Review the Last class

▪ Why do you need job costing ?

▪ Why not simply divide the total
cost/number of unit ?
 Review the Last class

Direct Labour cost 6,00,000

Direct Labour Hours 10000
Machine Hour 5000
Overhead Cost 6,00,000

Activa splendor
₹
Direct Material ₹ 1,000.00 2,000.00
₹
Direct Labour Cost ₹ 2,700.00 6,500.00
Direct Labour Hours 100 200
Machine Hours 40 110
Calculate the predetrmined overhead Rate under three suggested allocation Base
Calculate the cost Job of Activa and Splendor using three different base
Which Method you will prefer ?

2
 Review the Last class
LaPlatt & Associates is an accounting firm that provides audit, tax, and accounting
services to medium-size retail companies. It employs 50 professionals (10 partners
and 40 associates) who work directly with clients. The average expected total
compensation per professional for the year is $120,000. The services of LaPlatt are
in high demand, and each professional works for clients to their maximum of 1,600
billable hours. All professional salaries are traced to individual client service
summaries. All costs other than professional salaries are included in a single
indirect cost pool (professional support). The indirect costs are assigned to service
summaries using professional hours as the allocation base. The expected amount of
indirect costs for the year is $5,200,000.

a. Compute the budgeted indirect cost rate per hour of professional service.
b. LaPlatt & Associates is bidding on tax and audit services for a potential client that
are expected to require 100 hours of professional service time. Calculate the
estimated cost of the work using average professional wage rates and basing indirect
costs on estimated service time
Process Costing
What Is Process Costing
 Process Costing
▪ Process costing is a system where the unit cost of a product or
service is obtained by assigning total costs to many identical or
similar units of output.

▪ Unit costs are calculated by dividing total costs incurred by the

number of units of output from the production process.

▪ Each unit receives the same or similar amounts of direct materials

costs, direct manufacturing labor costs, and indirect
manufacturing costs (manufacturing overhead).
 Difference Between Job-Order
and Process Costing Systems
▪ Job-Order Costing
▪ Each unique product or batch is
considered a job for which cost
information is needed
▪ Necessary to trace manufacturing costs
to specific jobs
▪ When completed, cost of job is removed
from Work in Process and included in
Finished Goods

Slide 3-7 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
 Difference Between Job-Order
and Process Costing Systems
▪ Process Costing
▪ Large quantities produced of
homogeneous products
▪ Average cost = total costs divided by total
number of items produced
▪ When completed, number of units
completed times average cost
determines cost to be moved from WIP
to Finished Goods

Slide 3-8 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
 Test Your Knowledge 1

Which of the following characteristics are

associated with a process costing system?
a. Heterogeneous products
b. Homogeneous products

Answer: b
▪ Heterogeneous products are unique
▪ Homogeneous products are identical
▪ Process costing is associated with
identical products

Slide 3-9 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
 Test Your Knowledge 2

Which of the following characteristics are

associated with a process costing system?
a. Continuous production
b. Discontinuous production

Answer: a
▪ Job order costing is associated with
discontinuous production
▪ Process costing is associated with
continuous production

Slide 3-10 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
 Test Your Knowledge 3

Which of the following characteristics are

associated with a process costing system?
a. Costs are traced to jobs
b. Costs are traced to processing
departments

Answer: b
▪ Job order costing requires tracing costs to
jobs
▪ Process costing is associated with tracing
costs to departments
Slide 3-11 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
 Test Your Knowledge 4

An example of a business requiring a

process costing system would be a(n):
a. Custom cabinet shop
b. Antique furniture restorer
c. Soap manufacturer
d. Automobile repair shop

Answer: c
A soap manufacturer produces many identical
units

Slide 3-12 Learning objective 1: Describe how products flow through departments
and how costs flow through accounts
 Process-Costing Cost
Categories
▪ Process-costing systems separate costs into cost categories
according to when costs are introduced into the process.

1. Direct materials are usually added at the beginning of the

production process, or at the start of work in a subsequent
department down the assembly line.

2. Conversion costs are generally added equally along the production

process.
Three Key Concepts in Process
Costing

• Normal cost of Process and Decision

Making

• Equivalent Units and Decision Making

• Join Product and Decision Making

 Normal cost of Process and
Decision Making

• Normal Loss -Normal Loss is a loss

that takes place due to the inherent
nature of the raw materials and
process of production under
ordinary circumstances.

