Under the weighted-average method, the equivalent units for a particular cost category e.g., materials or conversion cost is computed by adding together the number of units completed and
Trang 1LO3 Prepare a quantity schedule using the weighted-average method
LO4 Compute the costs per equivalent unit using the weighted-average method
LO5 Prepare a cost reconciliation using the weighted-average method
LO6 (Appendix 4A) Compute the equivalent units of production using the FIFO method LO7 (Appendix 4A) Prepare a quantity schedule using the FIFO method
LO8 (Appendix 4A) Compute the costs per equivalent unit using the FIFO method
LO9 (Appendix 4A) Prepare a cost reconciliation using the FIFO method
New in this Edition
• Additional simple exercises have been created
1 Similarities between job-order and process costing Job-order and process costing
systems share some characteristics:
a Both systems have the same basic purpose—to assign material, labor, and overhead cost to products
b Both systems use the same basic manufacturing accounts: Manufacturing Overhead, Raw Materials, Work In Process, and Finished Goods
c The flow of costs through the manufacturing accounts is basically the same
2 Differences between job-order and process costing The differences between job-order
and process costing occur because the flow of units in a process costing system is more or less continuous and the units are essentially indistinguishable from one another Under process costing:
a A single homogenous product is produced on a continuous basis over a long period of time This differs from job-order costing in which many different products may be
Trang 2
b Costs in process costing are accumulated by department, rather than by individual job
c The department production report is the key document in process costing, showing the accumulation and disposition of cost In job-order costing, the job-cost sheet is the key document
B Overview of Process Costing. (Exercises 4-1 and 4-10.) Manufacturing costs are accumulated in processing departments in a process costing system A processing department is any location in the organization where work is performed on a product and where materials, labor, and overhead costs are added to the product Processing departments should also have two other features First, the activity performed in the processing department should be essentially the same for all units that pass through the department Second, the output of the department should be homogeneous In process costing, the average cost of processing units for a period is assigned to each unit passing through the department
Two process costing methods are illustrated in the text—the weighted-average method and the FIFO method While the FIFO method provides more current cost data for decision-making and performance evaluation purposes, it is more difficult for students to grasp For that reason, the FIFO method is covered in an appendix
C Equivalent Units of Product. (Exercises 4-2, 4-11, 4-13, and 4-17.) In order to calculate the average cost per unit, the total number of units must be determined Partially completed units pose a difficulty that is overcome using the concept of equivalent units Equivalent units are the equivalent, in terms of completed units, of partially completed units The formula for computing equivalent units is:
Number of Equivalent partially completed Percentage units = units × completion
Equivalent units are the number of complete, whole units one could obtain from the materials and effort contained in partially completed units
Under the weighted-average method, the equivalent units for a particular cost category (e.g., materials or conversion cost) is computed by adding together the number of units completed and transferred out to the next department during the period and the equivalent units in the ending work in process inventory in the department
Units transferred to Equivalent Equivalent units units of the next department in ending work in
or to finished goods process inventory production
D Production Report. The purpose of a production report is to summarize all of the activity that takes place in a department's work in process account for a period A production report consists of three parts:
• A quantity schedule and a computation of equivalent units
Trang 3
2 Costs per Equivalent Unit. (Exercises 4-6 and 4-13.) The second step in preparing a production report is to calculate the costs per equivalent unit The cost per equivalent unit is computed for a particular cost category (i.e., materials, labor, overhead, or conversion) by dividing its total cost by its total equivalent units Note that under the weighted-average method the costs include both the costs already in beginning inventory as well as the costs added by the department during the current period
