COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan Chapter Product and Service Costing: A Process Systems Approach COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license Study Objectives Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report Describe process costing for settings without beginning or ending work-inprocess inventories Define equivalent units, and explain their role in process costing Prepare a departmental production report using the FIFO method Prepare a departmental production report using the weighted average method Prepare a departmental production report with transferred-in goods and changes in output measures Describe the basic features of operation costing Explain how spoilage is treated in a process-costing system Process-Costing Systems: Basic Operational and Cost Concepts Process-Costing Systems: Basic Operational and Cost Concepts Process-Costing Systems: Basic Operational and Cost Concepts Process-Costing Systems: Basic Operational and Cost Concepts Process-Costing Systems: Basic Operational and Cost Concepts Basic features of a process-costing system 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 by a process for a given period of time There is a work-in-process account for each process continued Process-Costing Systems: Basic Operational and Cost Concepts Basic features of a process-costing system (con’t) Manufacturing cost flows and the associated journal entries are generally similar to job- order costing 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 of the period Process Costing With No Beginning or Ending Work-in-Process Inventories Services that are homogeneous and repetitively produced can use the processcosting approach Examples: check processing in a bank, changing oil, dental cleaning, surgical procedures JIT manufacturing firms minimize inventories and strive to reduce work-in-process inventories to insignificant levels Process Costing With Ending Work-in-Process Inventories 10 Operation Costing 39 Operation Costing 40 Operation Costing Operation costing example 41 Operation Costing Operation costing example The following costs are collected from work orders: 42 Operation Costing Operation costing example Work in Process—Picking Materials Work in Process—Picking Conversion Costs Applied 4,000 4,000 1,000 1,000 Work in Process—Encapsulating Work in Process—Picking 5,000 Work in Process—Encapsulating Conversion Costs Applied 5,000 3,000 3,000 continued 43 Operation Costing Operation costing example Work in Process—Bottling Work in Process—Encapsulating 8,000 8,000 Work in Process—Bottling Conversion Costs Applied 1,500 Finished Goods Work in Process—Bottling 9,500 1,500 9,500 The journal entries for Work Order #101 are not shown but would follow a similar pattern 44 Appendix: Spoiled Units BWIP – April 100,000 pounds, 40% complete (conversion) Direct materials Direct labor Overhead $20,000 10,000 30,000 EWIP – April 30 50,000 pounds, 60% complete (conversion) 45 Appendix: Spoiled Units Completed and transferred out: 360,000 pounds Direct materials Direct labor Overhead $211,000 100,000 270,000 April spoilage 10,000 pounds 46 Appendix: Spoiled Units 47 Appendix: Spoiled Units 48 Appendix: Spoiled Units DM unit cost ($20,000 + $211,000) ÷ 420,000 CC unit cost ($40,000 + $370,000) ÷ 398,000 Total cost per equivalent unit $0.55 1.03 $1.58 Cost of goods transferred out: Good units $1.58 × 360,000 $568,800 Spoiled units ($0.55 × 10,000) + ($1.03 × 8,000) 13,740 Total cost per equivalent unit $582,540 Cost of ending work in process: ($0.55 × 50,000) + ($1.03 × 30,000) $58,400 49 Appendix: Spoiled Units 50 Appendix: Spoiled Units Abnormal spoilage 51 Appendix: Spoiled Units Abnormal spoilage 52 COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan End Chapter 53 ... Process-Costing Systems: Basic Operational and Cost Concepts Process-Costing Systems: Basic Operational and Cost Concepts Process-Costing Systems: Basic Operational and Cost Concepts Process-Costing... for tracking manufacturing activity and costs Unit costs are computed by dividing the departmental costs of the period by the output of the period Process Costing With No Beginning or Ending... goods and changes in output measures Describe the basic features of operation costing Explain how spoilage is treated in a process-costing system Process-Costing Systems: Basic Operational and Cost