Managerial accounting 5th jiambalvo ch03

Prepared by
Debby Bloom-Hill
CMA, CFM


CHAPTER 3

Process Costing


Difference Between Job-Order
and Process Costing Systems
 Job-Order Costing
 Each unique product or batch is
considered a job for which cost
information is needed
 Necessary to trace manufacturing costs
to specific jobs
 When completed, cost of job is removed
from Work in Process and included in
Finished Goods
Slide 3-3

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Difference Between Job-Order and
Process Costing Systems
Process Costing
Large quantities produced of homogeneous

products
Average cost = total costs divided by total
number of items produced
When completed, number of units completed
times average cost determines cost to be
moved from WIP to Finished Goods
Slide 3-4

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Test Your Knowledge 1
Which of the following characteristics are
associated with a process costing system?
a. Heterogeneous products
b. Homogeneous products
Answer: b
.Heterogeneous products are unique
.Homogeneous products are identical
 Process costing is associated with
identical products
Slide 3-5

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Test Your Knowledge 2
Which of the following characteristics are

associated with a process costing system?
a. Continuous production
b. Discontinuous production
Answer: a
Job order costing is associated with discontinuous
production
Process costing is associated with continuous
production
Slide 3-6

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Test Your Knowledge 3
Which of the following characteristics are
associated with a process costing system?
a. Costs are traced to jobs
b. Costs are traced to processing departments
Answer: b
Job order costing requires tracing costs to jobs
Process costing is associated with tracing costs to
departments

Slide 3-7

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts

Test Your Knowledge 4
An example of a business requiring a
process costing system would be a(n):
a.
b.
c.
d.

Custom cabinet shop
Antique furniture restorer
Soap manufacturer
Automobile repair shop

Answer: c
A soap manufacturer produces many identical
units
Slide 3-8

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Job-Order Costing System

Slide 3-9

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts

Process Costing System

Slide 3-10

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Cost Flows through Departments
 Manufacturing operations typically pass
through two or more departments
 Costs are accumulated in each department
 Easy to identify when materials are added
 Harder to identify when labor and
overhead are added
 Often grouped together as conversion costs
 Assumed to be added evenly throughout the
process

Slide 3-11

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Test Your Knowledge 5
The costs in a process costing system are
traced to:
a.
b.

c.
d.

Specific jobs
Specific customers
Specific company administrators
Specific production departments

Answer: d
Specific production departments
Slide 3-12

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Cost Flows through Accounts


The product costs accumulated in process
are the same as in job-order costing
 Direct materials
 Direct labor
 Manufacturing overhead


A processing department might have transferred
in costs from another department

 Each processing department accumulates

product cost in a separate Work in Process
account

Slide 3-13

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Cost Flows through Accounts
 Direct Material
 Suppose that $142,000 of direct materials
are used
 Journal entry:

Slide 3-14

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Direct Labor
Suppose that $62,200 of direct labor costs are
incurred
Journal entry:

Slide 3-15

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts

Manufacturing Overhead
A company may use either actual overhead costs or a
predetermined overhead rate to assign overhead to
products
Unless production and overhead costs are constant
from month to month, use of actual overhead may
result in substantial fluctuations in the unit cost
For that reason most companies use a predetermined
overhead rate

Slide 3-16

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Manufacturing Overhead
Suppose manufacturing overhead is applied at a rate
of $3 per direct labor dollar
Journal entry:

Slide 3-17

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Transferred-in Cost

When a department completes its work, the items are
transferred to the next department
Related costs are transferred as well
Suppose the Mixing Department completed units with
a cost of $360,000

Slide 3-18

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Flow of Costs Between
Processing Departments

Slide 3-19

Learning objective 1: Describe how products flow through departments
and how costs flow through accounts


Calculating Unit Cost
 Equivalent Units
 Partially completed units are converted to a
comparable number of completed units, called
equivalent units
 Multiply the number of units by the percent
complete to calculate the equivalent units
 100 units that are 50% complete are equivalent
to 50 complete units (100 x 50%)

 Equivalent units may be different for material
and conversion costs if materials and
conversion costs enter production at different
times.
Slide 3-20

Learning objective 2: Discuss the concept of an equivalent unit


Equivalent Units – Material and
Conversion Costs

Slide 3-21

Learning objective 2: Discuss the concept of an equivalent unit


Calculating Equivalent Units
 Equivalent units are normally calculated
for materials and conversion costs
 The equivalent units produced is the sum
of the units finished and the units in
ending work in process
 Units finished are always 100% complete
in terms of materials and conversion costs
 Multiply the number of units in ending
work in process by the corresponding
percent complete to calculate the
equivalent units

Slide 3-22

Learning objective 3: Calculate the cost per equivalent unit


Test Your Knowledge 6
At Rainier Chemical, conversion costs (labor and
overhead) enter evenly throughout the production
process. At the end of the year, 200 units in work
in process are 80 percent complete. With respect
to conversion costs, how many equivalent units are
in work in process?
a.
b.
c.
d.

200
160
360
280

Answer: b
200 units * 80% complete = 160 equivalent units
Slide 3-23

Learning objective 3: Calculate the cost per equivalent unit


Test Your Knowledge 7

 Beginning Work in Process 500 units
% complete = 65% materials, 45% conversion
 Units started: 2,300
 Units finished: 2,500
 Ending Work in Process 300 units
% complete = 85% materials, 50% conversion
1. Calculate equivalent units for materials

Slide 3-24

Learning objective 2: Discuss the concept of an equivalent unit


Test Your Knowledge 8
Beginning Work in Process 500 units
% complete: 65% materials, 45% conversion

Units started: 2,300
Units finished: 2,500
Ending Work in Process 300 units
% complete: 85% materials, 50% conversion

2. Calculate equivalent units conversion

Slide 3-25

Learning objective 2: Discuss the concept of an equivalent unit