Kế toán tài chính 2 - Chapter 21: Costing systems: job order and process costing

cont’d)Costs of direct materials, direct labor, and manufacturing overhead are first traced to processes, departments, or work cellsCosts are then assigned to the products manufactured by these processes, departments, or work cells during a specific periodCopyright © Houghton Mifflin Company. All rights reserved.Copyright © Houghton Mifflin Company. All rights reserved.Job Order Versus Process Costing (cont’d)Few production processes are a perfect match for either systemThe typical product costing system is a hybrid of both job order costing and process costingCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat are the main differences between a job order costing system and a process costing system?Job order costing systemUsed by companies that produce large, unique, or special order itemsUses a single Work in Process Inventory account Process costing systemUsed by companies that produce large amounts of similar products or liquid products that have long, continuous production runsUses several Work in Process Inventory accountsCopyright © Houghton Mifflin Company. All rights reserved.The Job Order Costing SystemObjective 3Explain cost flow in a job order costing system, prepare a job order cost card, and compute product unit costCopyright © Houghton Mifflin Company. All rights reserved.The Job Order Costing SystemTraces the costs of a specific order or batch of products toProvide timely, accurate cost informationFacilitate smooth and continuous flow of that informationEmphasizes cost flowThe core of a job order costing system is the job order cost cards and subsidiary ledgersCopyright © Houghton Mifflin Company. All rights reserved.Cost Flow in a Job Order Costing System for a Manufacturing CompanyDirect materials costsCart frameWheelsUpholstered seatsWindshieldMotorRechargeable batteryDirect labor costsWages of two production workersManufacturing overhead costsIndirect materials cost forUpholstery zippersCloth strapsWheel lubricantsScrews and fastenersSiliconIndirect labor costs for Moving and inspectionDepreciation on plant and equipmentUtilities, insurance, and property taxesJon Lyman builds both customized and general-purpose golf cartsCopyright © Houghton Mifflin Company. All rights reserved.Cost Flow in a Job Order Costing System for a Manufacturing Company (cont’d)Inventory AccountsMaterials InventoryWork in Process InventoryFinished Goods InventorySubsidiary LedgersMaterials LedgerJob Order Cost CardsFinished Goods LedgerJon Lyman builds both customized and general-purpose golf cartsHe uses three inventory accounts, which all have subsidiary ledgers backing up their totalsCopyright © Houghton Mifflin Company. All rights reserved. Manufacturing OverheadCost Flow in a Job Order Costing System for a Manufacturing Company (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400Inventory accountsSubsidiary ledgers Copyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadMaterialsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912Purchased cart frames costing $572 and wheels costing $340, for a total purchase of $912This purchase increases the balances in the Materials Inventory account and the corresponding accounts in the materials ledgerCopyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadMaterials (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 4005723409128282Purchased indirect materials costing $82This purchase also increases the balance in the Materials Inventory account, as well as the balance in the Indirect Materials account in the materials ledgerCopyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadMaterials (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,880Production requested cart frames costing $1,240 and wheels costing $640, totaling $1,880The Materials Inventory account is decreased and the Work in Process Inventory account is increased by $1,880Copyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadMaterials (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Production requested cart frames costing $1,240 and wheels costing $640, totaling $1,880The corresponding accounts in the materials ledger must also be decreased by the appropriate amountsCopyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadMaterials (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 842Of the $1,880 of direct materials, $1,038 was used for Job CC and $842 was used for Job JBThese amounts must be recorded on the job order cost cards for each jobCopyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadMaterials (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 8429696Production also requested $96 of indirect materialsThe Materials Inventory account is decreased and the Manufacturing Overhead account is increasedIndirect materials costs flow to the Manufacturing Overhead account rather than to specific jobsCopyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadMaterials (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 