Process-Costing Systems

Presentation on theme: "Process-Costing Systems"— Presentation transcript:

1 Process-Costing Systems
Chapter 8

2 Process costing Characteristics Identical units
Continuous flow production Never “complete” Move from process (or department) to process Costs are accumulated by process for a time period Allocated to “equivalent units” of output during the period

3 Equivalent units Amount of finished units that could have been completed, given the materials or effort involved Three units started into production One is completed One is ¾ completed One is ¼ completed Two equivalent units are produced (1 + ¾ + ¼)

4 Equivalent units May have different number of equivalent units for materials, labor and overhead Using the previous example, assume all materials are added at the beginning = 3 equivalent units for materials conversion costs are added throughout the process 1 + ¾ + ¼ = 2 equivalent units for conversion costs

5 Equivalent units Try this one At the beginning of the period
5 units, each ½ complete, are in process During the period 27 more units are put into production At the end of the period 6 units, each ¾ complete, are still in process How many equivalent units were produced?

6 The process Step 1 – Summarize flow of physical units
How many were in beginning inventory? How many were started? How many are still in ending inventory? Step 2 – Calculate equivalent units Beginning inventory was completed Of the units started Some were completed Some are in ending inventory

7 The process Step 3 – Summarize costs to be accounted for
Cost in beginning inventory Cost added during the period Step 4 – Calculate cost per equivalent unit Step 5 – Assign costs to completed units and ending inventory

8 Production cost report
Part 1 – Units Summary of physical and equivalent units Where did they come from? Where did they go? Part 2 – Costs Summary of costs Calculation of cost per equivalent units Assignment of costs Transferred out Work in process

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10 Example 1 No beginning inventory 18,000 units started
2,000 in ending work in process inventory 40% complete as to materials 30% complete as to conversion cost Current period costs Materials - $45,360 Conversion costs - $68,060

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12 Example 2 Beginning and ending inventories
4,000 units in beginning work in process 80% complete as to materials 50% complete as to conversion costs 25,000 units started 3,000 units in ending work in process 60% complete as to materials Costs Materials: Beg. WIP - $7,040, current - $51,660 Conversion: Beg. WIP - $1,500, current - $20,400

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14 Example 3 Costs transferred from prior department
Units and costs transferred out of previous department (example 2) to department 2 Cumulative costs from prior department are treated as a separate cost category in current department Units are 100% complete as to prior department Transferred-in units are the “units started” in the current department

15 Example 3 In department 2 1,000 units in beginning work in process
70% complete as to materials 60% complete as to conversion costs 2,000 units in ending work in process 30% complete as to materials 20% complete as to conversion costs Costs Materials: Beg. WIP - $420, current - $14,940 Conversion: Beg. WIP - $840, current - $34,720

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17 First-in, first-out method
Previous examples used weighted average method Costs in beginning inventory were combined with current period costs First-in, first-out method separates the two Assumes units in beginning inventory were finished first

18 First-in, first-out method
Equivalent unit calculation includes Work done to complete the units in beginning inventory Work done on new units started 100% for those started and completed <100% for those started but not completed

19 First-in, first-out method
Beginning inventory costs are only assigned to units in beginning inventory Some current period costs are added to complete them Units started are only assigned current period costs Costs accounted for includes Beginning inventory cost transferred out Current costs added to complete beginning inventory Current costs of units started and completed Current costs in ending inventory

20 First-in, first-out method
Example 2 using FIFO method 4,000 units in beginning work in process 80% complete as to materials 50% complete as to conversion costs 25,000 units started 3,000 units in ending work in process 60% complete as to materials Costs Materials: Beg. WIP - $7,040, current - $51,660 Conversion: Beg. WIP - $1,500, current - $20,400

21 Example 2 - FIFO

22 Example 2 - FIFO

23 Accounting for spoilage
Spoiled units have incurred some cost but are not transferred to the next stage Treated as a separate line item for Units accounted for Equivalent units Costs accounted for

24 Accounting for spoilage
Example 2 with spoilage 4,000 units in beginning work in process 80% complete as to materials, 50% as to conversion costs 25,000 units started 800 units spoiled 50% complete as to materials, 30% as to conversion costs 2,200 units in ending work in process 60% complete as to materials, 50% as to conversion costs Costs Materials: Beg. WIP - $7,040, current - $51,660 Conversion: Beg. WIP - $1,500, current - $20,400

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26 Journal entries Same as for job-order costing
Dollar value of units transferred out represents the cost moving from WIP to the next stage in the process Another WIP account (department) Finished goods inventory Dollar value of spoiled goods is debited to an expense account

27 Operation costing Hybrid of job-order and process-costing
Products goes through a combination of common processes and individual processes No special accounting required Units may be transferred out of a process to become a separate job or vice-versa