Chapter 6 - Process Costing by FZQcnuZ

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									                 Hansen, Mowen, Elias & Senkow (ITP, 1998)




Chapter 6 - Process Costing




            Chapter 6-1
                            Hansen, Mowen, Elias & Senkow (ITP, 1998)



Chapter 6 - Learning Objectives

   Describe the basic characteristics and cost
    flows associated with process manufacturing.
   Define equivalent units and explain their role
    in process costing. Explain the differences
    between the weighted average method and
    the FIFO method of accounting for process
    costs.




                       Chapter 6-2
                            Hansen, Mowen, Elias & Senkow (ITP, 1998)


          Learning Objectives
              (continued)
   Prepare a departmental production report
    using the weighted average method.
   Explain how process costing is affected by
    nonuniform application of manufacturing
    inputs and the existence of multiple
    processing departments.
   Prepare a departmental production report
    using the FIFO method. (Appendix)




                       Chapter 6-3
                               Hansen, Mowen, Elias & Senkow (ITP, 1998)


        Cost Assignment and Cost
          Measurement (Again)
          Issue One                         Issue Two
         How to measure                     How to assign
         costs?                             costs?




Used for                                                      Used for
                          Unit Cost                           financial
effective
decision making                                               reporting




                          Chapter 6-4
                                Hansen, Mowen, Elias & Senkow (ITP, 1998)



      Process Costing This Time
              Issue One                       Issue Two
          How to measure                       How to assign
          costs?                               Costs?




Job Order                   Unit Cost                            Process
Cost System
                                                                 Cost System




                           Chapter 6-5
                                   Hansen, Mowen, Elias & Senkow (ITP, 1998)


   Cost Assignment with Process
              Costing
Accounting Information System
        * Job order   Job order
        (Actual)      (Normal)
                                               Cost Assignment
         * Process
                                               Objective
                      Process
         (Actual)     (Normal)


* Some manufacturing settings may need to use a blend of job and
process costing. Job order procedures could be used to assign
material costs while a process approach may be used to assign
conversion costs. The blending of the two methods is known as
operational accounting.


                              Chapter 6-6
                                     Hansen, Mowen, Elias & Senkow (ITP, 1998)



       Process Costing Cost Flow

               Direct
               Materials                                         Cost of Process
                                             Mfg.. Process
Traceable
                 Direct                                            Unit Cost
                                              Mfg.. Process
                 Labour                                            for Finished
                                              (Work-in-
                                                                   Goods
                                              Process)

                Mfg..
                Overhead                                 Sequential Processing
                                                                    or
                                                         Parallel Processing
Costs must be assigned using
an activity base and predetermined
overhead rate

                               Chapter 6-7
                            Hansen, Mowen, Elias & Senkow (ITP, 1998)


      Characteristics of Process
              Costing
   Homogeneous units pass through a series of
    similar processes.
   Each unit in each process receives a similar
    dose of manufacturing costs.
   Manufacturing costs are accumulated for a
    process for a given period of time.
   Manufacturing cost flows and the associated
    journal entries are generally similar to job-
    order costing.



                       Chapter 6-8
                            Hansen, Mowen, Elias & Senkow (ITP, 1998)


      Characteristics of Process
        Costing (Continued)
   The departmental production report is the key
    document for tracking manufacturing activity
    and costs.
   Unit costs are computed by dividing the
    departmental costs of the period by the output
    for the period.




                       Chapter 6-9
                                     Hansen, Mowen, Elias & Senkow (ITP, 1998)


          The Concept of Equivalent
                   Units
1,000 units - 20% materials added;         1,500 units - 1/3 materials added;
60% conversion costs added                 50% conversion costs added

            Units in                                 Units in
            BWIP              Work in                EWIP
                              Process
           Units                                    Units
           Starte                                   Completed
           d
       10,000 units;                                9,500 units
                Units of Input = Units of Output
  Units in BWIP + Units Started = Units in EWIP + Units Completed
                 1,000 + 10,000 = 1,500 + 9,500



                                 Chapter 6-10
                                 Hansen, Mowen, Elias & Senkow (ITP, 1998)


