Chapter 17: Process Costing system - Cost 301 - Cost ...

[Pages:12]Chapter 6: Process Costing system

Introduction:

As we learn from chapter 5, There are two types of product costing systems

which used in accumulating product cost in manufacturing firms.

1- Job Costing System

2- Process Costing System

)(

The type of industry determining which system is used

Job Costing System Is a product costing system in which costs are assigned to batches or job orders of production

Assign costs to Distinct units of product or service

Used when the firm produce distinct bath of production called job order Like:

Film Production , Building House Aircraft Manufacture

Process Costing System Accumulates the costs of a production process and assigns them to the products that comprise the organization's output. assign costs to masses ( Similar units) and compute unit cost on an Average base Used by companies that produce large number of identical units Like:

Chemicals, Microchips, Gasoline Beer, Textiles

In This chapter we will use process costing system in determining: 1- Product cost [ cost per unit produced] 2- Cost of goods sold [ units sold * cost per unit] 3- Cost of ending inventory [ units in ending inventory * cost per unit]

Nature of process costing system: 1- there are many stages to produce the product

Cost of goods sold

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Chapter 6: Process Costing system

Determining Product cost [Cost per unit]

The determination of product cost [total product cost] and then the cost per unit produced depending in three cases:

Case 1: Zero beginning and Ending work in process inventory At this case the unit cost can be averaged by dividing total cost in a given accounting period by total units produced in that period.

Cost per unit =

Total department cost

.

Number of units completed and transferred out

Exercise 1

The following data extracted from Nour Co. which has a two manufacturing departments ( Assembly and Testing ), books for the month of January 2011, show the followings:

Physical units for January 2011 Work in process beginning inventory (Jan 1) Started during January Completed and transferred out during January Work in process, Ending inventory (Jan 31)

0 Units 400 Units 400 Units

0 Units

Total Costs For January 2011 Direct material Conversion costs Total assembly department costs added during Jan

$32,000 $24,000 $56,000

Requirement 1- Compute the cost per unit completed and transferred to the Testing Department during January 2004?

Answer:

Cost per unit = Total assembly department cost . Number of units completed and transferred

= 56,000 / 400 = $140 per unit

This case shows that: in a process costing system , unit costs can be averaged by dividing total cost in a given accounting period by total units produced in that period.

Because each unit is identical

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Chapter 6: Process Costing system

Case 2: Zero Beginning But some ending work in process inventory

:

1- Units to be accounts for ( Summarize the flow of physical Units ) 2- Equivalent units ( Compute output in term of equivalent unit ) 3- Total cost 4- Cost per equivalent unit 5- Assignments of costs

Meaning of Equivalent units: ( ) or ( ) 01 ) %01 ( 011 :

01 = 1200.*011 ) %00 ( 011

:

) DM , C C ( Equivalent Units

%01 .

Exercise 2

The following data extracted from Nour Co. which has a two manufacturing departments ( Assembly and Testing ), books for the month of February 2004, show the followings:

Physical units for February 2004 Work in process beginning inventory (Jan 1) Started during January Completed and transferred out during January Work in process, Ending inventory (Jan 31)

0 Units 400 Units 175 Units 225 Units

The 225 partially assembled units are fully processed with respect to direct materials, an assembly department supervisor estimates that the partially assembled units are on average 60% complete from the respective of conversion costs.

Total Costs For February 2004 Direct material Conversion costs Total assembly department costs added during Jan

$32,000 $18,600 $50,600

Requirement 1- Compute the cost of goods completed and transferred to the refining Department during February.

Note: Degree of completion in this department (Direct material 100% , Conversion cost 60%)

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Chapter 6: Process Costing system

Answer:

1- Physical Units to account for: Work In process, Beginning + Started During the Year = Units To account for

2- Equivalent Units : * Started And Completed * Work In process, Ending

= Total Equivalent Unit 3- Total Costs:

* For Work In process, Beginning * Costs Added in Current Period = Total Cost To account for 4- cost per Equivalent unit

5- Assignment costs * Started and completed (175 U)

Total cost of units completed * Work In process, ending (225 u)

Total Work in process, end

Physical Units

Direct Material

Conversion costs

0 400 400

175 225

225*100%

500

175

175

225

135

225*60%

400

310

0 50,600 50,600

0 32,000 32,000

0 18,600 18,600

32,000/400= 18,600/310=

80

60

24,500 24,500

175*80 14,000

175*60 10,500

26,100

225*$80 18,000

135*$60 8,100

= Total cost to account for

50,600

Student Notes:

