Systems Design: Process Costing - Cabrillo Collegembooth/acct1b/Garrison 15e/Week 5 Chapter 4... ·...

Systems Design: Process

CostingInstructor: Michael G. Booth

Chapter 4

Detroit “The Beginning”

Harvard Business Case

Youngstown Harvard Analysis Spring 2015.xlsx

Youngstown Harvard Analysis Spring 2015.xlsx

Similarities Between Job-Order and Process Costing

• Both systems assign material, labor and overhead

costs to products and they provide a mechanism

for computing unit product costs.

• Both systems use the same manufacturing

accounts, including Manufacturing Overhead, Raw

Materials, Work in Process, and Finished Goods.

• The flow of costs through the manufacturing

accounts is basically the same in both systems.

Differences Between Job-Order and Process Costing

• Process costing 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 having different

production requirements are worked on each period.

• Process costing systems accumulate costs by department.

Job-order costing systems accumulated costs by individual

jobs.

• Process costing systems compute unit costs by department.

Job-order costing systems compute unit costs by job on the

job cost sheet.

Process costing is used for products

that are:

a. Different and produced continuously.

b. Similar and produced continuously.

c. Individual units produced to customerspecifications.

d. Purchased from vendors.

Quick Check

Processing DepartmentsAny 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 all

units of production. Furthermore, the output of

a processing department must be homogeneous.

Products in a process costing environment

typically flow in a sequence from one department

to another.

Comparing Job-Order and

Process Costing

Finished

Goods

Cost of

Goods

Sold

Work in

Process

Direct

Materials

Direct Labor

Manufacturing

Overhead


Process Costing

Finished

Goods

Cost of

Goods

Sold

Direct Labor

Manufacturing

Overhead

Jobs

Costs are traced and

applied to individual

jobs in a job-order

cost system.

Direct

Materials


Process Costing

Finished

Goods

Cost of

Goods

Sold

Direct Labor

Manufacturing

Overhead

Processing

Department

Costs are traced and

applied to departments

in a process cost

system.

Direct

Materials

WIP WIP

Cutting Assembly

Process Cost Flow (Classic

Glass; Demonstration Problem)

Product

costs

Materials

Labor

Overhead

Income

statement

Cost of

goods

sold

Finished

goods

inventory

Materials

Labor

Overhead

Transferred-

in costs

Materials

Labor

Overhead Cost of

goods

available

for sale

WIP WIP

Dept A Dept B

Product

costs

Materials

Labor

Overhead

Process (product costing)

System Accumulates the costs incurred in a production process

Assigns costs to the organizations products

WIP

Finished Goods

Product (process costing) Uses varies

Inventory valuation in financial accounting

Product costs are used to value inventory on the balance sheet

COGS is computed on Income Statement

Decision-facilitation

Planning, cost control, decision making (market penetration, pricing, product mix, quantity of units)

Product costs determine sales price:

Price determines relationships between firm and customer (distributors, direct customers, resellers)

i.e. Defense contractors operated on “Cost Plus contracts”

Product-costing systems are industry specific

Specific for companies producing large numbers of identical units

Averaged over the entire production run

Units must be very identical (very similar)

Accumulates all the production costs for large number of units and assigned as average “cost per unit”

Product costing (process costing) Non-

manufacturing firms

Product costs have identical role as in manufacturing

Merchandising includes the costs of buying and transporting in

product costs

Inventory items valued at product costs

Balance sheet -> product costs include freight and handling

Income statement -> COGS

Raw Materials

Process Cost Flows: The Flow

of Raw Materials

Work in ProcessDepartment B

Work in ProcessDepartment A

•DirectMaterials

•DirectMaterials

•DirectMaterials

Process Cost Flows: The Flow

of Labor Costs



Salaries and

Wages Payable

•DirectMaterials

•DirectMaterials

•DirectLabor

•DirectLabor •Direct

Labor

Process Cost Flows: The Flow of

Manufacturing Overhead Costs



Manufacturing Overhead

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•DirectLabor

•DirectMaterials

•Direct Labor

•DirectMaterials

•Actual

Overhead

Process Cost Flows: Transfers from

WIP-Dept. A to WIP-Dept.

