Chapter 4. Systems Design: Process Costing. Types of Costing Systems Used to Determine Product Costs

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1 4-1 Types of Systems Used to Determine Product Costs Chapter 4 Process Job-order Systems Design: Many units of a single, homogeneous product flow evenly through a continuous production process. One unit of product is from any other unit of product. Each unit of product is assigned the same cost. Types of Systems Used to Determine Product Costs Differences Between Job- Order and Process Job-order Typical process cost applications: Petrochemical refinery manufacturer Paper mill Job order costing Many jobs are worked during the period. Costs are accumulated by individual jobs. Job cost sheet is the key document. Unit cost computed by job. Process costing A single product is produced for a long period of time. Costs are accumulated by departments. Department production report is key document. Unit costs are computed by department. Quick Check 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. Dollar Amount labor costs may be small in comparison to other product costs in process cost systems. d. Purchased from vendors. Type of Product Cost

2 4-2 Comparing Job-Order and Dollar Amount Conversion Work in Process Finished Type of Product Cost So, direct labor and manufacturing overhead are often combined into one product cost called. Cost of Comparing Job-Order and Comparing Job-Order and Costs are traced and applied to individual in a job-order cost system. Costs are traced and applied to in a process cost system. Jobs Finished Processing Department Finished Cost of Cost of Raw Purchases Wages Payable Actual Applied Other Actual Applied Other

3 4-3 Actual Applied Other Applied to Work in Process Next, transfer work from to. Transferred to Dept. B Transferred from Dept. A Now let s complete the goods in and sell them. Equivalent Units of Production Transferred from Dept. A Manufactured Cost of Finished Manufactured Equivalent units are and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.

4 4-4 Equivalent Units of Production Quick Check Two half completed products are to one completed product. + = 1 So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. 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 Calculating and Using Equivalent Units of Production Cost per equivalent unit To calculate the cost per equivalent unit for the period: = Costs for the period Equivalent units of production for the period Quick Check Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones cost per equivalent unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 Equivalent Units of Production Weighted Average Method The weighted average method... Makes no distinction between work done in prior and current period. Blends together units and costs from period and period. Weighted Average Example Smith Company reported the following activity in for the month of June: Percent Completed Units Conversion Work in process, June % 20% Units started into production in June 6,000 Let s see how this works! Units completed and transferred out 5,400 of during June Work in process, June % 30%

5 4-5 Weighted Average Example Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Shows the flow of units and costs through work in process Provides cost information for financial statements Conversion Units completed and transferred out of in June 5,400 5,400 Work in process, June 30: Production Report 900 units 60% units 30% 270 Equivalent units of Production in during June 5,940 5,670 Becomes the job cost sheet in process costing Helps managers control their departments Section 1 Section 2 Section 3 A schedule showing the flow of units and the computation of equivalent units. A computation of per equivalent unit. Section 1 Section 2 Section 3 A reconciliation of cost flows for the period, including: Total cost for units completed and transferred from the processing department. Total cost for partially completed units remaining in work in process. Raw Accounts Payable To record the purchase of material. 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. - - Raw To record the use of direct material.

6 Salaries and Wages Payable To record direct labor costs. - - To apply overhead to departments. - - To record the transfer of goods from to. Finished - To record the completion of goods and their transfer from to finished goods inventory. Accounts Receivable Sales To record sales on account. Cost of Finished To record cost of goods sold.

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