costing accounting

8/12/2019 costing accounting

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Similarities Between Job-Order and

Process Costing1. Both systems assign material, labor, and overhead

costs to products and they provide a mechanism forcomputing unit product costs.

2. Both systems use the same manufacturing accounts,including Manufacturing Overhead, Raw Materials,Work in Process, and Finished Goods.

3. The flow of costs through the manufacturing accounts isbasically the same in both systems.


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Differences Between Job-Order and

Process CostingProcess costing:1. Is used when a single product is produced on a

continuing basis or for a long period of time. Job-order

costing is used when many different jobs havingdifferent production requirements are worked on eachperiod.

2. Systems accumulate costs by department. Job-ordercosting systems accumulated costs by individual jobs.

3. Systems compute unit costs by department. Job-ordercosting systems compute unit costs by job on the job

cost sheet.


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Quick Check

Process costing is used for productsthat are:

a. Different and produced continuously.b. Similar and produced continuously.

c. Individual units produced to customerspecifications.

d. Purchased from vendors.


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Process costing is used for productsthat are:

a. Different and produced continuously.b. Similar and produced continuously.

c. Individual units produced to customerspecifications.

d. Purchased from vendors.

Quick Check


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Processing Departments

Any unit in an organization where materials, labor,or overhead are added to the product.

The activities performed in a processing

department areperformed uniformlyon allunits of production. Furthermore, the output ofa processing department must be homogeneous.

Products in a process costing environment

typically flow in a sequence from one departmentto another.


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Comparing Job-Order and Process

Costing

FinishedGoods

Cost ofGoodsSold

Work inProcess

DirectMaterials

Direct Labor

ManufacturingOverhead


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Comparing Job-Order and Process

Costing

FinishedGoods

Cost ofGoodsSold

Direct Labor


ProcessingDepartment

Costs are traced andapplied to departments

in a process costsystem.

DirectMaterials


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T-Account and Journal Entry Views of

Process Cost FlowsFor purposes of this example, assumethere are two processing departments

DepartmentsAand B.We will use T-accounts and journalentries.


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Raw Materials

Process Cost Flows: The Flow of

Raw Materials (in T-account form)

Work in ProcessDepartment B

Work in ProcessDepartment A

DirectMaterials

DirectMaterials

DirectMaterials


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Process Cost Flows: The Flow of

Raw Materials (in journal entry form)

Work in Process - Department A XX,XXXWork in Process - Department B XX,XXX

Raw Materials XX,XXX


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Process Costing: The Flow of LaborCosts (in journal entry form)

Work in Process - Department A XX,XXX

Work in Process - Department B XX,XXX

Salaries and Wages Payable XX,XXX


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Process Cost Flows: The Flow of ManufacturingOverhead Costs (in T-account form)

Work in Process

Department B



OverheadApplied to

Work inProcess

AppliedOverhead

AppliedOverhead

DirectLabor

DirectMaterials

DirectLabor

DirectMaterials

ActualOverhead


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Process Cost Flows: Transfers from WIP-Dept.A to WIP-Dept. B (in T-account form)



DirectMaterialsDirectLabor

AppliedOverhead

Direct

MaterialsDirectLabor

AppliedOverhead

Transferred

to Dept. B

Transferredfrom Dept. A

DepartmentA

DepartmentB


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Process Cost Flows: Transfers from WIP-Dept.A to WIP-Dept. B (in journal entry form)

Work in Process - Department B XX,XXX Work in Process - Department A XX,XXX


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Finished Goods

Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in T-account form)


Cost of

GoodsManufactured

DirectMaterialsDirectLabor

AppliedOverhead

Transferred

from Dept. A

Cost of

GoodsManufactured


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Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in journal entry form)

Finished Goods XX,XXX Work in Process - Department B XX,XXX


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Finished Goods

Cost of Goods Sold

Process Cost Flows: Transfers from FinishedGoods to COGS (in T-account form)


Cost ofGoods

Manufactured

DirectMaterials

DirectLabor

AppliedOverhead

Transferred

from Dept. ACost ofGoodsSold

Cost ofGoods

Sold

Cost ofGoods

Manufactured


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Process Cost Flows: Transfers from FinishedGoods to COGS (in journal entry form)

Cost of Goods Sold XX,XXX

Finished Goods XX,XXX


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Equivalent Units of Production

Equivalent units are theproduct of the numberof partially completed

units and thepercentage completion

of those units.

