Cost accounting intrudoction by akbari.ppt

Copyright © 2019, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Management and Cost accounting
Seventh Edition
Chapter 4
Process costing

Introduction
• In many industries, products are mass
produced, that is, relatively homogeneous
products are processed in a very similar
manner.
• Companies in these industries use process
costing.
• This chapter presents process-costing systems.

Key Differences Between Job Costing and Process Costing
BASIS FOR COMPARISON JOB COSTING PROCESS COSTING
Meaning Job costing refers to calculating the
cost of a special contract, work
order where work is performed as
per client's or customer's
instructions.
A costing method, in which the
costs which are charged to various
processes and operations is
ascertained, is known as Process
Costing.
Nature Customized production Standardized production
Assignment of cost Calculating cost of each job. First of all, cost is determined for
the process, thereafter spread over
the produced units.
Cost Center Job Process
Scope of cost reduction Less High
Transfer of Cost No transfer Cost is transferred from one
process to another
Identity Each job is different from another. Products are manufactured
consecutively and so they lose
their identity.
Cost Ascertainment Completion of the job. End of the cost period.
Industry type Job costing is suitable for the
industries which manufactures
products as per customer's order
Process costing is perfect for the
industry where mass production is
done.
Losses Losses are usually not segregated. Normal losses are carefully
ascertained and abnormal losses
are bifurcated.
Work-in-progress (WIP) WIP may or may not exist at the beginning or at the end of the financial year. WIP will always be present in the beginning or at the end of the accounting period.

Key Differences Between Job
Costing and Process Costing
• The costing method which is used for the ascertainment of the cost of each job is known as
Job Costing. Conversely, by process costing, we mean the costing technique used to
determine the cost of each process.
• Job Costing is performed where the products produced of a specialized nature, whereas
Process Costing is used where standardized products are produced.
• In Job Costing, the cost is calculated for each job, but in Process Costing first of all the cost
of each process is calculated which is then dispersed over the number of units produced.
• In job costing the cost center is the job itself while the process is the cost center in case of
process costing.
• In job costing each job requires special treatment. On the other hand, no such special
treatment is required for each process in process costing.
• There is no transfer of cost in job costing, from one job to another. However, the cost of the
last process is transferred to the next process in the process costing.
• The possibility of cost reduction is very less in Job Costing. In contrast to Process Costing,
the scope of cost reduction is comparatively high.
• In Job Costing, the cost is ascertained after the completion of the job, but in Process
Costing, the cost of each job is determined.
• In job costing, losses are not bifurcated. On the contrary, in process costing normal losses
are ascertained carefully, while the abnormal losses are bifurcated.
• In job costing, WIP may or may not be present at the end of the financial year. As against
this, WIP will always be present, irrespective of the quantity, in the beginning, or at the end
of the accounting period, in process costing.

Learning objectives
1 Recognise when process-costing systems
are appropriate
2 Describe key steps in process costing
3 Calculate and use equivalent units

Learning objectives
(Continued)
4 Demonstrate the weighted-average and first-
in, first-out (FIFO) method of process costing
5 Show how standard costs simplify process
costing
6 Apply process-costing methods to cases with
transferred-in costs

Process costing
• In a process-costing system, the unit cost of a
product or service is obtained by assigning total
costs to many identical or similar units.
• In a manufacturing setting, each unit is assumed
to receive the same amount of direct material
costs, direct manufacturing labour costs and
indirect manufacturing costs.

Process costing (Continued)
• The principal difference between process
costing and job costing is the extent of
averaging used to compute unit costs of
products or services.
• In a job-costing system, individual jobs use
different quantities of production resources.
• Thus, it would be incorrect to cost each job at
the same average production cost.

• In contrast, when similar or identical units of
products or services are mass produced and not
processed as individual jobs, process costing
averages production costs over all units
produced.