The Concept of Equivalent Units
         (Continued)

Equivalent Units Calculation:
                      Direct Materials        Conversion Costs
Units Completed         9,500                     9,500
Ending WIP                500                       750
Total Units Processed *10,000                   *10,250
Beg. WIP Inventory      (200)                     (600)

Processed This Period **9,800                     **9,650

*Equivalent units for weighted average (total units worked on)

** Equivalent units for FIFO (units worked on this period)



                            Chapter 6-11
                                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



                      A Cost Analysis
                                                    1,500 units
1,000 units - $5,000 materials added;
$10,000 conversion costs added

         Cost added                                  Costs added
         to BWIP               Work in               to EWIP
                               Process
         Cost of                                     Cost of Units
         Units Started                               Completed

       10,000 units; $23,000                           9,500 units
       mat’l added; $120,175
       conversion cost added

                           Input Costs = Output Costs
                             $158,175 = $158,175


                                  Chapter 6-12
                            Hansen, Mowen, Elias & Senkow (ITP, 1998)


     Steps For Costing out
 Production in Process Costing
1.   Analysis of the flow of Physical units
2.   Calculation of equivalent units
3.   Computation of unit cost
4.   Valuation inventory
5.   Cost reconciliation




                        Chapter 6-13
                      Hansen, Mowen, Elias & Senkow (ITP, 1998)


    Weighted Average Costing

Step 1- Inputs/Outputs in Units

Inputs:                          Outputs:
BWIP 1,000                        EWIP     1,500
Started 10,000                   Completed 9,500

Total 11,000                     Total          11,000




                  Chapter 6-14
                              Hansen, Mowen, Elias & Senkow (ITP, 1998)


      Weighted Average Costing
            (Continued)
         Step 2 - Equivalent Units
Weighted                   Materials     Conversion Costs
Average EWIP                    500             750
         Completed            9,500           9,500
         Units Worked On 10,000             10,250
         BWIP                  (200)           (600)
         Units This Period 9,800             9,650



    FIFO




                          Chapter 6-15
                          Hansen, Mowen, Elias & Senkow (ITP, 1998)

     Weighted Average Costing
           (Continued)
Step 3 - Unit Cost Calculation

          BWIP Added This Period Total Unit Cost
Mat’l     $ 5,000    $ 23,000      *$ 28,000 $ 2.80
C. Costs 10,000       120,175        *130,175  12.70
Total    $15,000     $143,175       *$158,175 $15.50
                 Total Input Cost
*Divide total cost added to the system by the
 weighted average equivalent units.


                      Chapter 6-16
                      Hansen, Mowen, Elias & Senkow (ITP, 1998)


Weighted Average Costing
      (Continued)
Step 4 Value of Goods Completed and EWIP
(Reconciliation of input and output costs)
Cost of Goods Transferred
  9,500 x 15.50           =         $147,250

EWIP
 Materials 500 x $2.80 = $1,400
 C. Cost 750 x $12.70 = $9,525 $ 10,925
Total                           $158,175
            Total Output Cost

                  Chapter 6-17
                                   Hansen, Mowen, Elias & Senkow (ITP, 1998)


         Nonuniform inputs: An illustrative
                    example
Materials are added at the beginning of the process.
Units in process, May 1, 60% complete                            2,000
Units completed and transferred out                             10,000
Units in Process, May 31, 40% Complete                           1,000

Costs:
                                   BWIP                Cost Added
Materials                          $300                $3,000
Conversion Costs                    600                 4,600

Step I - Physical Flow:
Units to account for                   Units accounted for
  Units, BWIP              2,000       Units completed 10,000
  Units started            9,000        Units, EWIP         1,000
  Total                   11,000        Total              11,000
                             Chapter 6-18
                                    Hansen, Mowen, Elias & Senkow (ITP, 1998)



      Nonuniform inputs example cont’d
Step II - Equivalent Units (Weighted Average):
                           Material       Conversion
Units completed            10,000           10,000
EWIP                        1.000              400
Total equivalent           11,000           10,400