Work in Process Department B


•Direct

Materials

•Direct

Labor•Applied

Overhead

•Direct

Materials

•Direct

Labor•Applied

Overhead

Transferred

to Dept. B

•Transferred

from Dept. A

Department

A

Department

B

Finished Goods


WIP-Dept. B to Finished Goods


•Cost of

Goods

Manufactured

•Direct

Materials

•Direct

Labor•Applied

Overhead•Transferred

from Dept. A

•Cost of

Goods

Manufactured

Finished Goods

Cost of Goods Sold


Finished Goods to COGSWork in Process

Department B

•Cost of

Goods

Manufactured

•Direct

Materials

•Direct

Labor•Applied

Overhead•Transferred

from Dept. A

•Cost of

Goods

Sold

•Cost of

Goods

Sold

•Cost of

Goods

Manufactured

Product costing (process costing)

In Class Exercise

Classic Glass, Inc. makes stained glass lamps. Production

process uses two departments: cutting department and

assembly department where they are put together.

Record the data in T-accounts.

Prepare a schedule of cost of goods manufactured and sold,

an income statement, a balance sheet, and a statement of

cash flows for the first year.

WIP WIP

Cutting Assembly

Process Cost Flow (Classic Glass;

Demonstration Problem)

Product

costs

Materials

Labor

Overhead

Income

statement

Cost of

goods

sold

Finished

goods

inventory

Materials

Labor

Overhead

Transferred-

in costs

Materials

Labor

Overhead Cost of

goods

available

for sale

WIP WIP

Cutting Assembly

Product

costs

Materials

Labor

Overhead

Job Process Cost System

(Classic Glass)

Cash WIP Cutting WIP Assembly Finished Goods Common Stock

(1) 70,000 (2) 22,000 (4) 6,200 (8) 26,900 (5) 16,000 (10)39,000 (10)39,000 (11)

34,000

(1) 70,000

(11) 56,000 (3) 600 (5) 14,000 (6) 9,600 Bal 5,000 Bal 70,000

(5) 32,000 (6) 8,400 (8) 26,900

(7) 13,700 Bal 1,700 (9) 8,500 Retained Earnings

(12)11,300 Bal 22,000 (cl) 12,520

Bal 46,400 Bal 12,520

Raw Materials Sales Revenue

(2) 22,000 (4) 6,200 (cl) 56,000 (11)56,000

(9) 8,500

Bal 7,300

Cost of Goods Sold

Production Supplies (11)34,000 (14) 1,820

(3) 600 (13) 480 (cl) 32,180

Bal 120

Manuf. Overhead

(6) Overhead Applied:

Cutting $0.60 x $14,000 = $ 8,400

Assembly $0.60 x $16,000 = 9,600

Total $18,000

G,S&A Expenses

(5) 2,000 (6) 18,000 (12)11,300 (cl) 11,300

(7) 13,700

(13) 480

(14) 1,820

Bal 0

Classic Glass, Inc.

Cost of Goods Manufactured and Sold

For the First Year of Operation

Beginning Raw Materials Inventory $ 0

Purchases 22,000

Raw Materials Available 22,000

Ending Raw Materials Inventory (7,300)

Raw Materials Used 14,700

Direct Labor 30,000

Overhead1 16,180

Total Manufacturing Costs 60,880

Beginning Work in Process Inventory 0

Total Work in Process Inventory 60,880

Ending Work in Process Inventory2 (23,700)

Cost of Goods Manufactured 37,180

Beginning Finished Goods Inventory 0

Goods Available for 37,180

Ending Finished Goods Inventory (5,000)

Cost of Goods Sold $32,180

Classic Glass, Inc.

Balance Sheet

At End of First Year of Operation

ASSETS

Cash $46,400

Production Supplies 120

Raw Materials Inventory 7,300

Work in Process Inventory 23,700

Finished Goods Inventory 5,000

Total Assets $82,520

EQUITY

Common Stock $70,000

Retained Earnings 12,520

Total Equity $82,520

Classic Glass, Inc.