3 Cost Reconciliation. (Exercise 4-7.) The third step in preparing a production report is to prepare a cost reconciliation The purpose of a cost reconciliation is to show how the costs from beginning work in process inventory and costs that have been added during the period are accounted for
a Costs come into the department from units in beginning inventory, from material, labor, and overhead costs that are added during the period, and from any units that might have been transferred in from a prior department
b A department's costs are accounted for by showing the costs that are transferred out to the next department (or to finished goods) and by specifying the costs that remain in the ending work in process inventory
F Operation Costing. The costing systems discussed in Chapters 3 and 4 represent the two ends of a continuum On one end is job-order costing and on the other is process costing Between the two extremes, there are many “hybrid” systems Operation costing is an example of such a hybrid system It is used in situations where products have some common as well as individual characteristics TVs, for example, have some common characteristics in that all models must be assembled and tested following the same basic steps However, each model has different components with different costs The costs of the components (materials) would be charged to a batch of a particular model individually, as in job-order costing, but the conversion costs may be assigned using process costing
G FIFO Method (Appendix 4A). (Exercise 4-15 followed by Exercise 4-16.) The FIFO method segregates the units and costs in the beginning inventory from the units and costs of the current period
1 Quantity Schedule. (Exercises 4-5 and 4-12.) The quantity schedule prepared under the FIFO method is identical to that prepared under the weighted-average method, except that the “units transferred out” are separated into those units that came from beginning inventory and those units that were started and completed this period
Trang 4b Second, the equivalent units refers to just the equivalent units for the work performed during the current period The equivalent units under the FIFO method consist of three amounts: the work needed to complete the units in the beginning inventory; the work expended on the units started and completed during the current period; and the work expended on partially completed units in the ending inventory
c This method is called the FIFO method because it assumes that the units in beginning inventory are completed and transferred out before any new units are started The costs
of beginning inventory are segregated from costs added during the period
d The only difference in the equivalent unit calculations between the two methods is that the equivalent units in beginning inventory are included in the weighted-average method Under the weighted-average method the costs already in beginning inventory will be added to the costs incurred during the period to arrive at unit costs To be consistent we must add the equivalent units already in beginning inventory to the equivalent units for the work performed during the current period
3 Costs per Equivalent Unit. (Exercise 4-8.) In computing costs per equivalent unit, costs associated with the beginning work in process inventory are ignored It is assumed that the units in beginning inventory are completed and transferred to the next department before any new units are worked on Providing that more units are transferred out than were in beginning inventory, all of the costs associated with beginning inventory will be transferred
to the next department
4 Cost Reconciliation. (Exercises 4-9 and 4-16.) As with the weighted-average method, the purpose of a cost reconciliation is to show how the costs have been charged to a department during a period and to show how these costs are accounted for
a The “Costs to be accounted for” section of the report is the same as for the average method
weighted-b The “Cost accounted for” section differs from the weighted-average method in that four layers of cost are involved These layers are (1) the cost in the beginning inventory, (2) the cost required to complete the units in the beginning inventory, (3) the cost of units started and completed during the current period, and (4) the cost of the ending work in process inventory
H Evaluation of Weighted-Average and FIFO (Appendix 4A). The weighted-average method is simpler to learn and apply than the FIFO method, but the FIFO method is generally
Trang 5
Assignment Materials
Assignment Topic
Level of Difficulty
Suggested Time
