Hilton Maher Selto. 8 Process-Costing Systems McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies,...

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

8-4

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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Direct Materials (DM)


Conversion Costs (CC)


+

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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.

8-9

??

Example 1: All Units Fully Completed (No WIP)





+

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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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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.


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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


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.


Example 2: Some Units Not Fully Complete (Ending WIP)

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100% complete for materials

100% complete for conversion







. .

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. .

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8-18


8-19


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.

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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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





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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Weighted-Average





Weighted-Average





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


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.


For August, Toothpick purchased 9,500 pounds of wood scraps for $75,000. They spent $8,000 on labor


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.


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. .

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8-27


8-28


Step 2: Total Equivalent UnitsStep 2: Total Equivalent Units

8-29


8-30


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.


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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The 5-step approach discussed earlier can be modified by including Spoilage as an additional type of input and

adjusting the formulas accordingly.


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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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.

8-35

I get the feeling I’m in

over my head!

End of Chapter 8

Hilton Maher Selto. 8 Process-Costing Systems McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies,...

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Transcript of Hilton Maher Selto. 8 Process-Costing Systems McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies,...