Direct materials
Direct labour Department Department
Indirect manu- A
B facturing costs
Finished goods Cost of goods sold

Learning objective 2
Describe key steps
in process costing

Five steps in process costing
• Step 1: Summarise the flow of physical units
of output.
• Step 2: Compute output in terms of equivalent
units.
• Step 3: Compute equivalent unit costs.

three cases in process costing
1) Process costing with zero opening and zero closing work-in-progress
stock
2) Process costing with zero opening work-in-progress stock but some
closing work-in-progress
stock
3) Process costing with both some opening and some closing work-in-
progress stock

Five steps in process costing
(Continued)
• Step 4: Summarise total costs to account for.
• Step 5: Assign total costs to units completed
and to units in ending work-in-
progress stock.

Calculate and use equivalent units

Equivalent units
• Equivalent units is a derived amount of output
units that takes the quantity of each input
in units completed or in work-in-progress and
converts it into the amount of completed output
units that could be made with that quantity of
input.
• Equivalent unit calculations are necessary
when all physical units of output are not
uniformly completed during the period.

Equivalent units (Continued)
• The following information relates to Snowdon
Ltd, a manufacturer of skiing accessories.
• Ending work-in-progress stock is 100% complete
for materials and 20% complete for conversion.

Physical units (Step 1)
Physical
Flow of production units
Work-in-progress, opening 0
Started during current period 35,000
To account for 35,000
Completed and transferred out
during current period 30,000
Work-in-progress, closing (100%/20%) 5,000
Accounted for 35,000

Compute equivalent units (Step 2)
Equivalent units
Direct Conversion
Flow of production materials costs
Completed and
transferred out 30,000 30,000
Work-in-progress,
closing 5,000 (100%) 1,000
(20%)
Current period work 35,000 31,000

Compute equivalent unit costs
(Step 3)
Total production costs are £146,050.
Direct
Conversion
materials costs
£84,050 £62,000 Equivalent units
35,000 31,000 Cost per equivalent
unit £2.4014 £2.00

Summarise and assign total
costs (Steps 4 and 5)
• Step 4: Total costs to account for: £146,050
• Step 5: Assign total costs: Completed
and transferred out 30,000 × £4.4014
= £132,043 Work-in-
progress closing (5,000 units)
• Direct materials 5,000 × £2.4014 = 12,007
Conversion costs 1,000 × £2.00 = 2,000 Total
£146,050

Journal entries
• Journal entries in process-costing systems are
basically like those made in job-costing systems
with respect to direct materials and conversion
costs.
• The main difference is that in a process-costing
system, there is a separate work-in-progress
account for each department rather than for each
job.

Journal entries (Continued)
• Assume that Snowdon Ltd has two processing
departments – Assembly and Finishing.
• Snowdon Ltd purchases direct materials as
needed.
• What is the journal entry for materials?
Work-in-progress, Assembly 84,050
Accounts payable control 84,050
To record direct materials purchased and used.

• What is the journal entry for conversion costs?
Various accounts 62,000
To record Assembly Department conversion
costs.
• What is the journal entry to transfer completed
goods from Assembly to Finishing?

Work-in-progress, Finishing 132,043
To record cost of goods completed and transferred
from Assembly to Finishing during the period.

Flow of costs
Accounts Payable
Various Accounts
WIP Assembly
WIP Finishing
Finished Goods
84,050
62,000
84,050
62,000
132,043
14,007
132,043
Cost of Goods Sold

Demonstrate the
weighted-average and first-in,
first-out (FIFO) method of
process costing

Weighted-average method
• The weighted-average process-costing method
calculates the average equivalent unit cost of the
work done to date (regardless of the period in
which it was done).
• It assigns this cost to equivalent units completed
and transferred out, and to equivalent units in
closing work-in-progress stock.

(Continued)
• The weighted-average cost is the total of all
costs entering the work-in-progress account
(regardless of whether it is from opening work-
in-progress or from work started during the
period) divided by total equivalent units of work
done to date.

