Managerial Accounting 15th ed Chapter 4A

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Managerial Accounting 15th ed Chapter 4

Managerial Accounting 15th ed Chapter 4

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  • 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Process Costing Chapter 4
  • 2. 4-2 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.
  • 3. 4-3 Differences Between Job-Order and Process Costing Process 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 having different production requirements are worked on each period. 2.Systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs. 3.Systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.
  • 4. 4-4 Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors. Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors. Quick Check 
  • 5. 4-5 Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors. Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors. Quick Check 
  • 6. 4-6 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 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. 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.
  • 7. 4-7 Learning Objective 1 Record the flow of materials, labor, and overhead through a process costing system.
  • 8. 4-8 The Flow of Materials, Labor, and Overhead Costs Finished Goods Finished Goods Cost of Goods Sold Cost of Goods Sold Work in Process Direct Materials Direct Materials Direct LaborDirect Labor Manufacturing Overhead Manufacturing Overhead
  • 9. 4-9 The Flow of Costs in a Job-Order Costing System Finished Goods Finished Goods Cost of Goods Sold Cost of Goods Sold Direct LaborDirect Labor Manufacturing Overhead Manufacturing Overhead JobsJobsJobsJobs Costs are traced and applied to individual jobs in a job-order cost system. Costs are traced and applied to individual jobs in a job-order cost system. Direct Materials Direct Materials
  • 10. 4-10 The Flow of Costs in a Processing Costing System Finished Goods Finished Goods Cost of Goods Sold Cost of Goods Sold Direct LaborDirect Labor Manufacturing Overhead Manufacturing Overhead Processing Department Processing Department Costs are traced and applied to departments in a process cost system. Costs are traced and applied to departments in a process cost system. Direct Materials Direct Materials
  • 11. 4-11 T-Account and Journal Entry Views of Process Cost Flows For purposes of this example, assume there are two processing departments – Departments A and B. We will use T-accounts and journal entries.
  • 12. 4-12 Raw Materials Process Cost Flows: The Flow of Raw Materials (in T-account form) Work in Process Department B Work in Process Department A •Direct Materials •Direct Materials •Direct Materials
  • 13. 4-13 Process Cost Flows: The Flow of Raw Materials (in journal entry form) Work in Process - Department A XXXXX Work in Process - Department B XXXXX Raw Materials XXXXX
  • 14. 4-14 Process Cost Flows: The Flow of Labor Costs (in T-account form) Work in Process Department B Work in Process Department A Salaries and Wages Payable •Direct Materials •Direct Materials •Direct Labor •Direct Labor •Direct Labor
  • 15. 4-15 Process Costing: The Flow of Labor Costs (in journal entry form) Work in Process - Department A XXXXX Work in Process - Department B XXXXX Salaries and Wages Payable XXXXX
  • 16. 4-16 Process Cost Flows: The Flow of Manufacturing Overhead Costs (in T-account form) Work in Process Department B Work in Process Department A Manufacturing Overhead •Overhead Applied to Work in Process •Applied Overhead •Applied Overhead •Direct Labor •Direct Materials •Direct Labor •Direct Materials •Actual Overhead
  • 17. 4-17 Process Cost Flows: The Flow of Manufacturing Overhead Costs (in journal entry form) Work in Process - Department A XXXXX Work in Process - Department B XXXXX Manufacturing Overhead XXXXX
  • 18. 4-18 Process Cost Flows: Transfers from WIP- Dept. A to WIP-Dept. B (in T-account form) Work in Process Department B Work in Process Department A •Direct Materials •Direct Labor •Applied Overhead •Direct Materials •Direct Labor •Applied Overhead Transferred to Dept. B •Transferred from Dept. A Department A Department A Department B Department B
  • 19. 4-19 Process Cost Flows: Transfers from WIP-Dept. A to WIP-Dept. B (in journal entry form) Work in Process - Department B XXXXX Work in Process - Department A XXXXX
  • 20. 4-20 Finished Goods Process Cost Flows: Transfers from WIP- Dept. B to Finished Goods (in T-account form) Work in Process Department B •Cost of Goods Manufactured •Direct Materials •Direct Labor •Applied Overhead •Transferred from Dept. A •Cost of Goods Manufactured
  • 21. 4-21 Process Cost Flows: Transfers from WIP-Dept. B to Finished Goods (in journal entry form) Finished Goods XXXXX Work in Process - Department B XXXXX
  • 22. 4-22 Finished Goods Cost of Goods Sold Process Cost Flows: Transfers from Finished Goods to COGS (in T-account form) Work 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
  • 23. 4-23 Process Cost Flows: Transfers from Finished Goods to COGS (in journal entry form) Cost of Goods Sold XXXXX Finished Goods XXXXX
  • 24. 4-24 Equivalent Units of Production Equivalent units are the product of the number of partially completed units and the percentage completion of those units. 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.
  • 25. 4-25 Equivalent Units – The Basic Idea Two half completed products are equivalent to one complete product. Two half completed products are equivalent to one complete product. So, 10,000 units 70% complete are equivalent to 7,000 complete units. So, 10,000 units 70% complete are equivalent to 7,000 complete units. + = 1
  • 26. 4-26 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 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 
  • 27. 4-27 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 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 10,000 units + (5,000 units × 0.30) = 11,500 equivalent units Quick Check 
