Managerial Accounting Chap 004

8/11/2019 Managerial Accounting Chap 004

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

Copyri ght 2013 by The McGraw-H il l Companies, I nc. Al l r ights reserved.McGraw-Hill/Irwin

Chapter 04

Process Costing


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4-2

Processing Departments Any unit in an organization where materials, labor,

or overhead are added to the product.

The activities performed in a processing

department are performed uniformly on 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 ofGoods

Sold

Direct Labor

ManufacturingOverhead

ProcessingDepartment

Costs are traced andapplied to departments

in a process costsystem.

DirectMaterials


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Raw Materials

Process Cost Flows: The Flow of

Raw Materials (in T-account form)

Work in Process

Department B

Work in ProcessDepartment A

DirectMaterials

DirectMaterials

DirectMaterials


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Process Cost Flows: The Flow of

Labor Costs (in T-account form)

Work in ProcessDepartment B


Salaries andWages Payable

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor Direct

Labor


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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)



Direct

MaterialsDirectLabor

AppliedOverhead

Direct

MaterialsDirectLabor

AppliedOverhead

Transferred

to Dept. B

Transferredfrom Dept. A

Department A

DepartmentB


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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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Equivalent Units of Production

Equivalent units are theproduct of the numberof partially completed

units and thepercentage completionof those units.

These partially completed units complicate thedetermination of a departments output for a givenperiod and the unit cost that should be assigned to

that output.


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Equivalent Units The Basic IdeaTwo half-completed products are

equ ivalent to one complete product.

So, 10,000 units 70% completeare equ ivalent to 7,000 complete units.

+ = 1


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Equivalent Units of ProductionWeighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in prior

or current periods.2. Blends together units and costs from prior and

current periods.

3. Determines equivalent units of production for adepartment by adding together the number ofunits transferred out plus the equivalent units inending Work in Process Inventory.


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Treatment of Direct Labor

Type of Product Cost

D o l l a r

A m o u n

t ConversionDirect labor andmanufacturing

overhead may becombined into

one classificationof product

cost calledc onv er s i on c os t s .

DirectMaterials

Direct

Labor

DirectLabor



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Compute and Apply Costs

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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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., CPACopyri ght 2013 by The McGraw-H il l Companies, I nc. Al l r ights reserved.McGraw-Hill/Irwin

Appendix 4A

Process Costing Using the

FIFO 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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Cost per Equivalent Unit - FIFOThe formula for computing the cost perequivalent unit under FIFO method is:

Cost perequivalentunit

= Cost added during the periodEquivalent units of production


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A Comparison of Costing MethodsIn a lean production environment, FIFO and

weighted-average methods yield similarunit costs.

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

does not mix costs of the current period withcosts of the prior period.


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Managerial Accounting Chap 004

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