• Abnormal Loss - Abnormal Loss

refers to a loss that arises due to
unexpected events like defective
material, carelessness, machinery
breakdown, etc.
• Normal cost per unit=(Total cost-realization
from normal loss)/ (Input-normal loss)
 Equivalent Units: A Key
Concept
▪ By definition, units in work-in-process
inventory at both the beginning and end
of the period are only partially complete
(finished units are transferred out).
▪ Equivalent units is a concept expressing
these partially completed units.
▪ Equivalent units refers to the amount of
manufacturing activity that has been4-17

applied to a batch of physical units.

 Calculating Unit Cost
▪ Equivalent Units
▪ Partially completed units are converted to a
comparable number of completed units, called
equivalent units
▪ Multiply the number of units by the percent
complete to calculate the equivalent units
▪ 100 units that are 50% complete are equivalent to
50 complete units (100 x 50%)
▪ Equivalent units may be different for material
and conversion costs if materials and
conversion costs enter production at different
times.

Slide 3-18 Learning objective 2: Discuss the concept of an equivalent unit

Equivalent Units Example
Two half completed products are
equivalent to one completed product.

+ = l

So, 10,000 units that are 70% complete

are equivalent to 7,000 complete units.

4-19
 Calculating Equivalent Units
▪ Equivalent units are normally calculated
for materials and conversion costs
▪ The equivalent units produced is the sum
of the units finished and the units in
ending work in process
▪ Units finished are always 100% complete
in terms of materials and conversion costs
▪ Multiply the number of units in ending
work in process by the corresponding
percent complete to calculate the
equivalent units

Slide 3-20 Learning objective 3: Calculate the cost per equivalent unit
 Test Your Knowledge 6
At Rainier Chemical, conversion costs (labor and
overhead) enter evenly throughout the production
process. At the end of the year, 200 units in work
in process are 80 percent complete. With respect
to conversion costs, how many equivalent units are
in work in process?
a. 200
b. 160
c. 360
d. 280
Answer: b
200 units * 80% complete = 160 equivalent units
Slide 3-21 Learning objective 3: Calculate the cost per equivalent unit
 Test Your Knowledge 7
▪ Beginning Work in Process 500 units
% complete = 65% materials, 45% conversion
▪ Units started: 2,300
▪ Units finished: 2,500
▪ Ending Work in Process 300 units
% complete = 85% materials, 50% conversion

1. Calculate equivalent units for materials

Units finished 2,500 X 100% 2,500
Ending Work in Process 300 X 85% 255
Equivalent Units - Materials 2,755

Slide 3-22 Learning objective 2: Discuss the concept of an equivalent unit

 Test Your Knowledge 8
▪ Beginning Work in Process 500 units
▪ % complete: 65% materials, 45% conversion
▪ Units started: 2,300
▪ Units finished: 2,500
▪ Ending Work in Process 300 units
▪ % complete: 85% materials, 50% conversion

2. Calculate equivalent units conversion

Units finished 2,500 X 100% 2,500
Ending Work in Process 300 X 50% 150
Equivalent Units - Conversion Costs 2,650

Slide 3-23 Learning objective 2: Discuss the concept of an equivalent unit

 Calculating Unit Cost
▪ Cost Per Equivalent Unit
▪ The average unit cost in a process costing
system is referred to as cost per equivalent
unit
▪ The numerator represents the total cost for
which a processing department must account
in each period
▪ Divide by the units completed plus the
equivalent units in ending Work in Process

Slide 3-24 Learning objective 3: Calculate the cost per equivalent unit
 Test Your Knowledge 9
At Rainier Chemical, labor cost in Work in Process at the
start of April was $50,000 and $450,000 of labor was
incurred during the month. 200 units are in WIP at the end
of April and they are 80% complete with respect to labor.
840 units were completed during the month. What is the cost
per equivalent unit for labor?
a. $225
b. $481
c. $536
d. $500
Answer: d
Total labor cost = $50,000 + $450,000 = $500,000
Equivalent units = 840 units + 200 units * 80% = 1,000 units
Cost per equivalent unit = $500,000 / 1,000 = $500
Slide 3-25 Learning objective 3: Calculate the cost per equivalent unit
Departmental Production
Report

Analysis of Calculation
physical flow of equivalent
of units units

Production
Report

Computation Analysis of
of unit costs total costs

4-26
Equivalent Units of Production –
Weighted-Average Method
The weighted-average method . . .