Exercise 4-1 Process costing journal entries Basic 20 min Exercise 4-2 Computation of equivalent units—WAC Basic 10 min Exercise 4-3 (Appendix 4A) Computation of equivalent units—FIFO Basic 10 min Exercise 4-4 Preparation of quantity schedule—WAC Basic 15 min Exercise 4-5 (Appendix 4A) Preparation of quantity schedule—FIFO Basic 15 min Exercise 4-6 Cost per equivalent unit—WAC Basic 15 min Exercise 4-7 Cost reconciliation—WAC Basic 20 min Exercise 4-8 (Appendix 4A) Cost per equivalent unit—FIFO Basic 10 min Exercise 4-9 (Appendix 4A) Cost reconciliation—FIFO Basic 45 min Exercise 4-10 Process costing journal entries Basic 10 min Exercise 4-11 Quantity schedule and equivalent units—WAC Basic 15 min Exercise 4-12 (Appendix 4A) Quantity schedule and equivalent units—FIFO Basic 15 min Exercise 4-13 Equivalent units and cost per equivalent unit—WAC Basic 20 min Exercise 4-14 Cost reconciliation—WAC [assign after Exercise 4-13] Basic 15 min Exercise 4-15 (Appendix 4A) Quantity schedule; equivalent units; cost per
equivalent unit—FIFO Basic 20 min Exercise 4-16 (Appendix 4A) Cost reconciliation—FIFO [assign after
Exercise 4-15] Basic 20 min Exercise 4-17 Quantity schedule; equivalent units, and cost per equivalent
unit—WAC Basic 20 min Exercise 4-18 (Appendix 4A) Quantity schedule; equivalent units, and cost
per equivalent unit—FIFO Basic 20 min Problem 4-19 Step-by-step production report—WAC Basic 45 min Problem 4-20 (Appendix 4A) Step-by-step production report—FIFO Basic 45 min Problem 4-21 Production report—WAC Basic 45 min Problem 4-22 (Appendix 4A) Production report—FIFO Basic 45 min Problem 4-23 Analysis of Work in Process T-account—WAC Medium 45 min Problem 4-24 (Appendix 4A) Analysis of Work in Process T-account—FIFO Medium 45 min Problem 4-25 Interpreting a production report—WAC Medium 30 min Problem 4-26 Comprehensive process costing problem—WAC Difficult 90 min Problem 4-27 Equivalent units; costing of inventories; journal entries—WAC Difficult 60 min Problem 4-28 Comprehensive process costing problem—WAC Difficult 90 min Case 4-29 Ethics and the manager; understanding the impact of
percentage completion on profit—WAC Difficult 90 min Case 4-30 Production report of second department—WAC Difficult 45 min Case 4-31 (Appendix 4A) Production report of second department—FIFO Difficult 60 min
Essential Problems: Problem 4-19, Problem 4-21
Supplementary Problems: Problem 4-23, Problem 4-25, Problem 4-26, Problem 4-27, Problem
4-28, Case 4-29, Case 4-30
Appendix 4A Essential Problems: Problem 4-20, Problem 4-22
Appendix 4A Supplementary Problems: Problem 4-24, Case 4-31
Linked problems and exercises:
Exercise 4-14 should be assigned in conjunction with Exercise 4-13
Exercise 4-16 should be assigned in conjunction with Exercise 4-15
Trang 6
1 2
Trang 7
Chapter 4 Lecture Notes
Helpful Hint: Before beginning the lecture, show students the fourth segment from the first tape of the McGraw-Hill/Irwin Managerial/Cost Accounting video library This segment introduces students to many of the concepts discussed in chapter 4 The lecture notes reinforce the concepts introduced in the video
Chapter theme: Managers need to assign costs to products
to facilitate external financial reporting and internal
decision making This chapter illustrates an absorption
costing approach to calculating product costs known as process costing
I Comparison of job-order and process costing
A Similarities between job-order and process costing
i Both systems assign material, labor and overhead
costs to products and they provide a mechanism for computing unit product costs
ii Both systems use the same manufacturing accounts,
including Manufacturing Overhead, Raw
Materials, Work in Process, and Finished Goods
iii The flow of costs through the manufacturing
accounts is basically the same in both systems
2
1
Trang 8
3 4 5
Trang 9
B Differences between job-order and process costing
i Process costing is used when a single product is
produced on a continuing basis or for a long period
of time Job-order costing is used when many
different jobs are worked each period
ii Process costing systems accumulate costs by
department Job-order costing systems
accumulate costs by individual jobs
iii Process costing systems use department
production reports to accumulate costs Job-order
costing systems use job cost sheets to accumulate
costs
iv Process costing systems compute unit costs by
department Job-order costing systems compute unit costs by job
Quick Check − process vs job-order costing
“In Business Insights”
Some companies use a hybrid approach to calculating product costs that combines elements of process and job-order costing For example:
“A Hybrid Approach” (page 147)
• Some hospital pharmacies may use process
costing to develop the cost of formulating the base solution for parenterals (that is, drugs delivered
by injection or through the blood stream)
• Job-order costing can be used to accumulate the
additional costs incurred to create specific
3
4-5
Trang 10
6 7
Trang 11
• The additional costs include the ingredients added
to the base solution and the time spent by the pharmacist to prepare a specific prescribed solution
