Transcript Cost Management and Strategy: An Overview

Chapter Eleven
Process Costing
Blocher,Stout,Cokins,Chen, Cost Management 4e
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Learning Objectives
• Identify the types of firms or operations for which a
process costing system is most suitable
• Explain and calculate equivalent units produced
• Describe the five steps in process costing
• Demonstrate the weighted-average method of
process costing
• Demonstrate the FIFO method of process costing
Blocher,Stout,Cokins,Chen, Cost Management 4e
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Learning Objectives
(continued)
• Apply process costing to a firm with multiple
departments
• Prepare journal entries to record the flow of costs in a
process cost system
• Explain how process cost systems are implemented
and enhanced in practice
• Account for spoilage in process costing
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Process Costing
• Process costing: a product costing system that
accumulates costs according to processes or
departments
• Accumulated costs are spread over output of the
period
• Used when outputs are standardized/ homogeneous
• Examples: chemicals, oil refining, textiles, paints,
flour, canneries, rubber, steel, glass, cement, and
sporting goods
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Production Cost Report
• Prepared each period (e.g., each month) for each
department
• Each department has its own WIP Inventory
account
• The production cost report summarizes:
– The number of physical and equivalent units
– Costs incurred during the period
– Cost per equivalent unit for each cost element
(e.g., DL, DM, factory overhead)
– Costs assigned to units completed and to units in
ending WIP inventory
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Production Cost Report (continued)
• Equivalent units:
– A measure of output for the period
• Example: 2 units 50% complete = 1 unit fully complete
– An expression of partially completed units in terms of
fully completed units
• Cost/equivalent unit = costs in each department for
the period by the “number of equivalent units”
produced during the period
– Definition of numerator and denominator depends on
whether FIFO or weighted-average method is used
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Some Cost Issues
• Because of the relatively small DL content in many
process industries, factory overhead and DL costs are
often combined into a separate cost element and
called conversion costs
• Many firms incur conversion costs uniformly throughout
the production process
• DM costs can be added at discrete points of
manufacturing or continuously over production (in the
latter case, DM for equivalent-unit purposes will be
calculated using the same proportion as conversion
costs)
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Flow of Costs in Process Costing
Materials Inventory
XXX
XXX
Accrued Payroll
XXX
XXX
Direct matierals (DM)
Direct Labor (DL)
Factory overhead (OH)
Work-in-Process Inventory - Dept. A
XXX
XXX
XXX
XXX
Work-in-Process Inventory - Dept. B
Transferred-in costs (TI)
XXX
XXX
Direct materials (DM)
XXX
Direct Labor (DL)
XXX
Factory overhead (OH)
XXX
Factory Overhead Applied
XXX
XXX
Blocher,Stout,Cokins,Chen, Cost Management 4e
Finished Goods Inventory
XXX
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Completing the Production
Cost Report: 5 Steps
 Account for the physical units
 Calculate equivalent units for each manufacturing
cost element (FIFO or weighted-average method)
 Determine total costs for each manufacturing cost
element (FIFO or weighted-average method)
 Compute cost per equivalent unit for each
manufacturing cost element
 Assign total manufacturing costs to units completed
and ending WIP Inventory
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Weighted-Average vs. FIFO?
• The weighted average method includes all costs
(i.e., beginning WIP inventory + current period
manufacturing costs) in calculating cost per
equivalent unit for each cost element the unit cost
– Thus, prior period and current period costs are averaged
• The FIFO method includes in calculating the unit
cost only costs incurred and work effort performed
during the current period
– Thus, FIFO costs represent the current period’s cost per
equivalent unit for each manufacturing cost element
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Process Costing Example
HSU Toy Company has two production
departments, molding and finishing. Molding
places direct materials into production at the
beginning of the process. Direct labor and
factory overhead costs are incurred
gradually throughout the process with
different proportions. The molding
department’s units of production and costs
for the month of June are provided.
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Process Costing Example (continued)
Work-in-process inventory, June 1:
Direct materials: 100% complete
Direct labor: 30% complete
Factory overhead: 40% complete
Beginning work-in-process inventory
10,000 units
$ 10,000
1,060
1,620
$ 12,680
Units started during June
40,000 units
Units completed during June
44,000 units
Work-in-process inventory, June 30:
Direct materials: 100% complete
Direct labor: 50% complete
Factory overhead: 60% complete
Costs added during June:
Direct materials
Direct labor
Factory overhead
Total costs incurred
Blocher,Stout,Cokins,Chen, Cost Management 4e
6,000 units
?
?
?