▪ Makes no distinction between work done in the

prior period and work done in the current period.
▪ Blends together units and costs from the prior
period and the current period.
▪ The FIFO method is a more complex method and
is rarely used in practice.

4-27
 Production Report
Example (1 of 2)
▪ MVP Sports Equipment Company makes baseball
gloves in two departments, Cutting and Stitching.
▪ MVP uses the weighted-average process costing.
▪ Material is added at the beginning of the Cutting
Department, while conversion is incurred uniformly
throughout the process.
▪ Using the following information for the month of
March, let’s prepare a production report for the
Cutting Department.

4-28
 Production Report
Example (2 of 2)
Work in process, March 1: 20,000 units Cost
Materials: 100% complete $ 50,000
Conversion: 10% complete 7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units
Work in process, March 31: 10,000 units
Materials 100% complete
Conversion 50% complete

Costs incurred during March

Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs 193,500
Total costs to account for $ 340,700

4-29
Production Report Example
– Units Accounted For
① Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000
Total units accounted for 50,000

4-30
Production Report Example
– Equivalent Units (1 of 2)
② Calculation of Equivalent Units
Conversion Equivalent Units
Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000 50% of 10,000 units

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Beginning inventory % is not used in weighted-average method.

4-31
Production Report Example -
Equivalent Units (2 of 2)
② Calculation of Equivalent Units

Conversion Equivalent Units

Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000 100% of 10,000 units, all
Total units to account for 50,000 material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

4-32
Learning Objective 4-4 – Compute the cost
per equivalent unit under the weighted-
average method of process costing.

4-33
4-33
Computation of Unit Costs

Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units $2.80 + $4.46

$200,700 ÷ 45,000 equivalent units
4-34
4-35
 Production Report Example –
Total Costs (1 of 2)

Analysis of total costs

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 4-36
50,300
Total costs accounted for $ 340,700
Production Report Example
– Total Costs (2 of 2)
Analysis of total costs
Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

4-37
Production Report Example
– Costs Accounted For
Analysis of total costs
Cost of goods completed and transferred during March
40,000 units × $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units × $2.80 per equivalent unit $ 28,000
Conversion:
5,000 equivalent units × $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
All costs
Total costs accounted for $ 340,700
accounted for

4-38
Learning Objective 4-6 – Prepare a
departmental production report under
weighted-average process costing.

4-39
4-39
MVP Sports Equipment Report
Example MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Direct
Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

4-40
Departmental Production
Report
Analysis of
physical flow
of units
Calculation
of equivalent
units
Computation
of unit costs

Analysis of
total costs

4-41
 Process Costing and Incremental
Analysis
▪ Whenever we make a decision, we need to
perform incremental analysis
▪ We need to determine the change in
revenue and the change is cost, assuming a
particular alternative is selected
▪ If the net change is positive, the decision
alternative is “good” since it will have a
positive impact on firm profit
▪ If the net change is negative, the decision
alternative is “bad” in that it will have a
negative impact on firm profit

Slide 3-42 Learning objective 5: Describe a production cost report

 Process Costing and Incremental
Analysis
▪ When using process costing information
to make a decision, we have to be careful
to recognize that the cost per unit is the
average of fixed and variable costs
▪ It does not measure the change in cost
associated from producing an additional
unit
▪ Generally, total fixed costs do not change
when one additional unit is produced

Slide 3-43 Learning objective 5: Describe a production cost report

 Process Costing and Incremental
Analysis
▪ A company has no beginning or ending Work in
Process
▪ Variable costs are materials and labor
▪ Fixed cost is manufacturing overhead
▪ Cost summary:

Slide 3-44 Learning objective 5: Describe a production cost report

 Process Costing and Incremental
Analysis
▪ Decreasing price to $2.90 will increase
demand to 275,000 units
▪ $2.90 is less than equivalent cost per unit
▪ Incremental analysis: profit will increase

Slide 3-45 Learning objective 5: Describe a production cost report

 You Get What You Measure

Slide 3-46