(Continued)
• Assume that Snowdon Ltd had 1,000 units in the
Assembly Department opening work-in-progress
stock.
• These units were 100% complete for materials
(£2,350) and 60% complete for conversion
(£5,200).
• Closing work-in-progress stock consisted of
5,000 units (100% materials) and (20%
conversion).

• Work-in-progress, opening:
100% material
60% conversion costs 1,000
Units in progress 35,000 36,000
• Units transferred out: 31,000
Units in closing stock: 100%
Material 20%
Conversion costs 5,000 36,000

• Partially completed units are converted into
equivalent units.
• Closing stock is only 20% complete for
conversion which equals 1,000 equivalent units
(5,000 × 20%).

Compute equivalent units
(Step 2) (Continued)
Materials
Conversion
Completed and
transferred 31,000
31,000 Closing
stock 5,000 1,000 Equivalent
units 36,000 32,000
100% 20%

(Step 3)
Materials
Conversion Opening stock £2,350
£5,200
Current costs 84,050 62,000
Total £86,400 £67,200
Equivalent units 36,000 32,000
Cost per unit £2.40 £2.10

• Work-in-progress opening stock:
Materials
£2,350 Conversion
5,200 Total opening stock
£7,550
+ Current costs in Assembly Department:
Materials £84,050
Conversion 62,000
Costs to account for £153,600

• This step distributes the department’s costs to
units transferred out:
31,000 units × £4.50 = £139,500
• And to units in closing work-in-progress stock:
£12,000 + £2,100 = £14,100
costs (Steps 4 and 5) (Continued)

• Costs transferred out:
31,000 × (£2.40 + £2.10) £139,500
• Costs in closing stock:
Materials 5,000 × £2.40 12,000
Conversion 1,000 × £2.10
2,100
• Total costs accounted for: £153,600

Journalising: weighted-average
• What are the journal entries in the Assembly
Department?
• Work-in-progress, Assembly 84,050
To record direct materials purchased and used.
• Work-in-progress, Assembly 62,000
Various accounts 62,000
• To record Assembly Department conversion costs.

Journalising: weighted-average
(Continued)
Work-in-progress, Finishing 139,500
• To record cost of goods completed and
transferred from Assembly to Finishing during
the period.

Key T-account: weighted-average
Work-in-progress stock, Assembly
Opening stock 7,550 Transferred
Materials 84,050 to finishing
139,000
Conversion 62,000
Balance 14,600

First-in, first-out method
• FIFO process-costing method assigns the cost
of the prior accounting period’s equivalent units
in opening work-in-progress stock to the first
units completed and transferred out.

(Continued)
• FIFO assigns the cost of equivalent units worked
on during the current period first to complete
opening stock, then to start and complete new
units and finally to units in closing work-in-
progress stock.
• This method assumes that the earliest
equivalent units in the work-in-progress,
Assembly account are completed first.

• A distinctive feature of the FIFO process- costing
method is that work done on opening stock
before the current period is kept separate from
work done in the current period.
(Continued)

• Assume that Snowdon Ltd uses FIFO.
• How many units will be in the quantity schedule
(Step 1)?
36,000 (same as weighted-average method).
• What are the equivalent units (Step 2)?
(Continued)

Materials Conversion
Completed and
transferred: From
opening stock 0 400
Started and completed
30,000 30,000
Closing stock 5,000 1,000
35,000 31,400

Materials Conversion
Completed
and transferred 31,000
31,000 Closing stock
5,000 (100%) 1,000 (20%)
36,000 32,000 Opening stock 1,000
(100%) 600 (60%) Equivalent units
35,000 31,400

Compute equivalent unit
costs (Step 3)
Materials Conversion Current costs
£84,050 £62,000 Equivalent units 35,000
31,400 Cost per unit £2.40 £1.975

Work-in-progress opening stock £7,550
Current costs:
Material 84,050
Conversion 62,000
Total £153,600
• Same as using weighted-average.

