Post on 17-Dec-2015
Hilton • Maher • Selto
8Process-Costing Systems
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Process Costing is a costing system that assigns costs equally to homogeneous units
within a particular time period.
Process Costing is a costing system that assigns costs equally to homogeneous units
within a particular time period.
This is an appropriate system to use when:•Units do not differ from each other.
•Unit cycle time is relatively short.
•The production process is continuous.
This is an appropriate system to use when:•Units do not differ from each other.
•Unit cycle time is relatively short.
•The production process is continuous.
Process Costing System Design
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Process Costing at Monterrey Bay Abalone
Human and physical
resources
Human and physical
resources
Cultivation process activities
Cultivation process activities
Grow-out process activities
Grow-out process activities
Market-size abaloneMarket-size abalone
Finished Goods InventoryFinished Goods Inventory
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Process Costing: The Basics
Costs will be accumulated by process. They will not be traced to individual units of product.
Costs will be accumulated by process. They will not be traced to individual units of product.
Direct MaterialsDirect Materials Conversion CostsConversion Costs
Raw material directly traceable to the
process.
Raw material directly traceable to the
process.
Labor and overhead directly traceable to the
process.
Labor and overhead directly traceable to the
process.
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Process Costing: The Basics
Direct Materials (DM)
Direct Materials (DM)
Conversion Costs (CC)
Conversion Costs (CC)
+
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Process Costing: The Basics
Determine total Direct Material costs Compute DM Cost per Unit Determine total Conversion Costs Compute CC Cost per Unit Add Steps 2 and 4 to get Total Cost
per Unit COGS = Step 5 × Units Sold Ending Inventory = Step 5 × Units Not
Sold
Determine total Direct Material costs Compute DM Cost per Unit Determine total Conversion Costs Compute CC Cost per Unit Add Steps 2 and 4 to get Total Cost
per Unit COGS = Step 5 × Units Sold Ending Inventory = Step 5 × Units Not
Sold
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Example 1: All Units Fully Completed (No WIP)
Toothpick, Inc. is a new company that makes toothpicks from damaged antique furniture. The
product sells at a premium and is in high demand.
During June, they purchased 8,000 pounds of wood scraps costing $67,000. They spent $6,500 on labor. Toothpick, Inc. incurred other process
overhead (insurance, rent, benefits, etc.) of $6,000. They produced and sold 250,000 toothpicks during June. There were no units in beginning or ending
WIP inventory.
Compute the cost per toothpick produced.
Toothpick, Inc. is a new company that makes toothpicks from damaged antique furniture. The
product sells at a premium and is in high demand.
During June, they purchased 8,000 pounds of wood scraps costing $67,000. They spent $6,500 on labor. Toothpick, Inc. incurred other process
overhead (insurance, rent, benefits, etc.) of $6,000. They produced and sold 250,000 toothpicks during June. There were no units in beginning or ending
WIP inventory.
Compute the cost per toothpick produced.
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??
Example 1: All Units Fully Completed (No WIP)
Direct Materials (DM)
Direct Materials (DM)
Conversion Costs (CC)
Conversion Costs (CC)
+
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Some Units Not Fully Complete (Ending WIP)
In many cases, there will be
some units at the end of the month
still in the process.
In many cases, there will be
some units at the end of the month
still in the process.
With a continuous process, it would be unrealistic to expect
every unit to be complete at the end of each month
With a continuous process, it would be unrealistic to expect
every unit to be complete at the end of each month
We must compute EQUIVALENT UNITS of Production for the items still in Ending WIP.
We must compute EQUIVALENT UNITS of Production for the items still in Ending WIP.
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Some Units Not Fully Complete (Ending WIP)
We have to compute EQUIVALENT UNITS in Ending WIP for both Direct Materials and for
Conversion Costs.
We have to compute EQUIVALENT UNITS in Ending WIP for both Direct Materials and for
Conversion Costs.
For example, two half full glasses are equivalent to 1 full glass.
For example, two half full glasses are equivalent to 1 full glass.
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Total EQUIVALENT UNITS = EU in Ending WIP + Units Completed and Transferred to Finished
Goods.
Total EQUIVALENT UNITS = EU in Ending WIP + Units Completed and Transferred to Finished
Goods.
Some Units Not Fully Complete (Ending WIP)
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Some Units Not Fully Complete (Ending WIP)
Summarize the flow of physical units. Compute the number of equivalent
units. Summarize the total costs to account
for (for both DM and CC) Compute costs per equivalent unit. Assign costs to COGS and to ending
WIP.
Summarize the flow of physical units. Compute the number of equivalent
units. Summarize the total costs to account
for (for both DM and CC) Compute costs per equivalent unit. Assign costs to COGS and to ending
WIP.
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For July, Toothpick purchased 9,000 pounds of wood scraps for $72,000. They spent $7,500 on labor
and had other process overhead of $7,404.
Toothpick started 300,000 units in July, completing and selling 260,000 units. Ending WIP had 40,000
toothpicks. Beginning WIP was zero.
The ending WIP was 100% complete with respect to material, but only 40% of the conversion work has
been done.
Compute the cost per toothpick produced. Also, compute the Ending WIP Inventory and COGS.