Step III - Unit Cost
Unit Cost = $3,300/11,000 + $5,200/10,400
            = $0.30 (materials) + $0.50 (conversion)
            = $0.80

Step IV - Valuation of Inventories
Goods transferred out
  $0.80 X 10,000 = $8,000
  EWIP: ($0.30 X 1,000) + ($0.50 X 400) = $500

                                Chapter 6-19
                                   Hansen, Mowen, Elias & Senkow (ITP, 1998)



    Nonuniform inputs example cont’d
Step V - Cost Reconciliation

Costs assigned
  Goods transferred                  $8,000
  EWIP                                  500
                                      8,500

Cost to account for
  BWIP                               $ 900
  Costs added                        7,600
  Total                              8,500




                               Chapter 6-20
                         Hansen, Mowen, Elias & Senkow (ITP, 1998)



               FIFO Costing
   Step 1- Inputs/Outputs in Units

   Inputs:                          Outputs:
   BWIP 1,000                       EWIP      1,500
   Started 10,000                   Completed 9,500

   Total 11,000                     Total         11,000


*Step one is the same for weighted average and FIFO



                     Chapter 6-21
                                   Hansen, Mowen, Elias & Senkow (ITP, 1998)


           FIFO Costing (Continued)
           Step 2 - Equivalent Units
Weighted                     Materials    Conversion Costs
Average    EWIP                  500            750
           Completed           9,500          9,500
           Units Worked On 10,000            10,250
           BWIP                 (200)          (600)
           Units This Period 9,800             9,650


   FIFO




  *This step is the same for weighted average and FIFO


                               Chapter 6-22
                          Hansen, Mowen, Elias & Senkow (ITP, 1998)


      FIFO Costing (Continued)
Step 3 - Unit Cost Calculation

          BWIP Added This Period Total Unit Cost
Mat’l    $ 5,000 *$ 23,000          $ 28,000 $ 2.35
C. Costs 10,000       *120,175       130,175   12.45
Total    $15,000 *$143,175          $158,175 $14.80
                 Total Input Cost
*Divide total cost added this period by the
 equivalent units worked on this period (FIFO units).


                      Chapter 6-23
                     Hansen, Mowen, Elias & Senkow (ITP, 1998)


FIFO Costing (Continued)

Step 4 - Value of Goods Completed and EWIP
(Short-cut method)

Total Input Costs      =          $158,175.00
Less: EWIP
 Materials 500 x $2.35 = $1,175.00
 C. Cost 750 x $12.45 = 9,337.50 10,512.50

Cost of Goods Completed                        $147,662.50


                 Chapter 6-24
                          Hansen, Mowen, Elias & Senkow (ITP, 1998)


FIFO Costing (Continued)
Step 4a - Reconciliation of Costs
Beginning WIP
 Added last period            = $15,000
 Added this period:
 Materials 800 x $2.35         = $1,880
 Conversion costs 400 x $12.45 = $4,980        $21,860

Started and Completed 8,500 x $14.80           125,800

Ending WIP
 Materials 500 x $2.35        = $1,175
 Conversion Costs 750 X $12.45 = 9,337.50 10,512.5

                                             *$158,175

*Rounding error      Total Output Cost
                      Chapter 6-25
                  Hansen, Mowen, Elias & Senkow (ITP, 1998)


Numerical Questions from the
  Back of Chapters 5 and 6

       W5-3, E5-5, E5-13, P5-3
       E6-1, E6-9, E6-15, E6-19




              Chapter 6-26
                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



            Question E5-5

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                    Chapter 6-27
                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



           Question E5-13

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                    Chapter 6-28
                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



            Question P5-3

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                    Chapter 6-29
                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



            Question E6-1

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                    Chapter 6-30
                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



            Question E6-9

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                    Chapter 6-31
                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



           Question E6-15

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                    Chapter 6-32
                        Hansen, Mowen, Elias & Senkow (ITP, 1998)



           Question E6-19

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                    Chapter 6-33
     Hansen, Mowen, Elias & Senkow (ITP, 1998)



The End




 Chapter 6-34

								
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