8429696Production also requested $96 of indirect materialsThe corresponding account in the materials ledger must also be decreased by the appropriate amountIndirect materials costs flow to the Manufacturing Overhead account rather than to specific jobs96Copyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadLabor (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 84296962,400Production employees earned $2,400 of wages during the periodThe Factory Payroll account is increased and the Wages Payable account (not shown) is also increasedFactory Payroll is a clearing account (holds cost only until they are distributed to the various production accounts)96Copyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadLabor (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640Of this amount, $1,640 was direct labor and $760 was indirect laborThe Factory Payroll account is decreased and the Work in Process account is increased by the cost of direct labor96Copyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadLabor (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Of this amount, $1,640 was direct labor and $760 was indirect laborThe Factory Payroll account is decreased and the Manufacturing Overhead account is increased by the cost of indirect laborIndirect labor costs flow to the Manufacturing Overhead account rather than to specific jobs96Copyright © Houghton Mifflin Company. All rights reserved.These amounts must be recorded on the job order cost cards for each jobManufacturing OverheadLabor (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 320Job CC required $1,320 of direct labor and Job JB required $320Direct labor costs for Job CC and Job JB total $1,640, the amount recorded in the Work in Process Inventory account96Copyright © Houghton Mifflin Company. All rights reserved.Manufacturing OverheadOther indirect costs totaling $295 were paid during the periodManufacturing OverheadMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The Manufacturing Overhead account is increased82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 32029596Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadA $240 adjustment was made for factory-related depreciationManufacturing Overhead (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The Manufacturing Overhead account is increased82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 32029596Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadTotal manufacturing overhead of $1,394 is applied, with $1,122 (85% of $1,320) going to Job CC and $272 (85% of $320) going to Job JBManufacturing Overhead (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The Manufacturing Overhead account is decreased and the Work in Process Inventory account is increased by $1,394 ($1,320 + $320)82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,39496Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadTotal manufacturing overhead of $1,394 is applied, with $1,122 (85% of $1,320) going to Job CC and $272 (85% of $320) going to Job JBManufacturing Overhead (cont’d)Materials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912Manufacturing overhead must be recorded on the job order cost cards for each job82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,122Manuf. overhead 27296Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadJob CC was completed and moved to the finished goods storeroom. Its completed cost was $3,880Completed UnitsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The Work in Process Inventory account is decreased and the Finished Goods Inventory account is increased82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,1223,8803,88096Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadJob CC was completed and moved to the finished goods storeroom. Its completed cost was $3,880Completed UnitsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The job order cost card is also completed and transferred to the finished goods file82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,122Completed cost 3,8803,8803,8803,88096Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadOne general-purpose golf cart was soldSold UnitsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The Finished Goods Inventory account is decreased and the Cost of Goods Sold account is increased82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,122Completed cost 3,8803,8803,8803,880Two units were completed in Job CC. The cost of each was $1,940 ($3,880 ÷ 2)1,9401,94096Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadOne general-purpose golf cart was sold during the periodSold UnitsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The finished goods ledger is decreased by the cost of the unit sold82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,122Completed cost 3,8803,8803,8803,880Two units were completed in Job CC. The cost of each was $1,940 ($3,880 ÷ 2)1,9401,9401,94096Copyright © Houghton Mifflin Company. All rights reserved.240Manufacturing OverheadOne