Statement of Cash Flows


OPERATING ACTIVITIES

Inflow from Revenue $56,000

Outflow for Inventory3

Outflow for G,S&A Expenses

Net Outflow from Operating Activities

INVESTING ACTIVITIES

FINANCING ACTIVITIES

Inflow from Issuing Stock

Net Change in Cash

Beginning Cash Balance

Ending Cash Balance

Classic Glass, Inc.





Outflow for Inventory3 (68,300)

Outflow for G,S&A Expenses

Net Outflow from Operating Activities




Net Change in Cash


Ending Cash Balance

Classic Glass, Inc.






Outflow for G,S&A Expenses (11,300)

Net Outflow from Operating Activities (23,600)




Net Change in Cash


Ending Cash Balance

Classic Glass, Inc.








INVESTING ACTIVITIES 0



Net Change in Cash


Ending Cash Balance

Classic Glass, Inc.










Inflow from Issuing Stock 70,000

Net Change in Cash 46,400


Ending Cash Balance

Classic Glass, Inc.










Inflow from Issuing Stock 70,000

Net Change in Cash 46,400

Beginning Cash Balance 0

Ending Cash Balance $46,400

Job Process Cost System

(Classic Glass)

Cash WIP Cutting WIP Assembly Finished Goods Common Stock

(1) 70,000 (2) 22,000 (4) 6,200 (8) 26,900 (5) 16,000 (10)39,000 (10)39,000 (11)

34,000

(1) 70,000

(11) 56,000 (3) 600 (5) 14,000 (6) 9,600 Bal 5,000 Bal 70,000

(5) 32,000 (6) 8,400 (8) 26,900

(7) 13,700 Bal 1,700 (9) 8,500 Retained Earnings

(12)11,300 Bal 22,000 (cl) 12,520

Bal 46,400 Bal 12,520

Raw Materials Sales Revenue

(2) 22,000 (4) 6,200 (cl) 56,000 (11)56,000

(9) 8,500

Bal 7,300

Cost of Goods Sold

Production Supplies (11)34,000 (14) 1,820

(3) 600 (13) 480 (cl) 32,180

Bal 120

Manuf. Overhead

(6) Overhead Applied:

Cutting $0.60 x $14,000 = $ 8,400

Assembly $0.60 x $16,000 = 9,600

Total $18,000

G,S&A Expenses

(5) 2,000 (6) 18,000 (12)11,300 (cl) 11,300

(7) 13,700

(13) 480

(14) 1,820

Bal 0

Classic Glass, Inc.

Cost of Goods Manufactured and Sold


Beginning Raw Materials Inventory $ 0

Purchases

Raw Materials Available

Ending Raw Materials Inventory ( )

Raw Materials Used

Direct Labor

Overhead1

Total Manufacturing Costs

Beginning Work in Process Inventory 0

Total Work in Process Inventory

Ending Work in Process Inventory2 ( )

Cost of Goods Manufactured

Beginning Finished Goods Inventory 0

Goods Available for

Ending Finished Goods Inventory ( )

Cost of Goods Sold $32,180

Equivalent Units

Equivalent Units of ProductionEquivalent units are the product of the number of

partially completed units and the percentage completion of those units.

We need to calculate equivalent units because a

department usually has some partially completed units

in its beginning and ending inventory. These partially

completed units complicate the determination of a

department’s output for a given period and the unit cost

that should be assigned to that output.

Equivalent Units – The Basic

IdeaTwo half completed products are

equivalent to one complete product.

So, 10,000 units 70% complete

are equivalent to 7,000 complete units.

+ = 1

For the current period, Jones started 15,000

units and completed 10,000 units, leaving 5,000

units in process 30 percent complete. How

many equivalent units of production did Jones

have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Quick Check

For the current period, Jones started 15,000

units and completed 10,000 units, leaving 5,000

units in process 30 percent complete. How

many equivalent units of production did Jones

have 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

Calculating Equivalent Units

Equivalent units can be calculated

two ways:

•The Weighted-Average Method

•The First-In, First-Out Method (Includes units to be

completed beginning inventory, completed units, equivalent ending

inventory)

.

