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Transcript of 1 Copyright © 2008 Cengage Learning South-Western. Heitger/Mowen/Hansen Process Costing Chapter...
1Copyright © 2008 Cengage Learning South-Western.
Heitger/Mowen/Hansen
Process CostingChapter Five
Fundamental Cornerstones of Managerial Accounting
2
Characteristics of Process Manufacturing
Process costing works well whenever relatively homogeneous products pass through a series of processes and they
receive similar amounts of manufacturing costs.
Example industries:
Large manufacturing
plants
Tire manufacturers
Chemicals Food
3
Types of Processes
Sequential processing
Requires that units pass through one process before they can be worked on in later
processes.
In each department materials, labor, and overhead may be added. After
completing one process, the partially completed goods are transferred to the
next department.
4
Types of Processes
Parallel processing
Partially completed units can be worked on simultaneously in different processes and then
brought together in a final process for completion.
5
Raw Materials Cost Flow
The manufacturing cost flows are generally the same as those for a job-
order system.
Raw Materials
Materials purchases
As raw materials are purchased, the
cost of these materials flow into
a raw materials account.
+
6
Cost Flows into Work in Process
Work in Process+ Materials
+ Direct Labor
+ Overhead
Materials, labor and overhead flow
into the Work in Process account
7
Cost Flows into Finished Goods
Work in Process+ Materials
+ Direct Labor
+ Overhead
Finished Goods
+ Completed Goods
CompletedGoods
Completed goods are transferred out of Work in Process and into Finished
Goods
8
Cost Flows into Cost of Goods Sold
Finished Goods Cost of Goods Sold
+ Sold GoodsSold Goods
Goods that are sold are transferred out of Finished
Goods and into Cost of Goods Sold
+ Completed Goods
9
Transferred-In Costs
Transferred-In Costs are costs transferred from a prior process to a
subsequent process.
From the viewpoint of the subsequent process, transferred-in costs are a type of
raw material cost.
10
Production Report
Summarizes the manufacturing activity of a process department for a given period of time.
Two sections:
Unit Information section
Cost Information section
11
Production Report
Two sections:
Unit Information section
Cost Information section
Units to Account For
Units Accounted For
Unit Information Section has two major subdivisions
12
Production Report
Two sections:
Costs to Account For
Costs Accounted For
Cost Information Section also has two major
subdivisions
Unit Information section
Cost Information section
13
Computing unit cost is a key part of the production report.
Unit Cost is needed to:
This is not easy. It is difficult to define the
number of units produced.
Production Report
• Compute the cost of goods transferred out of a department
• Value ending work-in-process inventory
14
Equivalent Units Example
Assume that Department A had the following data for October:
Units in beginning work in process ---Units completed 1,000Units in ending work in process (25% complete) 600Total manufacturing costs $11,500
What is the output for this department? 1000 units?
1600 units?
15
Assume that Department A had the following data for October:
Units in beginning work in process ---Units completed 1,000Units in ending work in process (25% complete) 600Total manufacturing costs $11,500
If we say 1000, we ignore the ending work in
process.
Equivalent Units Example
16
Assume that Department A had the following data for October:
Units in beginning work in process ---
Units completed 1,000
Units in ending work in process (25% complete) 600
Total manufacturing costs $11,500
1600? Then we ignore the fact that the units in ending work in process are only
partially completed
Equivalent Units Example
17
Equivalent Units of Output
• What are equivalent units?◦ The total number of complete units that could
have been produced given the total manufacturing effort used during the period
• Dilemma◦ Some units are physically complete
∙ Called Units Completed
∙ When complete, units are transferred out
◦ Some units are not complete ∙ Remain in Work in Process
∙ Degree of completion must be determined
18
Beginning Work-In-Process Inventory
• Work done on these beginning inventory units◦ Represents prior period costs
◦ How should these costs figure into the computation of current period unit costs?
• Two methods:◦ Weighted Average Method
◦ FIFO Method
19
Weighted Average Method
• Combines◦ Beginning inventory costs
◦ Current-period costs
• Calculates Unit Cost for the period ◦ By averaging
• Unit cost is used to compute costs for:◦ Goods transferred-out
◦ Goods remaining in work-in-process
20
FIFO Method
Separates work and costs for the equivalent units in beginning inventory from work and costs of the equivalent
units produced during the current period.
Only current work and costs are used to calculate this
period’s unit cost.
21
Preparing a Weighted Average Production Report
• Trace the physical units of production◦ Two amounts are computed
∙ Units Started and Completed
∙ Units Started
Step #1 Physical Flow Analysis
22
• Adding together◦ Units Completed
◦ Units in Ending Work in Process x Fraction Complete
• Beginning inventory ◦ Included in the units completed
◦ Treats beginning inventory as if it was started and completed the current period
Step #2 Calculation of Equivalent Units
Preparing a Weighted Average Production Report
23
• Manufacturing Costs ÷ Equivalent Units◦ Costs include:
∙ Prior period costs associated with beginning work in process
∙ Current period manufacturing costs
Step #3 Computation of Unit Cost
Preparing a Weighted Average Production Report
24
• Computing cost of goods transferred out◦ Multiplying
∙ Unit cost (computed in step #3)
∙ Units completed (computed in step #1)
• Computing cost of ending work in process
◦ Multiplying∙ Unit cost (computed in step #3)
∙ Equivalent units (computed in step #2)
Step #4 Valuation of Inventories
Preparing a Weighted Average Production Report
25
• Checks to see if ◦ Costs to account for
∙ Beginning Work in Process + Costs incurred during the period
◦ Equal◦ Costs assigned to inventory
∙ Transferred Out + Ending Work In Process
Step #5 Cost Reconciliation
Preparing a Weighted Average Production Report
26
Evaluation of the Weighted Average Method
Major benefit of this method is the simplicity.
Main disadvantage is reduced accuracy in computing unit costs.
If greater accuracy is desired, a company should
use the FIFO method to determine unit costs.
27
Nonuniform Application of Manufacturing Inputs
This leads to separate completion percentages for materials and conversion
costs.
• In the prior example◦ Materials, labor and overhead were applied
uniformly throughout the process
• But often material is not added uniformly◦ Instead it is added at the beginning and end
of the process
28
Nonuniform Application of Manufacturing Inputs
Separate equivalent units, unit costs and category costs are computed for materials and
conversion costs.
Cornerstone 6-7 will walk us through this.
29
Multiple Departments
Some departments receive partially completed goods from prior departments.
Usual approach is to treat transferred-in goods as a separate material category.
Cost of this material is the cost of the goods
transferred out as computed in the prior department.