general-purpose golf cart was sold during the periodSold UnitsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldMaterials LedgerJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The cost of the unsold cart remains in the Finished Goods Inventory account and the finished goods ledger for Job CC82821,8801,8801,240640Direct materials 1,038Direct materials 84296962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,122Completed cost 3,8803,8803,8803,880Two units were completed in Job CC. The cost of each was $1,940 ($3,880 ÷ 2)1,9401,9401,940End Bal. 1,940End Bal. 1,94096Copyright © Houghton Mifflin Company. All rights reserved.96240Manufacturing OverheadThe Manufacturing Overhead account is closedReconciliation of Manufacturing Overhead CostsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 400572340912The ending balance of the Manufacturing Overhead account is transferred to the Cost of Goods Sold account82821,8801,8801,240640Direct materials 1,038Direct materials 842962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,122Completed cost 3,8803,8803,8803,880To prepare financial statements at the end of the period, actual and applied manufacturing overhead must be reconciled1,9401,9401,94031,394—1,3913End Bal. 1,937End Bal. 1,940End Bal. 1,94096Copyright © Houghton Mifflin Company. All rights reserved.End Bal. 1,43496240Manufacturing OverheadReconciliation of Manufacturing Overhead CostsMaterials InventoryFactory PayrollCart FramesWheelsIndirect MaterialsWork in Process InventoryFinished Goods InventoryJob CCJob CCJob JBCost of Goods SoldJob Order Cost CardsFinished Goods LedgerBeg. Bal. 1,230Beg. Bal. —Beg. Bal. 400Beg. Bal. 30Beg. Bal. 370Beg. Bal. 830Beg. Bal. —Costs from the previous period 40057234091282821,8801,8801,240640Direct materials 1,038Direct materials 842962,4001,6401,640760760Direct labor 1,320Direct labor 3202951,3941,394Manuf. overhead 1,122Completed cost 3,8803,8803,8803,8801,9401,9401,94031,394—1,3913End Bal. 1,937End of period account balances are determined for permanent accountsEnd Bal. 1,940End Bal. 1,940End Bal. 1,434These balances will now be carried over to the beginning of the next accounting periodEnd Bal. 16End Bal. 70End Bal. 162End Bal. 24896Copyright © Houghton Mifflin Company. All rights reserved.The Job Order Cost Card and Computation of Product Unit CostIn a job order costing system, all costs are accumulated in one Work in Process Inventory accountA subsidiary ledger of job order cost cards is used to trace these costs to specific jobsAs costs are incurred they are classified by job and recorded on the appropriate cardCopyright © Houghton Mifflin Company. All rights reserved.Job Order Cost Card—Manufacturing CompanyCopyright © Houghton Mifflin Company. All rights reserved.The Job Order Cost Card and Computation of Product Unit CostJob order costs cards are used to recordDirect materials, direct labor, and manufacturing overhead costsDirect materials and direct labor costs are recorded as incurredManufacturing overhead is applied at the predetermined rateJob order number, product specifications, name of customer, date of the order, projected completion date, and a cost summaryCopyright © Houghton Mifflin Company. All rights reserved.The Job Order Cost Card and Computation of Product Unit Cost (cont’d)Job order costs cards for incomplete jobs make up the subsidiary ledger for the Work in Process Inventory accountThe ending balance in the Work in Process Inventory account should equal the total of the costs shown on the job order cost cardsCopyright © Houghton Mifflin Company. All rights reserved.The Job Order Cost Card and Computation of Product Unit Cost (cont’d)When a job is completed, the costs on the job order cost card are totaledThe product unit cost is computed by dividing the total costs for the job by the number of units producedThis amount is entered on the job order cost card and will be used to value items in inventoryCopyright © Houghton Mifflin Company. All rights reserved.Job Order Costing in a Service OrganizationThe most important cost is laborAccounted for using time cardsThe cost flow of services is similar to that of manufactured productsMany service organizations base jobs on cost-plus contractsThe customer pays all costs incurred on the job plus a predetermined amount of profitCopyright © Houghton Mifflin Company. All rights reserved.Job Order Costing in a Service Organization (cont’d)Gartner Landscaping Service employs 15 people. The service overhead cost for landscape design is 40 percent of design labor cost and service overhead cost for landscape installation is 50 percent of installation labor costGartner has a 15 percent cost-plus contract with Rico CorporationRico Corporation is billed for $6,210Copyright © Houghton Mifflin Company. All rights reserved.Job Order Cost Card —Service OrganizationDiscussionWhich accounts are affected when direct labor is charged to production?The Factory Payroll account is decreased and the Work in Process Inventory account is increased by the