Example of Calculating Cost Units - PowerPoint

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					Chapter Three

      Process Costing
    Objectives
1. Describe how products flow through departments
   and how costs flow through accounts in process
   costing.
2. Discuss the concept of an equivalent unit.
3. Calculate the cost per equivalent unit.
4. Calculate the cost of goods completed and the
   ending Work in Process balance in a processing
   department.
5. Describe a production cost report.
6. Describe process costing for multiple departments.
Difference Between Job-Order
and Process Costing Systems
Job-Order Costing Systems assign costs
to heterogeneous jobs.

Process Costing Systems spread total
manufacturing costs over total,
homogenous, units produced.
Difference Between Job-Order
and Process Costing Systems
  Product and Cost Flows
1. Product Flows Through Departments (p 82)

2. Cost Flows Through Accounts (p 85)

3. Conversion direct +      manufacturing
   Costs     = labor        overhead
Product Flows Through
Departments
Cost Flows Through Accounts
Calculating Unit Cost
To compute unit costs it is first necessary
to compute Equivalent Units.
How Equivalent Units are
Calculated
Cost Per Equivalent Unit
Weighted average unit cost in a Process
Costing System is calculated as follows:

Cost Per Equivalent Unit =

Cost in BWIP + Costs incurred currently
Units completed + Equivalent units in EWIP
      Calculating and Applying Cost Per
      Equivalent Unit: Mixing Department Example
Units:
BWIP:10,000 gallons, 80% complete labor/overhead
Started:70,000 gallons, 60,000 of these completed
EWIP:20,000 gallons, 50% complete.
No spoilage or missing units.

Costs:
BWIP:$18,000 material, $7,800 labor, $23,400 overhead
Added:$142,000 of material, $62,200 labor
Overhead: applied at a predetermined rate of $3 per dollar of
labor or $186,600.
Calculating and Applying Cost Per
Equivalent Unit: Mixing Department
Example

  Calculate: Cost per equivalent unit.
  Answer: $6
  Solution:
       Material: $160,000/80,000=$2
       Labor:      $ 70,000/70,000=$1
       Overhead: $210,000/70,000=$3
       Total Costs/Unit:            =$6
Calculating and Applying Cost
Per Equivalent Unit: Mixing
Department Example
Calculating and Applying Cost
Per Equivalent Unit: Mixing
Department Example
Calculating and Applying Cost
Per Equivalent Unit: Mixing
Department Example
Production Cost Report
Production Cost Report Contains:
1. Reconciliation of units.
2. Reconciliation of costs.
3. Details of the cost per equivalent unit
   calculations.
Reconciliation of Units

BWIP + the number of units started = the
number of units completed EWIP.
Reconciliation of Costs
BWIP + costs added = costs transferred
out + EWIP.
Basic Steps in Process
Costing: A Summary
1. Account for the number of physical
   units.
2. Calculate the cost per equivalent unit
   for material, labor and overhead.
3. Assign cost to items completed and
   items in EWIP.
4. Account for the amount of product cost
   (reconciling costs and units identifies
   spoilage or missing units).
Dealing With Transferred-In
Costs
1. Process Costing Systems generally use
   several processes; not just one.
2. The costs from the previous processes are
   called Transferred-In costs . They are
   included in the current process, so the
   product accumulates cost or value as it flows
   through to finished goods inventory
3. Transferred-In costs are treated just like
   other product costs (l.e. material, labor and
   overhead).
 Process Costing and
 Incremental Analysis
1. Decisions are based on costing
   information obtained through Process
   Costing Systems.
2. Incremental Analysis is frequently
   used to make these decisions.
3. In incremental analysis we need to
   identify the extra cost of further
   processing to the extra benefit, and be
   wary of including allocated sunk costs.
Quick Review Question #1

1. The best example of a business
   requiring a process costing system
   would be a(n);
    a. Soap manufacturer.
    b. Automobile repair shop.
    c. Custom cabinet shop.
    d. Antique furniture restorer.
Quick Review Answer #1

1. The best example of a business
   requiring a process costing system
   would be a(n);
    a. Soap manufacturer.
    b. Automobile repair shop.
    c. Custom cabinet shop.
    d. Antique furniture restorer.
Quick Review Question #2

2. Costs in a process costing system are
   ultimately traced to
   a. Specific processes.
   b. Specific customers.
   c. Specific jobs.
   d. Specific production personnel.
Quick Review Answer #2

2. Costs in a process costing system are
   ultimately traced to
   a. Specific processes.
   b. Specific customers.
   c. Specific jobs.
   d. Specific production personnel.
Quick Review Question #3
3. BWIP consisted of 2,500 units, 100%
   complete for materials and 60% for
   conversion costs. 8,000 additional
   units were started. 9,000 units were
   completed and transferred out. How
   many physical units are in EWIP?
   a. 1,500.
   b. 10,500.
   c. 14,500.
   d. 0.
Quick Review Answer #3
3. BWIP consisted of 2,500 units, 100%
   complete for materials and 60% for
   conversion costs. 8,000 additional
   units were started. 9,000 units were
   completed and transferred out. How
   many physical units are in EWIP?
   a. 1,500.
   b. 10,500.
   c. 14,500.
   d. 0.
Quick Review Question #4
4. Using question #3 data, assume
   ending inventory was 100% complete
   for materials and 80% complete for
   conversion costs? Calculate
   equivalent units of production for
   materials and conversion costs.
    a. 6,500 & 6,500
    b. 8,000 & 6,500
    c. 8,000 & 8,700
    d. 9,000 & 8,700
Quick Review Answer #4
4. Using question #3 data, assume
   ending inventory was 100% complete
   for materials and 80% complete for
   conversion costs? Calculate
   equivalent units of production for
   materials and conversion costs.
    a. 6,500 & 6,500
    b. 8,000 & 6,500
    c. 8,000 & 8,700
    d. 9,000 & 8,700

				
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