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CHP4 Process Costing

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CHP4 Process Costing

Uploaded by

SURAIYA IBRAHIM
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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CHAPTER 4: PROCESS

COSTING
LEARNING OBJECTIVES
• Distinguish between job order costing and
process costing
• Understand the flow of production and how
manufacturing costs are traced to process
costing
• Compute equivalent units
• Use process costing in a second or later
production department
PROCESS COSTING V. JOB-ORDER COSTING
Process Costing Job Order Costing
A homogeneous product is Many jobs are worked on
produced on a continuous basis. during each period.
Costs are accumulated by Costs are accumulated by
department. job.
The departmental production
The job cost sheet is the key
report is the key document
document for accumulating
showing the accumulation and
costs.
disposition of costs.
Process costing is used for Job order costing is used for
mass production or lengthy small batches or very small
production runs production runs
COST FLOW IN PROCESS COSTING

There are three (3) building blocks of process


costing, namely:
1. conversion costs,
2.equivalent costing and
3.inventory flow assumption.
CONVERSION COSTS

• Conversion costs are the combination of


direct labor costs and manufacturing
overhead cost.
• In process costing we consider the three
manufacturing cost into two categories:
– Direct material costs
– Conversion costs – (direct labor + manufacturing
overhead costs)
EQUIVALENT COSTS
• Equivalents costs are calculated in order to find cost per
completed unit.
• Since production processes are continuous, we separate
inventory costs into two categories;
1. work in process inventories (unfinished goods/ partially
completed)
2. finished goods inventory.
The formula for equivalent costs is as follows:
Equivalent units of production =
No. of partially complete physical units x % of process completed
* Refer exhibit 4.2 for example.
VISUAL PERSPECTIVE OF EQUIVALENT UNITS
OF PRODUCTION
GAH 30 SDN BHD
Mixing Department
Production Units Ending
work in
process
200 units 300 units 100 units
20% completed Unit started and completed 30% completed
Timeline

Jan 2015
Beginning work in process 400 units started during Feb 2015
Unit completed and
transferred to next department:
200 + 300 500 units
Ending work in process:
100 units x 30% 30 units
Equivalent units of production: 530 units
INVENTORY FLOW ASSUMPTIONS

• Two type of inventory flow assumption:


1.First in First out (FIFO) method
2.Weighted average method
Normally, manufacturing companies consider
using weighted average method because it is
easier to calculate and provide the same
benefits as using FIFO method.
* Refer Exhibit 4.3 for examples
RECORD KEEPING:
COMPUTE AND APPLY COSTS
To provide production report, we need five-step
process costing procedure.
• Step 1: Measure the physical flow of production
• Step 2: Calculate the equivalent units of
production
• Step 3: Measure the product costs for which to
account
• Step 4: Compute the costs per equivalent unit
• Step5: Assign product cost to batches of work.
» We’ll walk through each of these steps now
Step 1: Measure the physical flow of
production
• The physical flow of production can be in any
stage of completion and it is calculated as follows:
– Beginning work in process =
Physical unit x 100%
– Started and completed in current period =
Physical unit x 100%
– Ending work in process =
Physical unit x % of work completed in the
current period
Production Report Format - step 1
Flow of Production:
• Unit to Account For:
– Unit in BWIP (% completed) XXX
– Unit Started during the period XXX
Total Unit to Account for: XXXX**
• Unit Accounted for:
– BWIP XXX
– Unit Started and completed XXX
– Unit completed and transfer out: XXX
– Unit in EWIP XXX
Total Unit Accounted for: XXXX**
** Note: ‘‘Total units to account for’’ must equal the ‘‘Total units
accounted for.’’
* Refer text book page 44 For example
Production Report Format – step 2
Materials Conversion Costs
Beginning WIP: Beginning WIP:
Physical units X 100% = xxx Physical units X 100% = xxx

Started & Completed: Started & Completed:

Physical units X 100% = xxx Physical units X 100% = xxx

Ending WIP: Ending WIP:


Physical units X % of work Physical units X % of work
completed in the current completed in the current
period = xxx period = xxx
Equivalent Units
xxxxx xxxxx

* Refer text book page 44 For example


Step 3: Measure the product costs for which to account
Step 4: Compute the costs per equivalent unit
• To measure step 3 and 4, we need additional information on
cost of production
STEP 3
• Cost to be account for: materials Conversion Costs
– BWIP RMxxx RMxxx*
– Current period cost RMxxx RMxxx *
Total cost to be account for RMxxx RMxxx
STEP 4:
÷ total equivalent unit xxxxx xxxxx
(as per refer step 1) __________________
Cost per equivalent unit (RM) xxx xxx
* Conversion costs = Direct labor cost +
Manufacturing overhead costs)
Step5: Assign product cost to batches
of work
• STEP 5
• Cost accounted for:
• Unit completed and transfer out
– (Unit completed and
transfer out x (cost/unit DM + CC) XXX
• EWIP
– Direct Materials (DM)
– Unit EWIP x cost/unit DM XXX
– Conversion Costs (CC)
– Unit EWIP x cost/unit CC XXX
Total cost accounted for XXXX
* Refer text book page 45 For example
PROCESS COSTING WORK IN A SECOND OR
LATER PROCESSING DEPARTMENT

• When we transfer the product from one process to another


process (for example from mixing process to filing process);
we need to transfer out all the cost incurred at previously
processing department to the new processing department.
• These costs are namely transferred in cost.
• To account for transfer in costs, we need one more column to
our calculation in step 2-5
Unit completed and transfer out
= Physical unit x 100%
transfer in costs Illustration
BWIP GAH 30 SDN BHD
125 units, 30% Completed Filling Department
Production Units
Raw Materials added March 2015

Transfer in from 425 units completed


mixing
department
500 units** 25 Units
Started but not completed Conversion Cost added evenly
throughout production process

Start
50% completed
Transfer out to
Labeling Department
100% completed
Production Report Format
– Step 1 & 2
Production Report
GAH 30 SDN BHD
Month ended March 2015
STEP 1 STEP 2
Equivalent units
Flow of Production:
Physical Units Direct Conversion
Transferred In Materials Costs
Unit to Account For:
Unit in BWIP Xxx
Transferred in during the month Xxx
Total Unit to Account for Xxxx
Unit Accounted for:
Units completed and transfer out: Xxx Xxx xxx Xxx
Unit in EWIP Xxx xxx Xxx Xxx
Total Unit Accounted for: xxxx
Total equivalent units: xxxx xxxx xxxx
Production Report Format Step 3 - 5
Physical Direct Conversion
Flow of Production Units Transferred In Materials Costs
STEP 3 - 4
Cost to be account for:
BWIP xxxxx xxxxx xxxxx
Current period cost xxxxx xxxxx xxxxx
Total cost to be account for xxxxx xxxxx xxxxx
Divided by total equivalent unit xxxx xxxx xxxx
Cost per equivalent unit (RM) xxx xxx xxx
STEP 5
Cost accounted for:
= unit complete & transfer out
Unit completed and transfer out x (cost TI + DM + CC) xxxxx
EWIP:
Transferred-in Costs = TI unit x (cost TI) xxxxx
Direct Materials = DM unit x (cost DM) xxxxx
Conversion Costs = CC unit x (cost CC) xxxxx
Total cost accounted for xxxxx

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