amount of direct labor charged to productionCopyright © Houghton Mifflin Company. All rights reserved.The Process Costing SystemObjective 4Explain product flow and cost flow in a process costing systemCopyright © Houghton Mifflin Company. All rights reserved.The Process Costing SystemUsed by companies that Produce large amounts of similar products or liquid products Have long, continuous production runs of identical productsTracking costs to individual products in a continuous flow environment would be too difficult and too expensiveAlso, would not result in significantly different product costsCopyright © Houghton Mifflin Company. All rights reserved.The Process Costing System (cont’d)Because products are alike, they should cost the same to produceA process costing system accumulates costs and assigns them to products as they are produced during a particular periodCopyright © Houghton Mifflin Company. All rights reserved.Patterns of Product Flows and Cost FlowsWhen using process costing, the steps in processing can be combined in hundreds of different waysTwo basic production flowsThe completed product from one department becomes the direct materials for the next departmentTwo separate products are each developed in their own department and then joined with a third direct material in another departmentCopyright © Houghton Mifflin Company. All rights reserved.Production Flows for Process CostingCopyright © Houghton Mifflin Company. All rights reserved.Patterns of Product Flows and Cost FlowsSteps describing the production flow during the manufacture of computer chipsProducing the silicon waferFabricating the chipsFinal testing, assembly, and packaging of chipsCopyright © Houghton Mifflin Company. All rights reserved.Product Flows in a Process Costing System for Computer Chip MakingCopyright © Houghton Mifflin Company. All rights reserved.Patterns of Product Flows and Cost FlowsCosts are accumulated as the product passes through each manufacturing process, department, or work cell and passed on to the next manufacturing process, department, or work cellAt the end of every accounting period, the system generates a process cost reportCopyright © Houghton Mifflin Company. All rights reserved.Process Cost ReportAssigns the costs that have accumulated during the period to the units thatHave transferred out of the process, department, or work cellAre still work in processUsed to assign costs using the FIFO costing methodCopyright © Houghton Mifflin Company. All rights reserved.FIFO Costing MethodCost flow follows the logical physical flow of productionCosts assigned to first materials processed are the first costs transferred out when the materials flow to the next process, department, or work cellCopyright © Houghton Mifflin Company. All rights reserved.Cost Flows Through the Work in Process Inventory AccountsWork in Process Inventory accounts are the focal point of process costingAs products flow through the Work in Process Inventory accounts for each process, department, or work cell, the costs associated with them flow to the Work in Process Inventory account of that process, department, or work cellCopyright © Houghton Mifflin Company. All rights reserved.Cost Flows Through the Work in Process Inventory Accounts (cont’d)Costs of cookiedough accumulateCookie dough is preparedMixing DepartmentCookie dough is prepared in the Mixing Department, where the costs of direct materials, direct labor, and manufacturing overhead incurred accumulateCopyright © Houghton Mifflin Company. All rights reserved.Cost Flows Through the Work in Process Inventory Accounts (cont’d)Costs of cookiedough accumulateCosts of cookiedough +Baking costs accumulateCookie dough is preparedCookies are bakedMixing DepartmentBaking DepartmentCookie dough is transferred to the Baking DepartmentThe costs accumulated in the Mixing Department Work in Process account are transferred to the Baking Department Work in Process accountCosts incurred to bake the cookies are accumulated in the Baking Department Work in process accountCopyright © Houghton Mifflin Company. All rights reserved.Cost Flows Through the Work in Process Inventory Accounts (cont’d)Costs of cookiedough accumulateCosts of cookiedough +Baking costs accumulateCosts of cookiedough & baking+Packaging costsaccumulateCookie dough is preparedCookies are bakedCookies are packagedMixing DepartmentBaking DepartmentPackaging DepartmentThe baked cookies are transferred to the Packaging DepartmentThe costs accumulated in the Baking Department Work in Process account are transferred to the Packaging Department Work in Process accountCosts incurred to package the cookies are accumulated in the Packaging Department Work in process accountCopyright © Houghton Mifflin Company. All rights reserved.Cost Flows Through the Work in Process Inventory Accounts (cont’d)Costs of cookiedough accumulateCosts of cookiedough +Baking costs accumulateCosts of cookiedough & baking+Packaging costsaccumulateCookie dough is preparedCookies are bakedCookies are