$
44,000
22,440
43,600
$ 110,040
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Step 1: Account for Physical
Product Flow
Flow of Units in June
Input
Work-in-Process Inventory, June 1
Units started in June
Total units to account for
Output
Units completed and transferred out
Work-in-Process Inventory, June 30
Total units accounted for
Blocher,Stout,Cokins,Chen, Cost Management 4e
Physical
Units
10,000
40,000
50,000
44,000
6,000
50,000
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Step 2: Calculate Equivalent Units for
Each Cost Element
Flow of Units in June
Work-in-Process Inventory, June 1
Direct Materials
Direct Labor
Factory Overhead
Units started in June
Total units to account for
Units completed and transferred out
Work-in-Process Inventory, June 30
Direct Materials
Direct Labor
Factory Overhead
Total units accounted for
Total equivalent units
Blocher,Stout,Cokins,Chen, Cost Management 4e
Step 1
Physical
%
Units
Complete
10,000
100%
30%
40%
40,000
50,000
44,000
6,000
Step 2
Equivalent Units
DM
DL
100%
44,000
44,000
100%
50%
60%
6,000
Factory
Overhead
44,000
3,000
3,600
50,000
50,000
47,000
47,600
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Step 3: Determine Total Cost for Each
Cost Element
“Total Costs for Each Manufacturing Cost Element”
= Numerator in cost per equivalent unit calculation
(and is different for FIFO vs. Weighted-Average
method)
Costs
DM
WIP Inventory, June 1 $10,000
Costs added, June
44,000
Total costs
$54,000
Blocher,Stout,Cokins,Chen, Cost Management 4e
Factory
DL
Overhead Total
$ 1,060 $ 1,620
$12,680
22,440
43,600 $110,040
$23,500 $ 45,220 $122,720
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Step 4: Calculate Cost per Equivalent
Unit for Each Cost Element
DM
Factory
OVH
DL
Total
Wtd. Average Costs:
WIP Inventory, June 1
Costs added, June
Total
$10,000 $1,060 $1,620 $12,680
$44,000 $22,440 $43,600 $110,040
$54,000 $23,500 $45,220 $122,720
¸ equivalent units, Step 2
Cost per equivalent unit
50,000
$1.08
Blocher,Stout,Cokins,Chen, Cost Management 4e
47,000
$0.50
47,600
$0.95
$2.53
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Step 5: Cost Assignment
Completed
Equiv. Equiv. and Trans.
Out
Units Unit Cost
44,000
Units completed
WIP Inv., June 30
6,000
DM
3,000
DL
3,600
Factory OVH
Total costs accounted for
$2.53
Total
$111,320
$111,320
$111,320
$6,480 $6,480
$1,500 $1,500
$3,420 $3,420
$11,400 $122,720
$1.08
$0.50
$0.95
Blocher,Stout,Cokins,Chen, Cost Management 4e
Ending
WIP
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FIFO Example: Step 1
Flow of Units in June
Input
WIP Inventory, June 1
Units started in June
Total units to account for
Output
Units completed and transferred out
WIP Inventory, June 30
Total units accounted for
Blocher,Stout,Cokins,Chen, Cost Management 4e
Physical
Units
10,000
40,000
50,000
44,000
6,000
50,000
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Step 2, Alternative 1: Calculate FIFO
Equivalent Units
Step 1
Physical
Units
10,000
Step 2
Equivalent Units
%
Complete
Flow of Units in June
DM
WIP Inventory, June 1
DM
100%
DL
30%
Factory Overhead
40%
Units started in June
40,000
Total units to account for
50,000
Units completed and transferred out 44,000
100%
44,000
WIP Inventory, June 30
6,000
DM
100%
6,000
DL
50%
Factory Overhead
60%
Total units accounted for
50,000
Total equivalent units: weighted-average method)
50,000
Less: equivalent units in June 1 work-in-process
(10,000)
Equiv. units for work done in June only (i.e., FIFO method) 40,000
Blocher,Stout,Cokins,Chen, Cost Management 4e
DL
Factory
OVH
44,000
44,000
3,000
3,600
47,000
(3,000)
44,000
47,600
(4,000)
43,600
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Step 2, Alternative 2: Calculate FIFO Equivalent Units
Flow of Units in June
WIP Inventory, June 1
DM
DL
Factory Overhead
Units started in June
Total units to account for
Units completed and trans. out
from WIP Inventory, June 1
DM
DL
Factory Overhead
Started and completed
WIP Inventory, June 30
DM
DL
Factory Overhead
Total units accounted for
Equiv. units (FIFO method)
Step 1
Step 2: Equivalent Units
Physical
%
Factory
Units
Complete
DM
DL
OVH
10,000
100%
10,000
30%
3,000
40%
4,000
40,000
50,000
Blocher,Stout,Cokins,Chen, Cost Management 4e
10,000
7,000
34,000
6,000
100%
34,000
100%
50%
60%
6,000
34,000
6,000
34,000
3,000
3,600
50,000
40,000
44,000
43,600
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Step 3: Calculate FIFO (i.e., Current
Period) Costs
Costs added, June
Total FIFO costs
DM
44,000
$ 44,000
Blocher,Stout,Cokins,Chen, Cost Management 4e
DL
22,440
$ 22,440
Factory
Overhead
43,600
$ 43,600
Total
110,040
$ 110,040
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Step 4: Calculate FIFO Costs per
Equivalent Unit
FIFO Costs, Step 3
¸FIFO equiv. units, Step 2
FIFO Equivalent unit costs
Blocher,Stout,Cokins,Chen, Cost Management 4e
Factory
DM
DL
Overhead Total
$44,000 $22,440 $43,600
40,000 44,000
43,600
$ 1.10 $ 0.51 $
1.00 $ 2.61
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Step 5, Part 1: Assign Costs to Units
Completed from Beginning WIP Inventory
WIP Inventory, June 1
$ 12,680
Costs in June to Complete Beg. WIP:
DL (2,100 eq. units x $0.51/eq. unit)
3,570
Overhead (6,000 eq. units x $1/eq. unit)
6,000
Total for beginning inventory units
$ 22,250
Blocher,Stout,Cokins,Chen, Cost Management 4e
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Step 5, Part 2: Assign Costs to Units Started
& Completed and Account for Total Costs
Accounting for Total Costs in June:
Units started and completed in June