II A perspective of process cost flows
A Processing departments − Any location in an
organization where materials, labor or overhead are added to the product
i The activities performed in a processing
department are performed uniformly on all units of
production Furthermore, the output of a
processing department must be homogeneous
ii Processing departments can be organized
sequentially or in parallel
1 Sequential processing means that units
flow in a sequence from one department to another
2 Parallel processing is used, where after a
point, some units go through different processing departments than others
a For example, a petroleum refinery separates crude oil into intermediate products that go through separate processes to become end products such as gasoline, jet fuel, and heating oil
6
7
Trang 12
8 9 10
11
Trang 13
B The flow of materials, labor, and overhead costs
i The flow of costs through the manufacturing
accounts is basically the same for process and
ii Nonetheless, there is a key fundamental
difference between process and job-order costing
systems
1 Job-order costing systems trace and apply
manufacturing costs to jobs
a One Work in Process account is often used to accumulate costs for all jobs The individual job cost sheets serve
as a subsidiary ledger
2 Process costing systems trace and apply
manufacturing costs to departments
a A separate Work in Process account
is maintained for each processing department
iii T-account and journal entry views of process
cost flows (For purposes of this example, assume
there are two processing departments − A and B)
8
9
10
11
Trang 14
12 13 14
15
Trang 15i Direct material costs are debited
to the appropriate departmental Work in Process account
depending upon where the materials were added to the production process The Raw Materials account is credited for the corresponding amounts
b In journal entry form:
i Debit the respective departmental Work in Process accounts Credit Raw Materials
2 The flow of labor costs
a In T-account form:
i Direct labor costs are debited to the appropriate departmental Work in Process account depending upon where the labor was added to the production process Salaries and Wages Payable is credited for the corresponding amounts
b In journal entry form:
i Debit the respective departmental Work in Processes accounts Credit Salaries and Wages Payable
12
13
14
15
Trang 16
16 17 18
Trang 171 Predetermined overhead rates are usually used to apply overhead to the departments
b In journal entry form:
i Debit the appropriate departmental Work in Process accounts Credit Manufacturing Overhead
4 The flow of manufacturing costs for
partially completed units transferred from
Department A to Department B:
a In T-account form:
i The cost of direct materials, direct labor and manufacturing overhead assigned to partially completed units from
Department A is debited to Department B and credited to Department A
ii The transferred-in costs from
Department A are added to the manufacturing costs incurred in Department B
16
17
18
Trang 18
19 20 21
22 23 24
Trang 19
b In journal entry form:
i Debit Work in Process − Department B and credit Work in Process − Department A
5 The flow of manufacturing costs from the
final processing department to finished goods
a In T-account form:
i Debit Finished Goods and credit Work in Process − Department B for the amount of the cost of goods manufactured
b In journal entry form:
i Debit Finished Goods and credit Work in Process − Department
B
6 The flow of manufacturing costs from
Finished Goods to Cost of Goods Sold
a In T-account form:
i Debit Cost of Goods Sold and credit Finished Goods
b In journal entry form:
i Debit Cost of Goods Sold and credit Finished Goods
III Equivalent units of production
A Equivalent units − are defined as the product of the
number of partially completed units and the percentage completion of those units
i Equivalent units need to be calculated because a department usually has some partially completed units in its beginning and ending inventory These
Trang 20
24 25 26
27 28 29
Trang 21
partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to that output
Helpful Hint: Explain that equivalent units simply restate the ending work in process inventory as if it were comprised of a smaller number of fully completed units
ii Equivalent units − the basic idea
1 Two half completed products are equivalent
to one complete product
2 10,000 units 70% complete are equivalent to 7,000 equivalent units
Quick Check − calculating equivalent units
iii Equivalent units can be calculated two ways
1 The FIFO method is covered in the
appendix
2 The weighted-average method is included
within the main portion of the chapter and it
is covered next
B The weighted-average method of calculating
equivalent units and the cost per equivalent unit
i Characteristics of the weighted-average method:
