CHAPTER 4 Process Costing and Hybrid ProductCosting Systems

CHAPTER 4 Process Costing and Hybrid Product-Costing Systems Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Comparison of Job-Order Costing and Process Costing Job-order Costing F Used for production of small, identical, low cost items. F Mass produced in automated continuous production process. F Costs cannot be directly traced to each unit of product. 4 -2

Comparison of Job-Order Costing and Process Costing Job-order Costing Typical process cost applications: v Petrochemical refinery v Paint manufacturer v Paper mill 4 -3

Differences Between Job-Order and Process Costing The work-in-process account consists of individual jobs in a job-order cost system. Direct Material Direct Labor Manufacturing Overhead Jobs Finished Goods Cost of Goods Sold 4 -4

Differences Between Job-Order and Process Costing Direct Material Direct Labor & Overhead (Conversion) The work-in-process account consists of individual products in a process-cost system. Products When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead. Finished Goods Cost of Goods Sold 4 -5

Process Cost Flows 4 -6

Process Cost Flows 4 -7

Equivalent Units: A Key Concept Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products. 4 -8

Equivalent Units Example Two half completed products are equivalent to one completed product. + = l So, 10, 000 units that are 70% complete are equivalent to 7, 000 complete units. 4 -9

Calculating and Using Equivalent Units of Production To calculate the direct materials and conversion costs per equivalent unit for the period: Materials cost per equivalent unit Conversion cost per equivalent unit = = Materials cost for the period Materials equivalent units for the period Conversion cost for the period Conversion equivalent units for the period 4 -10

Departmental Production Report Analysis of physical flow of units. Calculation of equivalent units. Production Report Computation of unit costs. Analysis of total costs. 4 -11

Equivalent Units of Production – Weighted-Average Method The weighted-average method. . . Makes no distinction between work done in the prior period and work done in the current period. Blends together units and costs from the prior period and the current period. The FIFO method is a more complex method and is rarely used in practice. 4 -12

Production Report Example MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching. MVP uses weighted-average process costing. Material is added at the beginning of the Cutting Department, while conversion is incurred uniformly throughout the process. Using the following information for the month of March, let’s prepare a production report for the Cutting Department. 4 -13

Production Report Example Work in process, March 1: 20, 000 units Materials: 100% complete. Conversion: 10% complete. Cost $ 50, 000 7, 200 Units started into production in March: Units completed and transferred out in March: 30, 000 units 40, 000 units Work in process, March 31: Materials 100% complete. Conversion 50% complete. 10, 000 units Costs incurred during March Materials cost Conversion costs: Direct labor Applied manufacturing overhead Total conversion costs Total costs to account for 90, 000 $ 86, 000 107, 500 193, 500 $ 340, 700 4 -14

Production Report Example ÊAnalysis of Physical Flow of Units 4 -15

Production Report Example ËCalculation of Equivalent Units 50% of 10, 000 units Beginning inventory % is not used in weighted-average method. 4 -16

Production Report Example ËCalculation of Equivalent Units 100% of 10, 000 units, all material added at beginning 4 -17

Production Report Example ÌComputation of unit costs $140, 000 ÷ 50, 000 equivalent units $2. 80 + $4. 46 $200, 700 ÷ 45, 000 equivalent units 4 -18

Production Report Example ÍAnalysis of total costs 4 -19

Production Report Example ÍAnalysis of total costs 4 -20

Production Report Example ÍAnalysis of total costs All costs accounted for 4 -21

Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Process Costing 4 -22

Operation Costing Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Material costs are charged to batches as in job-order costing. Process Costing Conversion costs are assigned to batches as in process costing. 4 -23

End of Chapter 4 I’m ready to process some leisure time. 4 -24