Cost per equivalent unit
$
Cost of units started and completed $
Total cost for beginning inventory
Work-in-Process, June 30
Direct Materials
Direct Labor
Factory Overhead
Total costs in ending inventory
Total costs accounted for
Blocher,Stout,Cokins,Chen, Cost Management 4e
$
34,000
2.61
88,740
22,250
$
6,600
1,530
3,600
$ 11,730
$ 122,720
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Weighted-Average vs. FIFO
WeightedAverage
Handling of
partially
completed
beginning WIP
No separate
treatment
Ease of
Easier; best in
calculation and situations where
appropriateness WIP is small and
prices/costs are
stable
Blocher,Stout,Cokins,Chen, Cost Management 4e
FIFO
Separates the units in the
beginning WIP (and their
costs) from the units
started and completed
during the period
More difficult; best in
situations where
prices/costs fluctuate;
better for “control”
purposes
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Process Costing with
Multiple Departments
• As a product passes from one department to another,
the accumulated cost passes from department to
department
• Transferred-in costs, or prior department costs, are
costs of work performed in earlier departments that
are transferred into the present department
• These costs are treated like an additional cost
element
Blocher,Stout,Cokins,Chen, Cost Management 4e
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Implementation and Enhancement of
Process Costing
• Sometimes process-based manufacturers have very
different products going through different processes,
making process costing by itself inadequate
• Activity-based costing (ABC) is an important
enhancement to process costing when product and
process variety arises
• Process costing also lacks the ability to identify the most
profitable product mix--to remedy this shortcoming we
might use:
– The contribution methods (Chapter 9)
– The theory of constraints (Chapter 10)
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Spoilage in Process Costing
There are two options to account for normal
spoilage:
– Count the number of spoiled units, prepare a separate
equivalent unit computation with the cost per unit of
the spoiled goods, and then allocate the cost of
spoilage to the good units produced
– Omit the spoiled units in computing the equivalent
units of production; the spoilage cost is thus included
as part of total manufacturing costs
Blocher,Stout,Cokins,Chen, Cost Management 4e
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Chapter Summary
• Process costing is a product costing system that
accumulates costs according to processes or
departments and assigns them to a large number of
nearly identical products
• The typical firm that uses process costing employs a
standardized production process (often mass
production) to manufacture homogeneous products
• Process costing is used in industries such as
chemicals, oil refining, textiles, paints, flour, canneries,
rubber, steel, glass, cement, and sporting goods
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008
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Chapter Summary (continued)
• Each period, each department prepares a production
cost report
• Five steps in preparing a production cost report:
– Analyze the physical flow of units
– Calculate equivalent units for each manufacturing cost
element (FIFO or Weighted-average method)
– Determine total costs for each manufacturing cost
element (FIFO or Weighted-average method)
– Compute cost per equivalent unit for each manufacturing
cost element
– Allocate total manufacturing costs for the period to units
completed and to ending WIP
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008
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Chapter Summary (continued)
The weighted average method includes all costs in
calculating unit costs, including both costs incurred during
the period and those in the beginning WIP inventory (i.e.,
those costs brought forward from last period into the
current period)
– Thus, prior period and current period costs are
averaged
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008
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Chapter Summary (continued)
The FIFO method includes in calculating equivalent unit
cost only costs incurred and work effort performed during
the current period; thus, the FIFO costs can be
considered “current period manufacturing costs per
equivalent unit” for each cost element
– For cost assignment purposes, the cost of units from the
beginning WIP inventory will include a combination of last
period’s costs + the current period’s (FIFO) cost to
complete the units
– Units that are both started and completed during the period
are assigned the current period costs per equivalent unit
– Ending inventory is assigned the current (FIFO) period’s
costs
Blocher,Stout,Cokins,Chen, Cost Management 4e
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Chapter Summary (continued)
• Transferred-in costs, or prior department costs, are
costs of work performed in an earlier department that
are transferred into the present department
– These costs are treated like an additional cost element
• Activity-based costing (ABC), the contribution
methods, and the theory of constraints are important
enhancements to a process costing system
• There are two options when accounting for spoilage:
– Calculate the cost per spoiled unit and allocate it to the
good units
– Omit the spoiled units from the computation
Blocher,Stout,Cokins,Chen, Cost Management 4e
©The McGraw-Hill Companies 2008