For July, Toothpick purchased 9,000 pounds of wood scraps for $72,000. They spent $7,500 on labor
and had other process overhead of $7,404.
Toothpick started 300,000 units in July, completing and selling 260,000 units. Ending WIP had 40,000
toothpicks. Beginning WIP was zero.
The ending WIP was 100% complete with respect to material, but only 40% of the conversion work has
been done.
Compute the cost per toothpick produced. Also, compute the Ending WIP Inventory and COGS.
Example 2: Some Units Not Fully Complete (Ending WIP)
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Example 2: Some Units Not Fully Complete (Ending WIP)
100% complete for materials
100% complete for conversion
100% complete for materials
100% complete for conversion
100% complete for materials
40% complete for conversion
100% complete for materials
40% complete for conversion
. .
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Example 2: Some Units Not Fully Complete (Ending WIP)
. .
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Example 2: Some Units Not Fully Complete (Ending WIP)
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Example 2: Some Units Not Fully Complete (Ending WIP)
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Example 2: Some Units Not Fully Complete (Ending WIP)
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Example 2: Some Units Not Fully Complete (Ending WIP)
.
Ending WIP = $9,600 + $864 = $10,464Ending WIP = $9,600 + $864 = $10,464
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Primary question to be answered:Which units were completed first
during the period?(How you answer this question will affect the Total EU for the period.)
Primary question to be answered:Which units were completed first
during the period?(How you answer this question will affect the Total EU for the period.)
Beginning & Ending WIP
When there is Beginning WIP, the determination of equivalent units
becomes somewhat more complicated.
When there is Beginning WIP, the determination of equivalent units
becomes somewhat more complicated.
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Beginning & Ending WIP
Weighted Average vs. FIFOWeighted Average vs. FIFO
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
FIFOCosts are accounted for by layer. Cost per EU for this period is computed separately from the Cost per EU
for last period.
FIFOCosts are accounted for by layer. Cost per EU for this period is computed separately from the Cost per EU
for last period.
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Beginning & Ending WIP
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
Weighted-Average
All units and costs are considered
together to determine average cost per EU,
regardless of whether the costs were incurred last
period or currently.
Weighted-Average is the most
commonly used
method.
Weighted-Average is the most
commonly used
method.
Weighted Average vs. FIFOWeighted Average vs. FIFO
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Example: Weighted-Average
For August, Toothpick purchased 9,500 pounds of wood scraps for $75,000. They spent $8,000 on labor
and had other process overhead of $7,000.
Toothpick started 320,000 units in July, completing 335,000 units. Ending WIP had 25,000 toothpicks.
Beginning WIP was 40,000 units.
The ending WIP was 100% complete for material, and 70% complete for conversion. Beginning WIP was
100% for material and 40% complete for conversion.
Compute the cost per toothpick produced. Also, compute the Ending WIP Inventory and COGS.
For August, Toothpick purchased 9,500 pounds of wood scraps for $75,000. They spent $8,000 on labor
and had other process overhead of $7,000.
Toothpick started 320,000 units in July, completing 335,000 units. Ending WIP had 25,000 toothpicks.
Beginning WIP was 40,000 units.
The ending WIP was 100% complete for material, and 70% complete for conversion. Beginning WIP was
100% for material and 40% complete for conversion.
Compute the cost per toothpick produced. Also, compute the Ending WIP Inventory and COGS.
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Example: Weighted-Average
100% complete for materials
40% complete for conversion
100% complete for materials
40% complete for conversion
100% complete for materials
70% complete for conversion
100% complete for materials
70% complete for conversion
. .
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Example: Weighted-Average
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Example: Weighted-Average
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Example: Weighted-Average
Step 2: Total Equivalent UnitsStep 2: Total Equivalent Units
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Example: Weighted-Average
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Example: Weighted-Average
Ending WIP = $5,875 + $789 = $6,664Ending WIP = $5,875 + $789 = $6,664
8-31
Recognizing Spoilage
Spoilage represents the amount of resources that go into the process, but DO NOT result in finished product.
Managers face key problems related to spoilage:
1. Identifying whether it exists.
2. Determining whether it can be eliminated.
3. Deciding whether eliminating it is worthwhile.
Spoilage represents the amount of resources that go into the process, but DO NOT result in finished product.
Managers face key problems related to spoilage:
1. Identifying whether it exists.
2. Determining whether it can be eliminated.
3. Deciding whether eliminating it is worthwhile.
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Recognizing Spoilage
Spoilage represents the amount of resources that go into the process, but DO NOT result in finished product.
The 5-step approach discussed earlier can be modified by including Spoilage as an additional type of input and
adjusting the formulas accordingly.
Spoilage represents the amount of resources that go into the process, but DO NOT result in finished product.
The 5-step approach discussed earlier can be modified by including Spoilage as an additional type of input and
adjusting the formulas accordingly.
.
This now includes Finished Goods AND Spoilage.
This now includes Finished Goods AND Spoilage.
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Recognizing Spoilage
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Recognizing Spoilage
Steps 3 & 4 are not affected by Spoilage.Steps 3 & 4 are not affected by Spoilage.
Spoilage is added as an additional line item in
Step 5.
Spoilage is added as an additional line item in
Step 5.
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I get the feeling I’m in
over my head!
End of Chapter 8