packagedTotal costs of cookies are transferred to Finished GoodsInventoryCookies are moved to finished goodsstoreroomMixing DepartmentBaking DepartmentPackaging DepartmentThe packaged cookies are transferred to the finished goods storeroomThe costs accumulated in the Packaging Department Work in Process account are transferred to the Finished Goods Inventory accountWhen the cookies are sold, their costs will be transferred to the Cost of Goods Sold accountCopyright © Houghton Mifflin Company. All rights reserved.Cost Flows Through the Work in Process Inventory Accounts (cont’d)Process cost report Prepared at the end of every accounting period Assigns the costs that have accumulated in each Work in Process account to the units Transferred out Still in processUsed to compute the unit cost of all products worked on during the periodIncludes all costs from all processes, departments, or work cellsCopyright © Houghton Mifflin Company. All rights reserved.Cost Flows Through the Work in Process Inventory Accounts (cont’d)Unit costThe total cost of direct materials, direct labor, and manufacturing overhead divided by the total number of units worked on during the periodBecause units of product will be in various stages of completion at the end of a period, the total number of units worked on is determined by computing equivalent units of productionCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhich accounts are the focal point of a process costing system?As products flow through the Work in Process Inventory accounts for each process, department, or work cell, the costs associated with them flow to the Work in Process Inventory account of that process, department, or work cellCopyright © Houghton Mifflin Company. All rights reserved.Computing Equivalent ProductionObjective 5Define equivalent production and compute equivalent unitsCopyright © Houghton Mifflin Company. All rights reserved.Equivalent Production is a measure that applies a percentage-of-completion factor to partially completed units to calculate the equivalent number of whole units produced in an accounting periodAlso called equivalent unitsCopyright © Houghton Mifflin Company. All rights reserved.Equivalent Production (cont’d)Equivalent units are computed for each type of inputDirect materialsDirect laborManufacturing overheadThe number of equivalent units produced is the sum ofTotal units started and completed during the periodAmount representing the work done on partially completed productsIn both the beginning and ending work in process inventoriesEquivalent production must be computed separately for each type of input because of differences in the ways the costs are incurredCopyright © Houghton Mifflin Company. All rights reserved.Equivalent Production (cont’d)Direct materialsUsually added to production at the beginning of the processCosts of direct labor and manufacturing overheadOften incurred uniformly throughout the production processAre combined when calculating equivalent unitsCalled conversion costsCopyright © Houghton Mifflin Company. All rights reserved.Computing Equivalent ProductionSoda Products Company makes bottled soft drinks. The company started Week 2 with one half-completed drink in process. During Week 2, it started and completed three drinks, and at the end of Week 2, it had one drink that was three-quarters completedCopyright © Houghton Mifflin Company. All rights reserved.Computing Equivalent ProductionSoda Products Company makes bottled soft drinks. The company started Week 2 with one half-completed drink in process. During Week 2, it started and completed three drinks, and at the end of Week 2, it had one drink that was three-quarters completedOne soft drink was started during Week 1 and was 50 percent completed (and still in production) when Week 2 startedDirect materials were all added during Week 1, so there were no equivalent units in regard to direct materials costs during Week 2The soft drink was 50 percent completed during Week 1, so the other 50 percent of conversion costs were incurred during Week 2Equivalent units in regard to conversion costs = .5 (1 x 50%)Copyright © Houghton Mifflin Company. All rights reserved.Three soft drinks were started and completed during Week 2Because materials are added at the beginning of production, all direct materials for these drinks were added during Week 2Computing Equivalent ProductionSoda Products Company makes bottled soft drinks. The company started Week 2 with one half-completed drink in process. During Week 2, it started and completed three drinks, and at the end of Week 2, it had one drink that was three-quarters completedEquivalent units in regard to direct materials costs = 3 (3 x 100%)Copyright © Houghton Mifflin Company. All rights reserved.Three soft drinks were started and completed during Week 2The soft drinks were started and completed during Week 2, so 100 percent of conversion costs were incurred during Week 2Computing Equivalent ProductionSoda Products Company makes bottled soft drinks. The company started