Chapter 4

Process Costing and Hybrid ProductCosting Systems

McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective 1

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Comparison of Job-Order Costing and Process Costing

Process Process Costing Costing Job-order Costing

Used for production of small, identical, low cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.
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Comparison of Job-Order Costing and Process Costing

Job-order costing
Costs accumulated by the job. Work in process has a job-cost sheet for each job. Many unique, high cost jobs. Jobs built to customer order.

Process costing
Costs accumulated by department or process. Work in process has a production report for each batch of products. A few identical, low cost products. Units continuously produced for inventory in automated process.
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Learning Objective 2

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Process Cost Flows

Work-in-Process Inventory Direct material Direct labor Applied manufacturing overhead One Production Department Finished Goods Inventory Cost of goods sold during current period Cost of Goods Sold

Cost of goods completed and transferred to finished goods

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Process Cost Flows

Two Sequential Production Departments Work-in-Process Inventory Work-in-Process Inventory Production Department A Production Department B Cost of goods completed Direct material Direct labor in department A and Cost of goods completed Applied manufacturing transferred to and transferred to overhead department B finished goods Direct material Direct labor Applied manufacturing overhead

Finished Goods Inventory Cost of goods sold during current period

Cost of Goods Sold

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Learning Objective 3

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Equivalent Units: A Key Concept

Costs are accumulated for a period of time for products in work-in-process inventory. Products in work-in-process inventory at the beginning and end of the period are only partially complete. Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

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Calculating and Using Equivalent Units of Production

To calculate the cost per equivalent unit for the period:
Cost per equivalent unit

Costs for the period Equivalent units for the period

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Calculating and Using Equivalent Units of Production

To calculate the direct materials and conversion costs per equivalent unit for the period:
Materials cost per equivalent unit Materials cost per equivalent unit Materials cost for the period Materials equivalent units for the period

Materials cost for the period Materials equivalent units for the period
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Departmental Production Report

Analysis of
physical flow of units.

Calculation
of equivalent units.

Production Report

Computation
of unit costs.

Analysis of
total costs.
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Equivalent Units of Production Weighted-Average Method

The weighted-average method . . .
Makes no distinction between work done in the prior period and work done in the current period. Blends together units and costs from the prior period and the current period.

The FIFO method is a more complex method and is rarely used in practice.
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Learning Objective 4

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Computation of Unit Costs

Direct Material Work in Process, March 1 Costs incurred during March Total costs to account for Equivalent units Cost per equivalent unit $ 50,000 90,000 $ 140,000 50,000 $ 2.80

Conversion $ 7,200 193,500 $ 200,700 $ 45,000 4.46

Total $ 57,200 283,500 $ 340,700 $ 7.26

$140,000 50,000 equivalent units $200,700 45,000 equivalent units

$2.80 + $4.46

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Learning Objective 5

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Analysis of Total Costs

Slide 1 of 3
Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Convserion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for

$ 290,400

$ 28,000 22,300 50,300

All costs accounted for

$ 340,700

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Learning Objective 6

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

MVP SPORTS EQUIPMENT COMPANY Production Report: Cutting Department Percentage of Completion Equivalent Units Physical with Respect to Direct Units Conversion Material Conversion Work in process, March 1 Units started during March Total units to account for Units completed and transferred Work in process, March 31 Total units accounted for Total equivalent units 20,000 30,000 50,000 40,000 10,000 50,000 10%

100% 50%

40,000 10,000 50,000

40,000 5,000 45,000

Direct Material Work in Process, March 1 Costs incurred during March Total costs to account for Equivalent units Cost per equivalent unit $ 50,000 90,000 $ 140,000 50,000 2.80

Conversion $ 7,200 193,500 $ 200,700 45,000 4.46

Total $ 57,200 283,500 $ 340,700

7.26

Cost of goods completed and transferred during March 40,000 units x $7.26 per equivalent unit Costs remaining in work-in-process on March 31 Direct Material: 10,000 equivalent units x $2.80 per equivalent unit Conversion: 5,000 equivalent units x $4.46 per equivalent unit Total cost of March 31 work-in-process Total costs accounted for

$ 290,400

28,000

22,300 50,300 $ 340,700

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Actual Costing

vs.

Normal Costing

Actual costs of manufacturing overhead are entered in Work-inProcess Inventory

Manufacturing overhead is applied to Work-inProcess Inventory using a predetermined overhead rate

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Departmental Production Report

Analysis of
physical flow of units.

Calculation
of equivalent units.

Computation
of unit costs.

Analysis of
total costs.

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Learning Objective 7

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Operation Costing
Operation costing employs some aspects of both job-order and process costing. Job-order Costing Operation Costing (Products produced in batches) Process Costing

Material Costs charged to batches as in job-order costing.

Conversion costs assigned to batches as in process costing.

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End of Chapter 4
Im ready to process some leisure time.

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