Costs transferred out:
From opening stock: £7,550
Conversion costs added:
1,000 × 40% × £1.975 790 £8,340
From current production:
30,000 × £4.375 131,250
Total £139,590

Work-in-progress closing stock:
Materials: 5,000 × £2.40 £12,000
Conversion:
5,000 × 20% × £1.975 1,975
Total £13,975

Costs transferred out £139,590
+ Costs in closing stock £13,975
= £153,565 (£35 rounding error)
• An alternative approach:
– Cost in closing stock £13,975
= Costs transferred out £139,625

Key T-account: FIFO
Work-in-progress stock, Assembly
Materials 84,050 to finishing 139,625
Conversion 62,000
Balance 13,975

Comparison of weighted-average
and FIFO methods
Weighted
average FIFO Difference
Costs of units
completed and
transferred out £139,500 £139,625 +£125 Work-
in-progress, closing
14,100 13,975 −£125 Total costs
accounted for £153,600
£153,600 0

• The weighted-average closing stock is higher
than the FIFO closing stock by £125.
• This results in a lower cost of goods sold and
hence higher operating income and higher
income taxes than does from the FIFO method.
and FIFO methods (Continued)

• Differences in equivalent unit costs of
opening stock and work done during the
current period account for the differences
in weighted-average and FIFO costs.
and FIFO methods (Continued)

Show how standard costs
simplify process costing

Standard-costing method
of process costing
• Setting standards for quantities of inputs needed
to produce output in companies
that use process costing is often relatively
straightforward.
• Standard costs per input unit may then be
assigned to these physical standards to
develop standard costs per output unit.

• Assume that Snowdon Ltd uses the standard-
costing method of process costing.
• Steps 1 and 2 are identical to the steps
described for the FIFO method.
• Step 3 is easier than that under weighted-
average and FIFO methods.
• Why?
of process costing (Continued)

• Because the cost per equivalent unit does not
have to be computed, as was done for the
weighted-average and FIFO methods.
• The cost per equivalent unit is the
standard costs.
• The entries to the work-in-progress account
are at standard costs rather than actual.

• Process-costing systems using standard costs
usually accumulate actual costs incurred
separately from the stock accounts.
• Assume that actual materials cost is £84,050
and standard materials cost is £84,250.
• What are the journal entries in the Assembly
Department?

• Direct materials control 84,050
Work-in-progress 84,250
Direct material
variances 200 Direct
materials control 84,050
• To record direct materials purchased and used
in production during the period and variances.

Apply process-costing methods
to cases with transferred-in costs

Transferred-in costs
weighted average
• Assume that the Finishing Department of
Snowdon Ltd had 4,000 units in opening work-
in-progress stock and 2,000 in closing work-in-
progress stock.
• 31,000 units were transferred from the Assembly
Department to the Finishing Department during
this period.

• The opening work-in-progress stock was
60% complete for materials and 25% for
conversion.
• The closing work-in-progress stock was
100% complete for materials and 40% for
conversion.
weighted average (Continued)

• There are three equivalent unit computations
for the Finishing Department:
1 Transferred-in
2 Direct materials
3 Conversion.
weighted average (Continued)

• Opening stock 4,000
Work-in-progress31,000 35,000
• Units completed and
transferred to
finished goods 33,000

(Step 2)
• Equivalent units for transferred-in costs:
Transferred to finished goods 33,000
Closing stock 2,000
35,000
• Stock is 100% complete for the work performed
in the Assembly Department.