Week 2 with one half-completed drink in process. During Week 2, it started and completed three drinks, and at the end of Week 2, it had one drink that was three-quarters completedEquivalent units in regard to conversion costs = 3 (3 x 100%)Copyright © Houghton Mifflin Company. All rights reserved.Computing Equivalent ProductionSoda Products Company makes bottled soft drinks. The company started Week 2 with one half-completed drink in process. During Week 2, it started and completed three drinks, and at the end of Week 2, it had one drink that was three-quarters completedOne soft drink was started during Week 2 and was 75 % completed (and still in production) when Week 2 endedDirect materials were all added during Week 2, so direct materials costs were 100% in regard to direct materials costs during Week 2Equivalent units in regard to direct materials costs = 1 (1 x 100%)Copyright © Houghton Mifflin Company. All rights reserved.Computing Equivalent ProductionSoda Products Company makes bottled soft drinks. The company started Week 2 with one half-completed drink in process. During Week 2, it started and completed three drinks, and at the end of Week 2, it had one drink that was three-quarters completedOne soft drink was started during Week 2 and was 75 % completed (and still in production) when Week 2 endedBecause 75% of this soft drink was completed during Week 2, 75% of conversion costs were incurred during Week 2Equivalent units in regard to conversion costs = .75 (1 x 75%)Copyright © Houghton Mifflin Company. All rights reserved.Computing Equivalent ProductionSoda Products Company makes bottled soft drinks. The company started Week 2 with one half-completed drink in process. During Week 2, it started and completed three drinks, and at the end of Week 2, it had one drink that was three-quarters completedTotal equivalent units 4 4.25 Copyright © Houghton Mifflin Company. All rights reserved.DiscussionIf 100 items in beginning inventory were 100 percent complete in regard to direct materials costs and 35 percent complete in regard to conversion costs, what is the number of equivalent units in regard to conversion costs if they were completed during the current period?100 x 65% = 65. Since 35 percent of conversion costs were incurred during the previous period, 65 percent must have been incurred during the current period. Copyright © Houghton Mifflin Company. All rights reserved.Preparing a Process Cost Report Using the FIFO Costing MethodObjective 6Prepare a process cost report using the FIFO costing methodCopyright © Houghton Mifflin Company. All rights reserved.Preparing a Process Cost Report Using the FIFO Costing MethodProcess cost reportUsed by managers to track and analyze costs for a process, department, or work cell in a process costing systemReport using the FIFO costing methodCost flow follows the logical physical flow of productionCopyright © Houghton Mifflin Company. All rights reserved.Preparing a Process Cost Report Using the FIFO Costing MethodFive steps in preparing a process cost reportAccount for the physical flow of productsCompute equivalent productionAccumulate and analyze all costs charged to the Work in Process Inventory accounts of each production process, department, or work cellCompute the cost per equivalent unit for direct materials and conversion costsAssign costs to products transferred out of the area and to those remaining behind in ending work in process inventoryCopyright © Houghton Mifflin Company. All rights reserved.Accounting for UnitsManagers must(Step 1) Account for the physical flow of products through their areas before they can(Step 2) compute equivalent production for the accounting periodCopyright © Houghton Mifflin Company. All rights reserved.Accounting for UnitsFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These units were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 1 - Account for physical unitsThese 63,700 units are the actual physical units that the manager is responsible for during the periodCopyright © Houghton Mifflin Company. All rights reserved.Accounting for Equivalent UnitsFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These unite were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 2 - Account for equivalent unitsUnits accounted for in Step 2 must equal the units accounted for in Step 1Copyright © Houghton Mifflin Company. All rights reserved.Beginning InventoryFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These unite were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 2 - Account for equivalent unitsBecause all materials are added at the beginning of the production process, the units in beginning inventory were already 100% complete in regard to direct materials00%Copyright © Houghton Mifflin Company. All rights reserved.Beginning InventoryFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These unite were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 2 - Account for equivalent unitsThey were 60% complete in regard to conversion