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College of San Mateo Accounting 131 . |
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Chapter 6
Learning Objectives 1.Record the flow of materials, labor, and overhead through a process costing system.. Lecture Notes A. Job-Order Costing vs. Process Costing. Process costing is used in industries that produce basically homogenous products such as bricks, flour, and cement on a continuous basis. 1. Similarities between job-order and process costing. There are some similarities between job-order and process costing systems:a. The same basic purpose exists in both systems-to assign material, labor, and overhead cost to products. B. Overview of Process Costing. Manufacturing costs are accumulated in processing departments in a process costing system. A processing department is any location in the organization where work is performed on a product and where materials, labor, and overhead costs are added to the product. Processing departments should also have two other features. First, the activity performed in the processing department should be essentially the same for all units that pass through the department. Second, the output of the department should be homogeneous. In process costing, the average cost of processing units for a period is assigned to each unit passing through the department. Two process costing methods are illustrated in the text-the weighted-average method and the FIFO method. While the FIFO method provides more current cost data for decision-making and performance evaluation purposes, it is more difficult to grasp. For that reason, the FIFO method is covered in an appendix. C. Equivalent Units of Product. In order to calculate the average cost per unit, the total number of units must be determined. Partially completed units pose a difficulty that is overcome using the concept of equivalent units. Equivalent units are the equivalent, in terms of completed units, of partially completed units. The formula for computing equivalent units is: Equivalent units = (Number of partially completed units x Percentage completion) Equivalent units are the number of complete, whole units one could obtain from the materials and effort contained in partially completed units. SUGGESTION: The following example can be used to illustrate the equivalent units concept. A company which had no beginning inventory completed 100 units last month. In addition, the company worked on another 60 units that were 40% complete. Ask students to identify the number of units that were produced during the period. Point out that simply adding up the total number of units that were worked on (100 + 60 = 160) would provide a misleading answer since the 60 units in ending inventory are only 40% complete. Ask the question, "If all work was directed to finishing products before starting any others, how many units could have been made in this period?" In terms of totally completed units, the amount of effort expended was equivalent to the production of 124 units (100 + 60 x 40%). Under the weighted-average method, the equivalent units for a particular cost category (e.g., materials or conversion cost) is computed by adding together the number of units completed and transferred out to the next department during the period and the equivalent units in the ending work in process inventory in the department. Equivalent units of production = (Units transferred to the next department or to finished goods + Equivalent units in ending work in process inventory) SUGGESTION: Students are often puzzled by the treatment of beginning inventory under the weighted-average method since work performed in prior periods is included in the equivalent units. Point out that this is called the weighted-average method because it averages together beginning inventory and the work that was performed in the current period. Costs and units are treated consistently. Both the equivalent units and the costs that go into the unit cost calculations under the weighted-average method include amounts already in beginning inventory. D. Production Report. The purpose of a production report is to summarize all of the activity that takes place in a department's work in process account for a period. A production report consists of three parts:
E. Production Report: Weighted-Average Method. Emphasize that the weighted-average method does not attempt to separate units in the beginning inventory from units started during the current period. Costs and units from beginning inventory are blended together with costs and units from the current period. 1. Quantity Schedule and Equivalent Units. The first step in preparing a production report is to prepare a quantity schedule, which shows the physical flow of units through the department. This schedule allows managers to see at glance how many units moved through the department during the period. Using the quantity schedule, the equivalent units can be easily computed. F. Operation Costing. The costing systems discussed in Chapters 3 and 4 represent the two ends of a continuum. On one end there is job-order costing and on the other there is process costing. Between the two extremes, there are many "hybrid" systems. Operation costing is an example of such a hybrid system. It is used in situations where products have some common as well as individual characteristics. TVs, for example, have some common characteristics in that all models must be assembled and tested following the same basic steps. However, each model has different components with different costs. The costs of the components (materials) would be charged to a batch of a particular model individually, as in job-order costing, but the conversion costs may be assigned using process costing. |