Chapter 4: Process Costing Flashcards
Conversion Costs
Combination of Direct Labour and Manufacturing Overhead costs
Examples of companies who use process costing
Reynolds Aluminum, Scott Paper, General Mills, Petro-Canada, Coppertone, and Kelloggs
When a department receives goods from the preceding department it will need to show the amount of cost transferred as a _______________________.
Separate cost entry
Process costing
Procedure that management accountants have developed to allocate each input type’s charged cost to completed units and to in-process units
Similarities between job-order and process costing:
1) The two systems have a common purpose, which is to assign materials, labour, and overhead costs to products and to provide a mechanism for computing unit costs
2) The two system maintain and use the same basic accounts, including manufacturing overhead, raw materials, work in process, and finished goods, and the flow of costs through the accounts is basically the same in both systems
Differences between job-order and process costing
1) The flow of units in a process costing system is more or less continuous
2) These units are indistinguishable from one another
3) each order is just one of many that are filled from continuous flow of virtually identical units from the production line, unlike in a job-order setting, where each unit is unique
Note: Process costing situation
Although each unit of product will absorb an input in the same way as another unit, the inputs themselves need not be applied during production at the same time (stage of production) or at the same rate
Example from the note
During production, at a given stage of the process, the in-process units may have 80% materials added, while only 60% of labour plus overhead has been applied to those units.
Therefore the cost per unit has to be determined separately for each type of input (direct material cost per unit, conversion cost per unit)
In a job-order shop:
The cost object is the job; at any given stage in production process of a job, exactly the same percentage of completion will have occurred for every type of input
The costs of inputs are assembled first into a total and then unitized
Production report
A report that summarizes all activity in a department’s work-in-process account during a period and that contains three parts: a quantity schedule and a computation of equivalent units, a computation of total and unit costs, and a cost reconciliation.
The _____ is not used in process costing because the focus of this method is on departments
Job cost sheet
The ___________ is the key document in a process costing system
Department production report
Major differences between Job-costing and Process
Can be found exhibit 4-3
Cost accumulation is a __________ process in costing system than in a job-order costing system
Simpler
Processing department
Any location in an organization where work is performed on a product and where materials, labour, or overhead costs are added to the product.
Transferred-in costs
The costs attached to products that have been received from a prior processing department.
This cost will continue to build as it comes from departments (like a snowball rolling down a hill)
Looking at the first processing department, department A, the journal entry for placing materials in production is: (accounts)
This is based on taking materials out of the storeroom using a material requisition form
Work in process - Department A 74,000
Raw Materials 74,000
If other materials are subsequently added in department B, the account entry is: (accounts)
Work in process - Department B XXXX
Raw Materials XXXX
Labour cost tracking in process costing (accounts)
Only necessary to track labor costs incurred in each department opposed to tracing it to specific jobs
Work in process - Department A XXXX
Salaries and Wages Payable XXXX
Overhead costs tracking in process costing (accounts)
** Predetermined overhead rates are usually used to apply overhead costs to departments (or processes), each department receives a portion of the total overhead based on this rate)
Work in process - Department A XXXX
Manufacturing Overhead Applied XXXX
Journal entry used to transfer the costs of the processed units from department A to department B
After processing is completed in one department, the units are transferred to the next department for further processing
Work in process - Department B (graphics) XXXX
Work in Process - department A XXXX
After processing has been completed in department E, the last department, the cost of the completed units are transferred to the finished goods inventory accounts (Accounts)
This company used 5 different departments, hence the use of E, however if a company had only 3 departments it would become C
Finished Goods EEEEE
Work in Process - department E EEEEE
Finally, when a customers order is filled and units are sold, the cost of units is transferred to cost of goods sold (COGS)
Cost of goods sold FFFF
Finished Goods FFFF
Production environments that use a process costing system for deterring product costs are typically highly ____________.
Capital intensive
Labour is usually a small proportion of total manufacturing costs
Conversion cost (equation)
Direct labour cost + manufacturing overhead cost.
Overhead will still come from using ocverhead allocation rate
The key task of process costing
Is to realize that it will not work to measure the volume of production activity undertaken by the processing department during the production period by the number of physical units processed and completed
For example: It two units are processed by a department and one is completed but the other is in process, they are not the same and you can you can not measure the volume of production by two physicals nits (as only ne is completed)
Number of units finished (equation) =
Number of units in beginning work in process (BWIP) + Number of units started
Volume of production activity
Should not be measured in physical units
Because a fully completed unit and a partially completed unit can not be responsible for the same amount of cost
A whole unit bears more burden than a partially completed one
Degree of completion (percentage complete)
The extent to which a physical unit is complete for each cost category.
Describes how much work has been done on the product
100% = fully completed 30% = partially completed
Can the degree of completion be different for direct materials and different from conversion costs?
Absolutly! You may see conversion costs at 70% while direct materials is only 30%
Equivalent units of production (EU)
The units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department’s ending work-in-process inventory.
Number of equivalent units (equation) =
Number of physical units x Degree of completion of the units
800 bikes x 70% completed = 560 bikes done
Number of equivalent units explained
Provides us the means to measure the production activity in a process costing environment
When there is work-in-process inventory, production quantity should be expressed in equivalent units of production using the percentage completion information NOT the number of physical units processed
EU =
Same as card 32 but in acronym form
Physical units x Degree of completion
There are 72 equivalent units in inventory which are 80% along the production process, the number of units in process must be:
72/0.8 = 90!!