Equivalent units of

production using the

weighted-average

method

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 a

department by adding together the number of

units transferred out plus the equivalent units in

ending Work in Process Inventory.

Treatment of Direct Labor

Direct labor costs

may be small

in comparison to

other product

costs in process

cost systems.

DirectMaterials

Type of Product Cost

Do

llar

Am

ou

nt

DirectLabor

ManufacturingOverhead

Treatment of Direct Labor

Type of Product Cost

Do

llar

Am

ou

nt Conversion

Direct labor and

manufacturing

overhead may be

combined into

one classification

of product

cost called

conversion costs.

DirectMaterials

DirectLabor

DirectLabor

ManufacturingOverhead

Weighted-Average – An

Example

Percent Completed

Units Materials Conversion

Work 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%

Weighted-Average – An ExampleThe first step in calculating the equivalent units is

to identify the 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

Weighted-Average – An Example

The second step is to identify the equivalent units of

production in ending work in process with respect to

materials for 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


Example





900 units × 60% 540

900 units × 30% 270


the Department during June 5,940 5,670

The third step is to identify the equivalent units of production in

ending work in process with respect to conversion for the month

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





900 units × 60% 540

900 units × 30% 270


the Department during June 5,940 5,670

Equivalent units of production always equals:


+ Equivalent units remaining in work in process

Weighted-Average – An Example

BeginningWork in Process

300 Units40% Complete

EndingWork in Process


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed


ExampleMaterials


540 Equivalent Units 900 × 60%

5,940 Equivalent units

of production

6,000 Units Started


5,100 Units Startedand Completed

270 Equivalent Units900 × 30%

5,670 Equivalent units

of production

BeginningWork in Process


EndingWork in Process



ExampleConversion

Compute the cost per

equivalent unit using the

weighted-average method.

Compute and Apply CostsBeginning Work in Process Inventory: 300 units

Materials: 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 $ 118,621Conversion cost $ 81,130

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

Compute and Apply CostsThe formula for computing the cost per

equivalent unit is:

Cost per

equivalent

unit=

Cost of beginning

Work in Process

Inventory Cost added during

the period

Equivalent units of production

+

Here is a schedule with the cost and equivalent

unit information.

Compute and Apply Costs

Total

Cost Materials Conversion

Cost 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

Total

Cost Materials Conversion

Cost 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$

Compute and Apply CostsHere is a schedule with the cost and equivalent

unit 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

ASSIGN COSTS TO UNITS

USING THE WEIGHTED-

AVERAGE METHOD.

Applying Costs

Materials Conversion Total

Ending WIP inventory:

Equivalent units 540 270

Assembly Department

Cost of Ending WIP Inventory and Units Transferred Out

Applying Costs





Assembly Department


Applying Costs





Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$

Assembly Department


Computing the Cost of Units

Transferred Out






Units completed and transferred out:

Units transferred 5,400 5,400

Assembly Department



Transferred Out









Assembly Department



Transferred Out









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

Assembly Department


PREPARE A COST

RECONCILIATION

REPORT.

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 Department

Cost Reconciliation

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$

Cost accounted for as follows:

Cost of ending Work in Process Inventory 15,390$

Cost of units transferred out 194,400

Total cost accounted for 209,790$

Assembly Department

Cost Reconciliation

In class Practice Chapter 4

•Break into teams of 2-4 people

•Complete one practice problem and stop

•We will review as a class each problem

Assignments:

See web: http//cabrillo.edu/~mbooth

This will be updated weekly

Note: Use McGrawHill Connect manager to submit assignments

http://www.cabrillo.edu/~mbooth/index_files/Related_links.htm

Systems Design: Process Costing - Cabrillo Collegembooth/acct1b/Garrison 15e/Week 5 Chapter 4... ·...

Documents

Transcript of Systems Design: Process Costing - Cabrillo Collegembooth/acct1b/Garrison 15e/Week 5 Chapter 4... ·...