9. Differences Between Job-Order and Process Costing Direct Material Finished Goods Cost of Goods Sold Direct Labor ManufacturingOverhead Jobs The work-in-process account consists of individual jobs in a job-order cost system.
10. Differences Between Job-Order and Process Costing Direct Material Finished Goods Cost of Goods Sold Products The work-in-process account consists of individual products in a process cost system. Direct Labor & Overhead ( Conversion) When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.
14. Equivalent Units of Production Equivalent units are partially complete and are part of work in process inventory. Partially completed products are expressed in terms of a smaller number of fully completed units.
15.
16. Equivalent Units of Production Two half completed products are equivalent to one completed product. So, 10,000 units 70 percent complete are equivalent to 7,000 complete units. + = 1
17. Quick Check 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
18. Quick Check 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
19.
20. 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 Quick Check
21. 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 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit Quick Check
43. Production Report Example 160 units @ $76.25 Section 3: Cost Reconciliation All costs accounted for 100 units @ $72.75
44. Manufacturing overhead is applied to Work-in-Process Inventory using a predetermined overhead rate Actual costs of manufacturing overhead are entered in Work-in-Process Inventory Actual Costing vs. Normal Costing
45.
Editor's Notes
This chapter covers process-costing systems. Process costing is used in repetitive production environments, where large numbers of identical or very similar products are manufactured in a continuous flow. (LO1)
Industries using process costing include paper, petroleum, chemicals, textiles, food processing, lumber, and electronics. (LO1)
In many ways, job-order costing and process costing are similar. Both product-costing systems have the same ultimate purpose—assignment of production costs to units of output. Moreover, the flow of costs through the manufacturing accounts is the same in the two systems. (LO1)
In job-order costing, costs are accumulated by job order and recorded on job-cost records. The cost of each unit in a particular job order is found by dividing the total cost of the job order by the number of units in the job. (LO1)
In process costing, costs are accumulated by department, rather than by job order or batch. The cost per unit is found by averaging the total costs incurred over the units produced. (LO1)
In a single production department situation, direct-material, direct-labor, and manufacturing-overhead costs are added to a Work-in-Process Inventory account. As goods are finished, costs are transferred to Finished-Goods Inventory. During the period when goods are sold, the product costs are transferred to Cost of Goods Sold. (LO2)
In the two-department case, when goods are finished in the first production department, costs accumulated in the Work-in-Process Inventory account for production department A are transferred to the Work-in-Process Inventory account for production department B. (LO2)
The term equivalent units is used in process costing to refer to the amount of manufacturing activity that has been applied to a batch of physical units. (LO3)
The MVP Sports Equipment Company manufactures baseball gloves. Two production departments are used in sequence: the Cutting Department and the Stitching Department. In the Cutting Department, direct material is placed into production at the beginning of the process. Direct-labor and manufacturing overhead costs are incurred uniformly throughout the process. The predetermined overhead rate used in the Cutting Department is 125 percent of direct-labor cost. (LO3)
This slide presents a summary of the activity and costs in the Cutting Department during March. The direct-material and conversion costs for the March 1 work in process consist of costs that were incurred during February. These costs were assigned to the units remaining in process at the end of February. Materials costs of $90,000 and conversion costs of 193,500 were added during the month of March. The beginning work in process and the costs added during March are the total costs to be accounted for. (LO3)
The first step is to prepare a table summarizing the physical flow of production units during March. (LO3)
The second step is to calculate the equivalent units of direct material and conversion activity. The table of equivalent units, displayed on this slide, is based on the table of physical flows prepared in step 1. The Cutting Department completed their work on 40,000 physical units. Thus, they represent 40,000 equivalent units for both direct material and conversion. The 10,000 units in the Cutting Department’s ending work-in-process inventory are 50 percent complete with respect to conversion. Therefore, the ending work-in-process inventory represents 5,000 equivalent units of conversion activity (10,000 physical units x 50% complete). (LO3)
With respect to direct material, the 10,000 units in the Cutting Department’s ending work-in-process inventory are 100 percent complete. Therefore, the ending work-in-process inventory represents 10,000 equivalent units of direct material. (LO3)
The third step in the process-costing procedure is calculating the cost per equivalent unit for both direct material and conversion activity. The cost per equivalent unit for direct material is computed by dividing the total direct-material cost, including the cost of the beginning work in process and the cost incurred during March, by the total equivalent units (from step 2). The same procedure is used for conversion costs. (LO3)
The final step is to determine the total cost to be transferred out of the Cutting Department’s Work-in-Process Inventory account and into the Stitching Department’s Work-in-Process Inventory account. The cost per equivalent unit, $7.26, was calculated in step 3. The number of units transferred is multiplied by the cost per equivalent unit. (LO4)
The direct material equivalent units is multiplied by the direct materials cost per equivalent unit. The conversion equivalent units is multiplied by the conversion cost per equivalent unit. These two amounts are added together. (LO4)
The sum of these costs is added to the cost of goods completed and transferred. Now all costs on the production report have been accounted for. These calculations are used as the basis for the journal entries to transfer the cost of goods completed and transferred out to the Stitching Department. (LO4)
We have now completed all four steps necessary to prepare a production report. The report simply combines the tables prepared in Learning Objectives 3, 4 and 5. The report provides a convenient summary of all of the process-costing calculations made under the weighted-average method. This method is called the weighted-average method because the cost per equivalent unit, for both direct material and conversion activity, is computed as a weighted average of the costs incurred during two different accounting periods. (LO6)
Both actual and normal costing can be used in conjunction with a process costing system. Our illustration used a predetermined overhead rate based on direct-labor cost, which is normal costing. (LO6) In our illustration, production requires two sequential production operations: cutting and stitching. Although the process-costing procedures for the second department are similar to those illustrated for the first, there is one additional complication. The cost of goods completed and transferred out of the Cutting Department must remain assigned to the partially completed product units as they undergo further processing in the Stitching Department. Process-costing procedures for subsequent production departments are covered in the appendix at the end of this chapter, which may be studied now. LO6)
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