1- Very important formula:

W.I.P + Started = Completed + W.I.P

beg

end

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Chapter 6: Process Costing system

Case 3: Some beginning and some ending Work in process inventory ) Average Method ( ) FIFO (

Average method cost :

Exercise 3-1: At the beginning of march 2004, Nour Co. had 225 partially assembled DG-19

units in the assembly department, it started production of another 275 units in march,2004 , data for assembly department for march are:

Physical units for march:

Work in process, beginning inventory ( March 1 )

Direct material ( 100% completed ) Conversion costs ( 60% completed )

Started during March:

Completed and transferred out during March

Work in process, ending inventory ( March 31 )

Direct material ( 100% completed ) Conversion costs ( 50% completed )

225 units

275 Units 400 Units

100 Units

Total costs for March 2004 Work In process, beginning inventory

Direct materials ( 225 equivalent units * $80 per unit ) Conversion costs ( 135 equivalent units * $60 per unit ) Direct material cost added during march Conversion cost added during march Total costs to account for

$18,000 $ 8,100

$26,100 $19,800 $16,380 $62,280

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Chapter 6: Process Costing system

1- Physical Units to account for: Work In process, Beginning + Started During the Year = Units To account for

2- Equivalent Units : * Started And Completed * Work In process, Ending

= Total Equivalent Unit 3- Total Costs:

* For Work In process, Beginning * Costs Added in Current Period = Total Cost To account for 4- cost per Equivalent unit

5- Assignment costs * Started and completed (225 U)

Total cost of units completed * Work In process, ending (225 u)

Physical Units

Direct Material

Conversion costs

225 275 500

400 100

100*100%

500

400

400

100

50

100*50%

500

450

26,100 36,180 62,280

18,000 19,800 37,800

8,100 16,380 24,480

37,800/500= 24,480/450=

$75.60

$54.40

52,000 52,000

400*$75.60 400*$54.40

30,240

21,760

Total Work in process, end = Total cost to account for

10.280 62.280

100*$75.60 50*$54.40

7,560

2,720

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Chapter 6: Process Costing system

First In First Out ( FIFO) : Equivalent units

Assignments of cost

1- Physical Units to account for: Work In process, Beginning + Started During the Year = Units To account for

2- Equivalent Units : * Started And Completed (400 Units) From Beginning WIP

Started and Completed

* Work In process, Ending

= Total Equivalent Unit 3- Total Costs:

* For Work In process, Beginning * Costs Added in Current Period = Total Cost To account for 4- cost per Equivalent unit

5- Assignment costs * Started And Completed (400 Units) Cost forwarded From Beginning WIP (225 units)

Started and Completed (175 units)

* Work In process, Ending

= Total cost of units completed

Physical Units

225 275 500

Direct Material

Conversion costs

225

225*0%

175

175*100%

100

100*100%

500

0

90

225*40%

175

175

175*100%

100

50

275

315

26,100 36,180 62,280

0 19,800 19,800

0 16,380 16,380

19,800/275= 16,380/315=

$72

$52

26,100 4,680

21,700

52,480 9,800

62,280

0*$72 175*$72

100*$72

0 12,600

7,200

4,680

90*$52

9,100

175*$52

2600

50*$52

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Chapter 6: Process Costing system

Use the following information for the next 3 questions. Salmon Manufacturing Company uses a process costing system. Direct materials are added at the beginning of the process. During January, Department Q had a beginning inventory of 2,000 units, 25% complete for conversion costs. During the month 14,000 units were started and there were 1,000 units in ending inventory, 60% complete for conversion costs.

2. Using FIFO process costing, the equivalent units for direct materials for the month were a. 13,600 b. 14,000 c. 16,000 d. 15,600

3. Using weighted average process costing, the equivalent units for direct material for the month were a. 13,600 b. 14,000 c. 16,000 d. 15,600

4. Using weighted average process costing, the equivalent units for conversion costs for the month were a. 14,100 b. 14,000 c. 16,000 d. 15,600

1- Physical Units to account for: Work In process, Beginning + Started During the month = Units To account for

2- Equivalent Units : * Started And Completed (15,000) From Beginning WIP

From Started During Month

* Work In process, Ending

= Total Equivalent Unit

Physical Direct Conversion

Units Material

costs

2,000 14,000 16,000

2,000

0

1,500

2,000*0%

2,000*75%

13,000

13,000

13,000

13,000*100% 13,000*100%

1,000

1,000

600

1,000*100% 1,000*60%

16,000

14,000

15,100

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