costs; therefore, the remaining 40% of conversion costs were incurred during the current month (6,200 x 40% = 2,480)00%2,4800%Copyright © Houghton Mifflin Company. All rights reserved.Units Started and Completed During the PeriodFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These unite were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 2 - Account for equivalent unitsAll direct materials costs and conversion costs for the 52,500 units started and completed were incurred during this period 00%2,4800%52,500100%52,500100%Copyright © Houghton Mifflin Company. All rights reserved.Ending InventoryFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These unite were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 2 - Account for equivalent units00%2,4800%52,500100%52,500100%All materials were added to the units in ending inventory when the units went into production during the month5,000100%Copyright © Houghton Mifflin Company. All rights reserved.Ending InventoryFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These unite were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 2 - Account for equivalent units00%2,4800%52,500100%52,500100%5,000100%These units were 45% complete in regard to conversion costs by the end of the period (5,000 x 45%)2,25045%Copyright © Houghton Mifflin Company. All rights reserved.TotalsFor the accounting period ending February 20x6, Soda Products Company had beginning work in process inventory consisting of 6,200 units, 60% complete. These unite were completed and 57,500 more were started into production. Of the 57,500 started, 52,500 were completed. The other 5,000 remained in ending work in process inventory and were 45% completeStep 2 - Account for equivalent units00%2,4800%52,500100%52,500100%5,000100%2,25045%Total equivalent units for direct materials costs and conversion costs will be used in Step 457,50057,230Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Costs During the accounting period ending February 20x6, Soda Products Company had costs from beginning inventory of $20,150 for direct materials and $21,390 for conversion costs. Current period costs include $189,750 for direct materials costs and $320,488 for conversion costsStep 3 - Account for costsOnly the Total Costs column is totaledCurrent costs for direct materials costs and conversion costs will be used in Step 4Copyright © Houghton Mifflin Company. All rights reserved.Step 4 – Compute cost per equivalent unitAccounting for Costs For the accounting period ending February 20x6, Soda Products Company’s equivalent units of production totaled 57,500 for direct materials costs and 57,230 for conversion costs. Current period costs totaled $189,750 for direct materials and $320,488 for conversion costsCosts attached to beginning inventory are not included in these computations because the FIFO costing method uses separate costing analyses for each accounting periodCopyright © Houghton Mifflin Company. All rights reserved.Assigning Costs Step 5 – Assign costs to cost of goods manufactured and ending inventoryUse information from Steps 2 through 4 to assign costsStep 2Equivalent units for direct materials costsEquivalent units for conversion costsStep 3Total costs of beginning inventoryThe total costs assigned to units completed and transferred out and to ending inventory in Step 5 must equal the total costs in Step 3Step 4Cost per equivalent unit for direct materials costsCost per equivalent unit for conversion costsCopyright © Houghton Mifflin Company. All rights reserved.Cost of Goods Manufactured and Transferred Out Step 5 – Assign costs to cost of goods manufactured and ending inventoryThis amount is calculated in Step 3 in the Total Costs column for beginning inventoryCopyright © Houghton Mifflin Company. All rights reserved.Cost of Goods Manufactured and Transferred Out Step 5 – Assign costs to cost of goods manufactured and ending inventoryThe 2,480 equivalent units were calculated in Step 2 in the Equivalent Units/Conversion Costs column for beginning inventoryThe $5.60 cost per equivalent unit for conversion costs was calculated in Step 4Current costs to complete13,888=+0(2,480 x $5.60)Copyright © Houghton Mifflin Company. All rights reserved.Units Started and Completed This Period Step 5 – Assign costs to cost of goods manufactured and ending inventory13,888=+Current costs to complete0(2,480 x $5.60)The 52,500 equivalent units were calculated in Step 2 in the Equivalent Units/Direct Materials Costs column for units started and completed during the periodThe $3.30 and $5.60 costs per equivalent unit for direct materials costs and conversion costs, respectively, were calculated in Step 4Units started and completed this period467,250=+(52,500 x $5.60)(52,500 x $3.30)Copyright © Houghton Mifflin Company. All rights reserved.Cost of Goods Manufactured and Transferred Out Step 5 – Assign costs to cost of goods manufactured and ending inventory13,888=+Current costs to complete0(2,480 x $5.60)467,250=+Units started and completed this period(52,500 