  • 28. 4-28 Calculating Equivalent Units Equivalent units can be calculated two ways: The First-In, First-Out Method – FIFO is covered in the appendix to this chapter. The Weighted-Average Method – This method will be covered in the main portion of the chapter. Equivalent units can be calculated two ways: The First-In, First-Out Method – FIFO is covered in the appendix to this chapter. The Weighted-Average Method – This method will be covered in the main portion of the chapter.
  • 29. 4-29 Learning Objective 2 Compute the equivalent units of production using the weighted- average method.
  • 30. 4-30 Equivalent Units of Production Weighted-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. 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.
  • 31. 4-31 Treatment of Direct Labor Direct labor costs may be small in comparison to other product costs in process cost systems. Direct labor costs may be small in comparison to other product costs in process cost systems. Direct Materials Type of Product Cost DollarAmount Direct Labor Manufacturing Overhead
  • 32. 4-32 Treatment of Direct Labor Type of Product Cost DollarAmount Conversion Direct labor and manufacturing overhead may be combined into one classification of product cost called conversion costs. Direct labor and manufacturing overhead may be combined into one classification of product cost called conversion costs. Direct Materials Direct Labor Direct Labor Manufacturing Overhead
  • 33. 4-33 Weighted-Average – An Example Smith Company reported the following activity in the Assembly Department for the month of June: 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%
  • 34. 4-34 Weighted-Average – An Example The 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
  • 35. 4-35 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. Materials Conversion Units completed and transferred out of the Department in June 5,400 5,400 Work in process, June 30: 900 units × 60% 540 Equivalent units of Production in the Department during June 5,940
  • 36. 4-36 Weighted-Average – An Example Materials Conversion Units completed and transferred out of the Department in June 5,400 5,400 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 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.
  • 37. 4-37 Materials Conversion Units completed and transferred out of the Department in June 5,400 5,400 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 Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Weighted-Average – An Example
  • 38. 4-38 Beginning Work in Process 300 Units 40% Complete Ending Work in Process 900 Units 60% Complete 6,000 Units Started 5,400 Units Completed 5,100 Units Started and Completed Weighted-Average – An Example MaterialsMaterials 5,400 Units Completed 540 Equivalent Units 900 × 60% 5,940 Equivalent units of production
  • 39. 4-39 6,000 Units Started 5,400 Units Completed 5,100 Units Started5,100 Units Started and Completedand Completed 270 Equivalent Units 900 × 30% 5,670 Equivalent units of production Beginning Work in Process 300 Units 20% Complete Ending Work in Process 900 Units 30% Complete Weighted-Average – An Example ConversionConversion
  • 40. 4-40 Learning Objective 3 Compute the cost per equivalent unit using the weighted-average method.
  • 41. 4-41 Compute and Apply Costs Beginning Work in Process Inventory: 400 units Materials: 40% complete $ 6,119 Conversion: 20% complete $ 3,920 Production started during June 6,000 units Production completed during June 5,400 units Costs added to production in June Materials cost $ 118,621 Conversion cost $ 81,130 Ending Work in Process Inventory: 900 units Materials: 60% complete Conversion: 30% complete
  • 42. 4-42 Compute and Apply Costs The 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 +
  • 43. 4-43 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
  • 44. 4-44 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 Costs Here is a schedule with the cost and equivalent unit information. $124,740 ÷ 5,940 units = $21.00 $85,050 ÷ 5,670 units = $15.00$85,050 ÷ 5,670 units = $15.00 Cost per equivalent unit = $21.00 + $15.00 = $36.00Cost per equivalent unit = $21.00 + $15.00 = $36.00
  • 45. 4-45 Learning Objective 4 Assign costs to units using the weighted- average method.
  • 46. 4-46 Applying Costs Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Assembly Department Cost of Ending WIP Inventory and Units Transferred Out
  • 47. 4-47 Applying Costs Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Assembly Department Cost of Ending WIP Inventory and Units Transferred Out
  • 48. 4-48 Applying Costs Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 Cost per equivalent unit 21.00$ 15.00$ Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$ Assembly Department Cost of Ending WIP Inventory and Units Transferred Out
  • 49. 4-49 Computing the Cost of Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 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 Assembly Department Cost of Ending WIP Inventory and Units Transferred Out
  • 50. 4-50 Computing the Cost of Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 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 Cost per equivalent unit 21.00$ 15.00$ Assembly Department Cost of Ending WIP Inventory and Units Transferred Out
  • 51. 4-51 Computing the Cost of Units Transferred Out Materials Conversion Total Ending WIP inventory: Equivalent units 540 270 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 Cost per equivalent unit 21.00$ 15.00$ Cost of units transferred out 113,400$ 81,000$ 194,400$ Assembly Department Cost of Ending WIP Inventory and Units Transferred Out
  • 52. 4-52 Learning Objective 5 Prepare a cost reconciliation report.
  • 53. 4-53 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
  • 54. 4-54 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
  • 55. 4-55 Operation Costing Operation cost is a hybrid of job-order and process costing because it possesses attributes of both approaches. Operation costing is commonly used when batches of many different products pass through the same processing department. Operation costing is commonly used when batches of many different products pass through the same processing department.
  • 56. 4-56 End of Chapter 4