1 This method makes no distinction between
work done in the prior and current periods
Trang 22
29 30 31
32 33 34
35
Trang 23
2 This method blends together units and costs
from the prior and current periods
ii Treatment of direct labor
1 Direct labor costs are often small in comparison to the other product costs in process cost systems
2 Therefore, direct labor and manufacturing overhead are often combined into one classification of product cost called
conversion costs The forthcoming
example combines these costs
iii An example of the weighted-average method
1 Assume that Smith Company reported activity for June as shown on this slide
2 The first step in calculating the equivalent units is to identify the units completed and
transferred out of Department A in June
(5,400 units)
3 The second step is to identify the equivalent
units of production in ending work in
process with respect to materials for the month (540 units) and adding this to the
5,400 units from step one
4 The third step is to identify the equivalent
units of production in ending work in
process with respect to conversion for the month (270 units) and adding this to the
5,400 units from step one
Trang 24
36 37 38
Trang 25
Helpful Hint: Explain that there will most likely be differences in the equivalent unit calculations between material and conversion costs, as materials are usually added at the beginning of production, while conversion costs are added during the period
5 The equivalent units of production equals
the units completed and transferred out
(5,400 units) plus the equivalent units remaining in work in process (540 units for
materials and 270 units for conversion)
6 A different visual depiction of the equivalent
units calculation for materials is shown on
this slide
7 A different visual depiction of the equivalent
units calculation for conversion is shown on
this slide
Helpful Hint: The treatment of beginning inventory under the weighted-average method often puzzles students, since work done in the prior periods is included in the equivalent units Explain that this is called the weighted-average method precisely because
it averages together beginning inventory and work performed in the current period Costs and units are treated consistently Both the equivalent units and the costs that go into the unit cost calculations under the weighted-average method include amounts already in beginning inventory
IV Production report − weighted-average method
A There are three sections in a production report:
36
37
38
Trang 26
39 40 41
42 43
Trang 27
i The quantity schedule shows the flow of units
through the department and a computation of equivalent units
ii The costs per equivalent unit section shows the
computation of costs per equivalent unit
iii The cost reconciliation section shows the
reconciliation of all cost flows into and out of the department during the period
Helpful Hint: Explain that a production report indicates where units and costs came from (beginning work in process and additional units and costs) and where these units and costs end up (finished goods and ending work in process)
B An example of a production report
i Assume that Double Diamond Skis uses the weighted-average method of process costing to determine unit costs in its Shaping and Milling Department
ii Assume the following facts as shown on this slide
iii The first step is to prepare the quantity schedule
and compute the equivalent units
1 Calculate the units to be accounted for
(5,200 units) and the allocation of those
units between “completed and transferred”
Trang 28
43 44 45
46 47 48
49
Trang 29
(4,800 units) and ending work in process (400 units)
2 Calculate the equivalent units in ending
work in process with respect to materials (160 units) and add these units to the units completed and transferred (4800 units) to
obtain total equivalent units with respect to
materials for the period (4,960 units)
3 Calculate the equivalent units in ending
work in process with respect to conversion (100 units) and add these units to the units completed and transferred (4800 units) to
obtain the total equivalent units with respect
to conversion for the period (4,900 units)
iv The second step is to calculate the cost per
equivalent unit
1 Generally speaking, the cost per equivalent unit is calculated by dividing the costs for the period by the equivalent units of
production for the period
2 Calculate the total material and conversion costs to be accounted for during the period
by summing the costs added during the
period ($368,600 for materials and
$350,900 for conversion) and the costs in
beginning work in process ($9,600 for
materials and $5,575 for conversion)
3 Calculate the cost per equivalent unit for
materials ($76.25)
4 Calculate the cost per equivalent unit for
conversion ($72.75), and the total cost per
Trang 30
50 51 52
53