x $5.60)(52,500 x $3.30)Cost of goods manufactured$522,678Copyright © Houghton Mifflin Company. All rights reserved.Ending InventoryStep 5 – Assign costs to cost of goods manufactured and ending inventory13,888=+Current costs to complete0(2,480 x $5.60)467,250=+Units started and completed this period(52,500 x $5.60)(52,500 x $3.30)$522,678Cost of goods manufacturedThe 5,000 and 2,250 equivalent units were calculated in Step 2 in the Equivalent Units/Direct Materials Costs and Conversion Costs columns, respectively, for ending inventoryThe $3.30 and $5.60 costs per equivalent unit for direct materials costs and conversion costs, respectively, were calculated in Step 4Ending inventory29,100=+(5,000 x $3.30)(2,250 x $5.60)Copyright © Houghton Mifflin Company. All rights reserved.Total CostsStep 5 – Assign costs to cost of goods manufactured and ending inventory13,888=+Current costs to complete0(2,480 x $5.60)467,250=+Units started and completed this period(52,500 x $5.60)(52,500 x $3.30)$522,678Cost of goods manufactured29,100=+Ending inventory(5,000 x $3.30)(2,250 x $5.60)Remember that the total costs in Steps 3 and 5 must always be the sameIf differences occur due to rounding in Step 4, adjust the total costs transferred out for any rounding difference so that the total costs in Steps 3 and 5 are equalTotal costs$551,778Copyright © Houghton Mifflin Company. All rights reserved.Recap of Work in Process Account Work in Process Inventory Account: Cost RecapBeg. Bal$41,540Direct Materials$189,750Conversion Costs$320,488End. Bal$29,100$522,678 (cost of goods manufactured and transferred out)Work in Process Inventory Account: Unit RecapBeg. Bal6,200Direct Materials57,500End. Bal5,00058,700 (FIFO units transferred out from the 6,200 in beginning inventory plus 52,500 started and completedand Conversion CostsCopyright © Houghton Mifflin Company. All rights reserved.Process Costing for Two or More Production DepartmentsMore than one production departmentMust have a Work in Process Inventory account for each departmentCosts are accumulated in each department and transferred to the next department as the product flows from one department to the nextCopyright © Houghton Mifflin Company. All rights reserved.DiscussionHow is the cost per equivalent unit computed?For either direct materials costs or conversion costs, divide the current period costs by the number of equivalent unitsCopyright © Houghton Mifflin Company. All rights reserved.Using Information About Product Cost to Evaluate PerformanceObjective 7Evaluate performance using information about product costCopyright © Houghton Mifflin Company. All rights reserved.Using Information About Product Cost to Evaluate PerformanceHow managers use information from a product costing systemDetermine a product’s priceCompute balances in the Materials Inventory, Work in Process, and Finished Goods Inventory accounts on the balance sheetCompute the balance in the Cost of Goods Sold account on the income statementEvaluate operating performanceCopyright © Houghton Mifflin Company. All rights reserved.Using Information About Product Cost to Evaluate Performance (cont’d)Analyses for evaluating operating performance may includeCost trends of a product or product lineHelp identify areas of rising costs or those for which cost-effectiveness has improvedUnits produced per time periodHelps evaluate operating efficiencyMaterials usage and labor costs per unit producedHelp determine optimal resource usageCopyright © Houghton Mifflin Company. All rights reserved.Using Information About Product Cost to Evaluate Performance (cont’d)Analyses for evaluating operating performance may includeSpecial needs of customersIdentify which customers are increasing or reducing their orders and take actionCost-effectiveness of changing a more advanced production processEstimate unit costs for new equipment and compare with those for existing equipmentCopyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy would managers want to analyze cost trends of a product?Cost trends developed over a period of time help managers identify areas of rising costs or areas in which cost-effectiveness has improved. The factors causing the changes can then be identified for purposes of improving cost-effectivenessCopyright © Houghton Mifflin Company. All rights reserved.Time for ReviewDiscuss the role information about costs plays in the management cycle and explain why unit cost is importantDistinguish between the two basic types of product costing systems and identify the information each providesExplain cost flow in a job order costing system, prepare a job order cost card, and compute product unit costCopyright © Houghton Mifflin Company. All rights reserved.And FinallyExplain product flow and cost flow in a process costing systemDefine equivalent production and compute equivalent unitsPrepare a process cost report using the FIFO costing methodEvaluate performance using information about product costCopyright © Houghton Mifflin Company. All rights reserved.