bg management accounting chapter 3 3466

CHAPTER PROCESS COSTING METHOD 3.1 The process costing – an overview 3.1.1 The concept of Process costing Process costing is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes 3.1.1 The concept of Process costing This is an appropriate system to use when: - Units not differ from each other - Unit cycle time is relatively short - The production process is continuous Process costing is used most commonly in industries that convert raw materials into homogeneous 3.1.2 Characteristic of Process costing - Direct material cost would be charged to each job - Direct labor cost would be determined from detailed time records kept for each employee - Overhead would be absorbed into the total cost of each job using the actual overhead absorption rate for each cost centre 3.2 The process costing flow 3.2.1 Processing department A processing department is an organizational unit where work is performed on a product and where materials, labor, or overhead costs are added to the product 3.2.1 Processing department The features of processing department: - The activity in the processing department is performed uniformly on all of the units passing through it - The output of the processing department is homogeneous; in other words, all of the units produced are identical - Materials costs can be added in any processing department, although it is not unusual for materials to be added only in the first processing department - Labor costs are traced to departments — not to individual jobs 3.2.2 The flow of Manufacturing Cost Manufacturing overhead is applied to each processing department based on a predetermined rate for each department The predetermined rate does not have to be based on the same cost driver for each processing department Process Cost Flows (in T-account form) Work in Process Department A Manufacturing Overhead •Actual Overhead •Overhead Applied to Work in Process •Direct Materials •Direct Labor •Applied Overhead Work in Process Department B •Direct Materials •Direct Labor •Applied Overhead 3.3 The Production report Production report (statement) is the report that reflects the production situation incurring in each particular department (workshop) There are sections in a production report: 3.3 The production report Production Report Œ A quantity schedule showing Section the flow of units and the computation of equivalent units A computation of cost per equivalent unit Section Ž Section Cost Reconciliation section shows the reconciliation of all cost flows into and out of the department during the period 3.3 The production report Step 1: Prepare quantity schedule - Beginning work in process (WIP) (1) - Ending WIP (2) - Units started into production in period (3) - Units completed and transferred out (4) - Units started into production and completed in period (5) 3.3 The production report Step 2: Calculate equivalent unit costs Equivalent units are the product of the number of partially completed units and the percentage completion of those units Equivalent units of production always equals: Units completed and transferred + Equivalent units remaining in work in process Equivalent Units of Production Weighted- Average Method Total equivalent units Units completed = and transferred + out in period Equivalent units of ending = WIP Ending WIP X Equivalent units of ending WIP Percent Completed (%) Equivalent units The FIFO method (generally considered more accurate that the weighted - average method) differs from the weighted average method in two ways: The computation of equivalent units The way in which the costs of beginning inventory are treated in the cost reconciliation report Equivalent units Total Equivalent Units started Equivalent equivalent = of beginning + into production + of ending units WIP completed in WIP period Equivalent units of beginning WIP = Beginning WIP x Percent Uncompleted Equivalent units of ending WIP: same formula in Weighted – Average method Step 3, 4: Determine total costs to account for (Weighted – Average Method) Total Costs for the period consist: - Cost of beginning WIP - Cost added in the period To calculate the cost per equivalent unit for the period: Cost per equivalent unit Costs for the period = Equivalent units of production for the period Step 3, 4: Determine total costs to account for (FIFO Method) Total Costs for the period consist only cost added in the period Cost per equivalent unit Costs for the period = Equivalent units of production for the period Step 5: Cost Reconciliation Cost flows Costs of beginning WIP = + Costs added = during the period Allocated costs Costs for Completed units + Costs for equivalent units Step 5: Cost Reconciliation - Calculate the total cost from beginning inventory transferred to the next department - Calculate the cost of units started and completed during the period - Calculate the costs in ending work in process inventory and the sum of the cost accounted for Step 5: Cost Reconciliation • Weighted – Average Method: Cost flows consists of: - Costs of beginning WIP - Costs added to production during the period Allocated cost: - To completed units - To equivalent units of ending WIP Cost Reconciliation Costs for completed and transferred units = Quantity of completed units Costs for Equivalent equivalent units = units of ending WIP X X Total Unit cost Cost per equivalent unit Step 5: Cost Reconciliation • FIFO method Cost flows consists of: - Costs of beginning WIP - Costs added to production during the period Allocated cost: - To completed units - To equivalent units of beginning and ending WIP Costs that allocated to equivalent units of beginning WIP had parts: - Cost in prior period - Costs added in current period to complete beginning WIP Cost Reconciliation Costs for equivalent units of beginning WIP Costs for units started and completed in the period = = Equivalent units of beginning WIP X Quantity of units started and completed in the period Costs for equivalent Equivalent units units of ending WIP = of ending WIP X Cost per equivalent unit X Total Unit cost Cost per equivalent unit ... during the period 3. 3 The production report Step 1: Prepare quantity schedule - Beginning work in process (WIP) (1) - Ending WIP (2) - Units started into production in period (3) - Units completed... cost of each job using the actual overhead absorption rate for each cost centre 3. 2 The process costing flow 3. 2.1 Processing department A processing department is an organizational unit where... •Applied Overhead Work in Process Department B •Direct Materials •Direct Labor •Applied Overhead 3. 3 The Production report Production report (statement) is the report that reflects the production