These partially completed units complicate thedetermination of a departments output for a given

period and the unit cost that should be assigned tothat output.


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Equivalent UnitsThe Basic Idea

Two half-completed products areequivalent toone complete product.

So, 10,000 units 70% completeare equivalent to7,000 complete units.

+ = 1


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For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Quick Check


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For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave 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

Quick Check


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4-28

Calculating Equivalent Units

Equivalent units can be calculatedtwo ways:

The First-In, First-Out MethodFIFO iscovered in the appendix to this chapter.

The Weighted-Average MethodThis method

will be covered in the main portion of the chapter.


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Learning Objective 2

Compute the equivalent

units of productionusing the weighted-

average method.


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Treatment of Direct Labor

Type of Product Cost

Do

llarAmoun

t Conversion

Direct labor andmanufacturing

overhead may becombined into

one classificationof product

cost calledconvers ion costs.

DirectMaterials

Direct

Labor

DirectLabor



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Weighted-AverageAn Example

Smith Company reported the following activity in theAssembly Department for the month of June:

Percent Completed

Units Materials ConversionWork in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900 60% 30%


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The first step in calculating the equivalent units is to identifythe units completed and transferred out of Assembly

Department in June (5,400 units)

Materials Conversion

Units completed and transferred

out of the Department in June 5,400 5,400


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The second step is to identify the equivalent unitsof production inending work in processwith respect to materialsfor the month(540 units) and adding this to the 5,400 units from step one.




Work in process, June 30:

900 units 60% 540

Equivalent units of Production in

the Department during June 5,940


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Work in process, June 30:

900 units 60% 540

900 units 30% 270

Equivalent units of Production in

the Department during June 5,940 5,670

The third step is to identify the equivalent unitsof production inending work in processwith respect to conversionfor the month

(270 units) and adding this to the 5,400 units from step one.


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Beginning

Work in Process300 Units

40% Complete

Ending

Work in Process900 Units

60% Complete

6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed


Materials

5,400 Units Completed540 Equivalent Units 900 60%

5,940 Equivalent units

of production


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Compute the cost per

equivalent unit using theweighted-averagemethod.


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Compute and Apply Costs

Beginning Work in Process Inventory: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

Production started during June 6,000 units

Production completed during June 5,400 units

Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130

Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete


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The formula for computing the cost perequivalent unit is:

Cost perequivalent

unit=

Cost of beginningWork in Process

InventoryCost added during

the period

Equivalent units of production

+


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Here is a schedule with the cost and equivalentunit information.


Total

Cost Materials ConversionCost to be accounted for:

Work in process, June 1 10,039$ 6,119$ 3,920$

Cost added in Assembly 199,751 118,621 81,130

Total cost 209,790$ 124,740$ 85,050$

Equivalent units 5,940 5,670


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Total

Cost Materials ConversionCost to be accounted for:

Work in process, June 1 10,039$ 6,119$ 3,920$

Cost added in Assembly 199,751 118,621 81,130

Total cost 209,790$ 124,740$ 85,050$

Equivalent units 5,940 5,670

Cost per equivalent unit 21.00$ 15.00$


Here is a schedule with the cost and equivalentunit information.

$124,740 5,940 units = $21.00 $85,050 5,670 units = $15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00


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Assign costs to units

using the weighted-average method.


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Applying Costs

Materials Conversion Total

Ending WIP inventory:

Equivalent units 540 270

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out


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Applying Costs







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Computing the Cost of UnitsTransferred Out




Cost per equivalent unit 21.00$ 15.00$Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$

Units completed and transferred out:

Units transferred 5,400 5,400



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Cost of units transferred out 113,400$ 81,000$ 194,400$



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Prepare a costreconciliation report.


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Reconciling Costs

Costs to be accounted for:

Cost of beginning Work in Process Inventory 10,039$

Costs added to production during the period 199,751

Total cost to be accounted for 209,790$

Assembly DepartmentCost Reconciliation


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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPAMcGraw-Hill/Irwin Copyri ght 2013 by The McGraw-H il l Companies, Inc. Al l r ights reserved.

Appendix 4A

Process Costing Using theFIFO Method


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FIFO vs. Weighted-Average Method

The FIFO method (generally considered moreaccurate than the weighted-average method) differs

from the weighted-average method in two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning

inventory are treated.


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Compute the equivalent

units of productionusing the FIFO method.