• Equivalent units for direct materials costs:
Closing stock (100%) 2,000
35,000

• Equivalent units for conversion costs
(closing stock 2,000):
Closing stock (40%) 800
33,800

costs (Step 3)
• Assume the following costs in the Finishing
Department:
• Work-in-progress opening stock from:
Assembly Department £30,200
Direct materials
9,400 Conversion costs
8,000 Total cost in
opening stock £47,600

• Current costs in Finishing Department are as
follows:
Costs received from the
Assembly Department £139,500 Direct
materials 9,780
Conversion 42,640
Total £191,920
costs (Step 3) (Continued)

(Transferred-in costs £30,200 + Costs
transferred-in from the Assembly Department
£139,500) ÷ 35,000 units = £4.85
(Direct materials £9,400 + £9,780) ÷ 35,000 =
£0.55
(Conversion costs £8,000 + £42,640) ÷ 33,800 =
£1.50
Total unit cost = £6.90
costs (Step 3) (Continued)

Total costs in opening
stock £47,600
Current costs in
Finishing Department 191,920
£239,520
Costs to account for:
£47,600 + £ 191,920 = £239,520

• Costs in work-in-progress closing stock:
Transferred-in costs:
2,000 × £4.85 £9,700
Direct materials: 2,000 × £0.55 1,100
Conversion: 2,000 × 40% × £1.50 1,200
Total cost in closing stock £12,000

• Costs to account for: £239,520
Costs transferred to
finished goods stock: 33,000
× £6.90 £227,700
Costs in closing work-in- progress
stock:
£12,000 − £180 rounding error 11,820
Total £239,520

T-account finishing department
Work-in-progress stock – Finishing
Transferred-in 139,500 to Finished
Materials 9,780 Goods 227,700
Conversion 42,640
Balance 11,820

Transferred-in costs FIFO method
• The physical units (Step 1) is the same as in
weighted-average.
• Opening stock 4,000 Units
Work-in-progress31,000 35,000
• Units transferred to
finished goods 33,000

FIFO (Step 2)
Equivalent units for transferred-in costs:
From Opening work-in-progress 0
Started and completed 29,000
Work-in-progress, closing (100%) 2,000
Total equivalent units 31,000

Equivalent units for transferred-in costs:
Closing work-in-progress stock 2,000 Total
35,000
Opening work-in-progress stock 4,000
Equivalent units 31,000
• Stocks are 100% complete for the work
performed in the Assembly Department.
FIFO (Step 2) (Continued)

Equivalent units for materials costs:
From opening work-in-progress 1,600
Started and completed 29,000
Work-in-progress, closing (100%) 2,000
Total equivalent units 32,600

Equivalent units for material costs
(opening stock 4,000):
Closing stock (100%) 2,000 Total
35,000
Opening stock (60%) 2,400

Equivalent units for conversion costs:
From opening work-in-progress 3,000
Started and completed 29,000 Work-
in-progress, closing (40%) 800 Total
equivalent units 32,800

Equivalent units for conversion costs
(opening stock 4,000, closing stock 2,000):
Closing stock (40%) 800
Total 33,800
Opening stock (25%) 1,000

FIFO (Step 3)
• Cost per equivalent unit:
Transferred-in: £139,590 ÷ 31,000 £4.50
Direct materials: £9,780 ÷ 32,600 0.30
Conversion: £42,640 ÷ 32,800 1.30
Total unit cost £6.10

costs FIFO (Steps 4 and 5)
Current costs in Finishing Department £192,010
Work-in-progress opening stock
47,600
Costs to account for
£239,610
• Same as weighted-average.

Work-in-progress closing stock:
Transferred-in: 2,000 × £4.50 £9,000
Direct materials: 2,000 × £0.30 600
Conversion: 800 × £1.30 1,040
Total £10,640
Summarise and assign total costs
FIFO (Steps 4 and 5) (Continued)

• Costs transferred out:
From opening stock: £47,600
Direct materials added:
4,000 × 40% × £0.30 480
Conversion costs added:
4,000 × 75% × £1.30 3,900
Total £51,980

• Total costs transferred out:
From opening stock £51,980
From current production:
29,000 × £6.10 176,900 Total
£228,880

• Total costs accounted for:
Transferred to finished goods:
£176,900 + £51,980
£228,880
Work-in-progress closing stock
10,640
Rounding 90
Total £239,610

Work-in-progress closing stock −10,640
Transferred to finished goods £228,970

End of Chapter 4

Cost accounting intrudoction by akbari.ppt

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