Total EU processed (equation) =
To compute the total EU processed in a given production period for a given input, the formula is:
Total units completed + EU in ending inventory
Volume of production, in EU (equation) =
If you want to calculate the volume produced in a period opposed to the volume processed during the period, measured in EU, the formula to do so is:
Total EU processed - EU in beginning inventory
The equivalent units processed and the equivalent units of production are different concepts!!
Volume processed include the EU from the previous period (this can be thought of as total EU to account for)
When measuring the production activity from current period you must remove the Eu that represents the previous periods production activity from the total volume of units handled
Weighted average cost method
A method of process costing that blends together units and costs from both the current and prior periods.
Cost to account for
The cost to allocate in the WACM is the sum of the cost in beginning inventory and the cost incurred in the period
The process costing steps are
1) Measure the production activity
2) Calculate the costs to allocate
3) Calculate the cost per equivalent unit
4) Apply the calculated cost per unit to completed units and to units in ending inventory, measured in EU
5) Confirm that the costs after allocation equal the costs that were to be allocated
In WACM approach, the volume of production activity is the
Volume of EU processed (NOT PRODUCTION)
The first step in costing process is to calculate the total EU processed in May for each type of unit (STEP 1)
Example provided:
WACM EU, Direct materials = EU of completed units + EU in EWIP (4,800 + 400 x 0.40)
WACM EU, Conversion cost = EU of completed units + EU in EWIP (4,800 + 400 x 0.25)
Second step is to determine the cost per equivalent unit
Example provided (STEP 2)
WACM cost per Eu, DIrect materials = Total cost charged to dept. / WACM EU (ex: $77,000/4960 = $15.52)
WACM cost per EU, conversion = Total cost charged to dept. / WACM EU (ex: $71,000 / 4,900 = $14.49)
Total cost per EU = 15.52 + 14.49 = $30.01 (add a+b)
Final step of costing process (STEP 3)
With the cost per EU calculated, the cost allocation between the completed units and the EU in ending inventory can be made
Cost reconciliation
The part of a department’s production report that shows the cost to be accounted for during a period and how those costs are accounted for.
The production report: WACM
A presentation of the costing procedure just described
Takes the place of a job cost sheet in process costing
Comprises of:
1) Quantity schedule, which shows the flow of units through the department and a computation of equivalent units
2) Schedule of computation of the costs per equivalent unit
3) Schedule showing the reconciliation of all cost flows into and out of the department during the period
Product costing in a process costing Environment - FIFO approach
Product costing in a process costing Environment - FIFO approach
First-in-first-out (FIFO) method
Uses production and not processed
A method of accounting for cost flows in a process costing system in which equivalent units and unit costs relate only to work done during the current period.
FIFO method only cares about the production activity in the desired month (say May) and doesn’t care about any other month (fuck April)
Just only focus on the month at hand and no other months or costs outside
FIFO EU, for an input = (equation)
Total EU processed - EU in beginning inventory
FIFO EU, for an input =
WACM EU - EU in beginning inventory
Cost per EU using FIFO
Direct materials = Current period cost / FIFO EU
Conversion costs = Current period cost / FIFO EU
In the FIFO method, costs are accounted for as follows
1) Costs in the beginning work-in-process inventory for the previous period
2) Materials and conversion costs added to complete the units in beginning work-in-process inventory
3) Materials and conversion costs incurred to start and fully complete units in the current period
4) Materials and conversion costs added to partially complete the units in ending work-in-process inventory
Cost of goods transferred FIFO) = (equation)
Total costs to account for - Cost in ending inventory
Cost of goods transferred FIFO) = (equation)
ALTERNATIVE
Costs from beginning work in process + Cost in May to complete beginning work in process + Cost to start and finish units introduced in the period
Production Report FIFO method
Made up of three schedules, considers only one month
Weighted average cost method Vs FIFO Method
WACM: 1) Combines beginning work-in-process inventory (units and costs) with the current periods units and costs
FIFO: 1) Separates beginning work-in-process inventory (unit and costs) from the current period’s units and costs
WACM: 2) Simple and less detailed
FIFO: 2) Detail orientated and more involved
WACM: 3) Uses a cost per equivalent unit that is an average number and is therefore not reflective of the current period’s performance
FIFO: 3) Uses a cost per equivalent unit that is specific to the current period and it therefore reflective of the current period’s performance
WACM: 4) Not very useful to assess cost control when beginning inventory levels are substantial
FIFO: 4) Can be used to assess cost control even when inventory levels are substantial
Cost per equivalent unit = (equation)
Manufacturing costs for the period / Equivalent units of production for the period
Work in process in _______ costing should have a separate work in process account for each job (exam)
Job-order costing!!
Job order costing
Job #90, 91, 92 etc
Equivalent Units of production always equals:
Units completed and transferred+ Equivalent Units remaining in work in process
Cost per equivalent unit
Manufacturing Costs for the Period / Equivalent Units of production for the Period
Weighted-Average Method slides (use this for exam)
Units transferred to the next production department and or to finished goods + equivalent units in ending work-in-process inventory of particular production department = equivalent units of production for particular production department
