week 2 = 4.25 units

Week 1 Week 3

B C D

1.0 1.0 1.0

Week 2

Units started and completedduring Week 2 = 3.0 units


The Schedule of The Schedule of Equivalent ProductionEquivalent Production

Materials.Materials.

Conversion costs.Conversion costs.

» The schedule of equivalent production The schedule of equivalent production

includes unit figures for two elements.includes unit figures for two elements.


Step 1: Schedule of Equivalent Production: Step 1: Schedule of Equivalent Production: With Beginning InventoryWith Beginning Inventory

Kernan Computer Products CompanySchedule of Equivalent Production - Cables

For the Month Ended February 28, 20xx

Equivalent Units

Units -Stage of Completion

Units to BeAccounted

For

DirectMaterials

CostsConversion

Costs

Beginning inventory - units started last period but completed in this period (Direct materials costs 100% complete) (Conversion costs 60% complete)

6,200

2,480Units started and completed in this period 52,500 52,500 52,500Ending inventory - units started but not completed in this period (Direct materials costs 100% complete) (Conversion costs 60% complete)

5,0005,000

2,250Totals 63,700 57,500 57,230


Step 2: Unit Cost DeterminationStep 2: Unit Cost DeterminationKernan Computer Products Company

Unit Cost Analysis Schedule - Cables

For the Month Ended February 28, 20xx

Total Cost Analysis Costs fromBeginningInventory Costs

CurrentPeriod

Total Costs toBe Accounted

For

Direct materials costConversion costsTotals

$20,150 21,390$41,540

$189,750 320,488$510,238

$209,900 341,878$551,778

Computation ofEquivalent Unit Costs

Costs fromCurrent Period

Equivalent+ Units

Cost perEquivalent

= Unit

Direct materials costsConversion costs

Totals

$189,750 320,488

$510,238

57,50057,500

$ 3.30 5.60

$ 8.90


Step 3: Cost Summary ScheduleStep 3: Cost Summary ScheduleKernan Computer Products Company

Cost Summary Schedule - CablesFor the Month Ended February 28, 20xx

Cost of GoodsTransferred to

Finished GoodsInventory

Cost of EndingWork inProcess

Inventory

Total Coststo Be

AccountedFor

Beginning inventoryCosts from preceding period $ 41,540

Direct materials costs: none ----Conversion costs: 2,480

units x $5.60 13,888

Subtotal $ 55,428

Totals $522,678 + $29,100 = $551,778

Costs to complete this period

Units started and completed52,500 units x $8.90 467,250

Ending inventoryDirect materials costs: 5,000 units x $3.30 $16,500Conversion costs: 2,250 units x $5.60 12,600


Process Costing and Process Costing and Activity-Based CostingActivity-Based Costing


Apply activity-based costing to Apply activity-based costing to

a process costing system.a process costing system.


Traditional Process Traditional Process Costing SystemCosting System

» In a traditional process costing In a traditional process costing

system, only costs that can be traced system, only costs that can be traced

directly to the process and indirect directly to the process and indirect

production costs are assigned to the production costs are assigned to the

Work in Process Inventory account.Work in Process Inventory account.


Activity-Based CostingActivity-Based Costing» In an activity-based costing system, In an activity-based costing system,

all costs are first divided into two all costs are first divided into two groups:groups:

Those that are directly traceable to Those that are directly traceable to

a product, process, or department.a product, process, or department.

Those that are not directly Those that are not directly

traceable to a cost object.traceable to a cost object.


Activity-BasedActivity-BasedCosting SystemCosting System

» The first step is the calculation of The first step is the calculation of the assignment rate for each cost the assignment rate for each cost driver for the overall company.driver for the overall company.

» The second step is to assign the The second step is to assign the costs applicable to the department.costs applicable to the department.

» The third step is to prepare a The third step is to prepare a process cost report.process cost report.

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