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Equivalent UnitsFIFO Method

Lets revisit the Smith Company example. Here isinformation concerning the Assembly Departmentfor the month of June.

Percent Completed

Units Materials Conversion


Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June



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Step 1:Determine equivalent units needed to completebeginning Work in Process Inventory.


To complete beginning Work in Process: Materials: 300 units (100% - 40%) 180

Conversion: 300 units (100% - 20%) 240


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Step 2:Determine units started and completed duringthe period.


To complete beginning Work in Process: Materials: 300 units (100% - 40%) 180

Conversion: 300 units (100% - 20%) 240

Units started and completed during June 5,100 5,100


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Beginning

Work in Process300 Units40% Complete

Ending


6,000 Units Started


FIFO Example

Materials

900 60%5,100 Units Completed540 Equivalent Units

5,820 Equivalent unitsof production

180 Equivalent Units300 60%


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Beginning


Ending


6,000 Units Started


FIFO Example

Conversion

5,100 Units Completed270 Equivalent Units

900 30%

5,610 Equivalent unitsof production

240 Equivalent Units300 80%


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Equivalent Units:Weighted-Average vs. FIFO


Equivalent units - weighted-average method 5,940 5,670

Less equivalent units in beginning inventory:

300 units 40% 120300 units 20% 60

Equivalent units - FIFO method 5,820 5,610

As shown below, the equivalent units in beginning inventory aresubtracted from the equivalent units of production per theweighted-average method to obtain the equivalent units of

production under the FIFO method.


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Compute the cost per

equivalent unit using theFIFO method.


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Beginning work in process: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

Production started during June 6,000 unitsProduction completed during June 5,400 units

Costs added to production in JuneMaterials cost $ 118,621

Conversion cost $ 81,130

Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete

Cost per Equivalent Unit - FIFO

Lets revisit the Smith Company Assembly Departmentfor the month of June to prepare our production report.


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Cost per Equivalent Unit - FIFO

Total

Cost Materials Conversion

Cost added in June 199,751$ 118,621$ 81,130$

Equivalent units 5,820 5,610Cost per equivalent unit 20.3816$ 14.4617$

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

$118,621

5,820$81,1305,610


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Assign costs to unitsusing the FIFO method.


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Ending WIP inventory:Equivalent units 540 270

Assembly Department

Cost of Ending WIP Inventory

Applying Costs - FIFOStep 1: Record the equivalent units of production in ending Work

in Process Inventory.

900 units60% 900 units30%


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Applying Costs - FIFO

Step 2: Record the cost per equivalent unit.




Assembly Department



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Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$

Assembly Department


Applying Costs - FIFO

Step 3: Compute the cost of ending Work in Process Inventory.

540$20.3816 270$14.4617


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Cost of Units Transferred OutStep 1: Record the cost in beginning Work in Process Inventory.


Cost of Units Transferred Out:

Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$Cost to complete beginning WIP

Equivalent units to complete 180 240


Cost to complete beginning WIP 3,669$ 3,471$ 7,140

Cost of units started and completed:

Units started and completed 5,100 5,100


Cost of units started and completed 103,946$ 73,755$ 177,701

Cost of Units Transferred Out 194,880$

Assembly Department

Cost of Units Transferred Out in June


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Cost of Units Transferred OutStep 2: Compute the cost to complete the units in beginning

Work in Process Inventory.












Assembly Department



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Cost of Units Transferred OutStep 3: Compute the cost of units started and completed this

period.












Assembly Department



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Cost of Units Transferred OutStep 4: Compute the total cost of units transferred out.












Assembly Department



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Prepare a costreconciliation report

using the FIFO method.

Prepare a cost

reconciliation reportusing the FIFO method.


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Reconciling Costs

Costs to be accounted for:

Cost of beginning Work in Process Inventory 10,039$

Costs added to production during the period 199,751Total cost to be accounted for 209,790$

Cost accounted for as follows:

Cost of ending Work in Process Inventory 14,911$

Cost of units transferred out 194,880Total cost accounted for* 209,791$

Assembly Department

Cost Reconciliation for June

*$1 rounding error.


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A Comparison of Costing Methods

In a lean production environment, FIFO andweighted-average methods yield similar

unit costs.

When considering cost control, FIFO issuperior to weighted-average because it

does not mix costs of the current period with

costs of the prior period.


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End of Chapter 04

costing accounting

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