Professional Documents
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Process-Costing Systems
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 14 - 1
Learning Objective 1
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Introduction to Process Costing
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing Compared With
Job Costing
Direct Materials
Direct Labor
Indirect Resource Cost
Finished Cost
Cost of
of Goods
Goods
Goods Sold
Sold
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing Compared With
Job Costing
Direct Materials
Direct Labor
Indirect Resource Cost
Finished Cost
Cost of
of Goods
Goods
Goods Sold
Sold
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 2
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Physical Units and Equivalent
Units
Step 1
Track the physical flow in units.
Step 2
Compute output in terms of equivalent units.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Compute Output in Terms of
Equivalent Units
Step 2
Flow of
Step 1 Physical Direct Conv.
Units Mtls. Costs
Started and completed 20,000 20,000 20,000
Ending WIP 5,000 5,000 1,250
Units to account for: 25,000
Equivalent units 25,000 21,250
100% 25%
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 3
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Calculation of Product Costs
Step 3
Summarize total costs to account for.
Step 4
Compute the cost per equivalent unit.
Step 5
Assign costs to units completed and
to units in ending work in process.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Production Cost Report
Steps 3 and 4
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Production Cost Report
Step 5
Units completed and transferred out:
20,000 × (2.80 + 2.00) $ 96,000
Units in ending inventory:
Materials: 5,000 × 2.80 14,000
Conversion: 1,250 × 2.00 2,500
Total costs $112,500
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Journal Entries
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Journal Entries
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objectives 4 and 5
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
First-In, First-Out Method
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
Step 2
Direct Conversion
Materials Costs
Completed 31,000 31,000
+ Ending WIP 2,000 1,000
= Equivalent units 33,000 32,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
Steps 3 and 4
Total Direct Conversion
Costs Materials Costs
Beginning WIP $ 9,360 $ 8,060 $ 1,300
Costs added 56,140 41,440 14,700
Costs to account for $65,500 $49,500 $16,000
÷ Equivalent units 33,000 32,000
= Cost per EU $ 2.00 $ 1.50 $ .50
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
Step 5
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 2
Direct Conversion
Materials Costs
Completed 31,000 31,000
+ Ending WIP 2,000 1,000
– Beginning WIP 5,000 2,000
= Equivalent units 28,000 30,000
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 3
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 5
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Differences Between FIFO and
Weighted-Average Methods
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Transferred-in Costs in
Process Costing...
– treat transfers from a previous department
similar to direct material added at the
beginning of processing.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 6
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing in a JIT System
The “something” is a
The “when” is
production, purchasing,
as needed.
or delivery activity.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Industry Characteristics
– Sequential arrangement of production
activities
– Reduction of set-up times
– Scheduling of production as needed, by use
of a “demand-pull” system
– Cross-training of employees
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing in a JIT System
In just-in-time production systems,
inventory of work in process is typically
small compared to the costs of goods
produced and sold.
The cost of tracking work in process
exceeds the benefits for many companies.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing
What is backflush
costing?
It is an accounting
system that applies
costs to products
only when the
production is
complete.
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Principles of Backflush Costing
Materials Conversion
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example
Speaker Technology, Inc., recently
introduced backflush costing and JIT.
Model AX27 Standard material cost: $14
Standard conversion cost: $21
Actual production for the month: 400 units
Actual materials purchased: $5,600
Actual conversion costs: $8,400
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example
The backflush costing system has only three
accounts related to production:
1 Materials and parts inventory
2 Conversion costs
3 Finished goods inventory
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 7
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
How Process-Costing Systems
Track Costs to Products
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
How Process-Costing Systems
Track Costs to Products
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
End of Chapter 14
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 14 - 45