Bài giảng Cost Management - Chapter Six: Process Costing

Process CostingChapter Six6-2Identify the types of firms or operations for which a process costing system is most suitableExplain and calculate equivalent units producedDescribe the five steps in process costingDemonstrate the weighted-average method of process costingDemonstrate the FIFO method of process costingLearning Objectives6-3Learning Objectives (continued)Apply process costing to a firm with multiple departmentsPrepare journal entries to record the flow of costs in a process cost systemExplain how process cost systems are implemented and enhanced in practiceAccount for spoilage in process costing6-4Process CostingProcess costing: a product costing system that accumulates costs according to processes or departmentsAccumulated costs are spread over output of the periodUsed when outputs are standardized/ homogeneousExamples: chemicals, oil refining, textiles, paints, flour, canneries, rubber, steel, glass, cement, and sporting goods6-5Production Cost ReportPrepared each period (e.g., each month) for each departmentEach department has its own WIP Inventory accountThe production cost report summarizes:The number of physical and equivalent unitsCosts incurred during the periodCost per equivalent unit for each cost element (direct materials, direct labor, and factory overhead)Costs assigned to units completed and to units in ending work-in-process inventory6-6Production Cost Report (continued)Equivalent units:A measure of output for the periodExample: 2 units 50% complete are “equivalent” to 1 unit fully completeAn expression of partially completed units in terms of fully completed unitsCost per equivalent unit = costs in each department for the period divided by the number of equivalent units produced during the periodDefinition of numerator and denominator depends on whether FIFO or weighted-average method is used7Some Important Process Cost IssuesBecause of the relatively small direct labor content in many process industries, factory overhead and direct labor costs are often combined into a separate cost element and called conversion costsMany firms incur conversion costs uniformly throughout the production processDirect materials costs can be added at discrete points of manufacturing or continuously over production (in the latter case, direct materials for equivalent-unit purposes will be calculated using the same proportion as conversion costs)6-76-8Flow of Costs in Process Costing6-9Completing the Production Cost Report: 5 Steps Account for the physical units Calculate equivalent units for each manufacturing cost element (FIFO or weighted-average method) Determine total costs for each manufacturing cost element (FIFO or weighted-average method) Compute cost per equivalent unit for each manufacturing cost element Assign total manufacturing costs to units completed and ending work-in-process Inventory6-10Weighted-Average or FIFO?The weighted average method includes all costs (beginning work-in-process inventory costs + current period manufacturing costs) in calculating cost per equivalent unit for each cost element the unit costThus, prior period and current period costs are averagedThe FIFO method includes only costs incurred during the current periodThus, FIFO costs represent the current period’s cost per equivalent unit for each manufacturing cost element6-11Process Costing ExampleNaftel Toy Company has two production departments, molding and finishing. Molding places direct materials into production at the beginning of the process. Direct labor and factory overhead costs are incurred gradually throughout the process with different proportions. The molding department’s units of production and costs for the month of June are provided.Naftel uses the weighted-average method.6-12Process Costing Example (continued)6-13Step 1: Account for Physical Flow6-14Step 2: Calculate Equivalent Units (weighted-average method)6-15Step 3: Determine Total Cost for Each Cost ElementTotal Costs for Each Manufacturing Cost Element are calculated below: 6-16Step 4: Calculate Cost per Equivalent Unit for Each Cost Element6-17Step 5: Cost Assignment6-18FIFO Example: Step 1 (same as for weighted-average method)6-19Step 2, Alternative A: Calculate FIFO Equivalent Units6-20Step 2, Alternative B: Calculate FIFO Equivalent Units6-21Step 3: Calculate FIFO (i.e., Current Period) Costs6-22Step 4: Calculate FIFO Costs per Equivalent Unit6-23Step 5, Part A: Assign Costs to Units Completed from Beginning WIP InventoryAnalyze total completed units:44,000 = total units completed10,000 = units in beginning inventory completed this period34,000 = units started and completed this periodThe cost for the 10,000 units in beginning WIP inventory completed this period: 6-24Step 5, Part B: Assign Costs to Units Started & Completed and Account for Total CostsWeighted-Average vs. FIFOWeighted-AverageFIFOHandling of partially completed beginning WIPNo separate treatmentSeparates the units in the beginning WIP (and their costs) from the units started and completed during the periodEase of calculation and appropriatenessEasier; best in situations where WIP is small and prices/costs are stableMore difficult; best in situations where prices/costs fluctuate; better for “control” purposes6-256-26Weighted-average vs. FIFO Equivalent Units6-27Process Costing with Multiple Departments: Transferred-in costsAs a product passes from one department to another, the accumulated cost passes from department to departmentTransferred-in costs, or prior department costs, are costs of work performed in earlier departments that are transferred into the present departmentThese costs are treated like an additional cost element6-28Illustration of Calculation of Equivalent units with Transferred-in Costs (weighted-average)Transferred in equivalent units under weighted average = units to account for6-29Illustration of Calculation of Equivalent units with Transferred-in Costs (FIFO)Transferred-in equivalent units under FIFO = equivalent units under the weighted average method less equivalent units completed in beginning WIP inventory.Steps 3,4 and 5 of the cost report for both weighted average and FIFO methods are determined in the same manner as for the case without transferred-in costs.6-30Implementation and Enhancement of Process CostingSometimes process-based manufacturers have very different products going through different processes, making process costing by itself inadequateActivity-based costing (ABC) is an important enhancement to process costing when product and process variety arisesProcess costing also lacks the ability to identify the most profitable product mix--to remedy this shortcoming, the appropriate cost management methods are:The contribution method (Chapter 11)The theory of constraints (Chapter 13)6-31Implementation and Enhancement of Process Costing (continued)Just-in-time manufacturing processes and backflush costing represent an alternative to process costing in process systems where management has achieved a low level of materials, in-process, and finished goods inventory, through process engineering, process flow enhancements, lean manufacturing, and the use of theory of constraints (chapter 13).Backflush costing recognizes that in a system with low inventory levels there is no need to determine equivalent units, and instead current production costs are charged directly to finished goods inventory using standard costs. Backflush accounting is not accepted for generally accepted accounting principles (GAAP) because it does not value in-process inventory. 6-32Normal Spoilage in Process CostingThere are two options to account for normal spoilage:Count the number of spoiled units, prepare a separate equivalent unit computation with the cost per unit of the spoiled goods, and then allocate the cost of spoilage to the good units producedOmit the spoiled units in computing the equivalent units of production; the spoilage cost is thus included as part of total manufacturing costs and is averaged over good units produced and ending work-in-process inventoryOption 1. is preferred since it shows the cost of normal spoilage6-33Abnormal Spoilage in Process Costing When units are spoiled not under normal operating conditions, but instead is due to operator error or machine malfunction, or other preventable cause, it is accounted for as abnormal spoilage. Abnormal spoilage is calculated as the cost of lost materials, labor and overhead up to the inspection point where it is determined that the units are spoiled. The cost of abnormal spoilage is calculated and reported separately in the cost report so that abnormal spoilage gets the desired management attention. 6-34Process costing is a product costing system that accumulates costs according to processes or departments and assigns them to a large number of nearly identical productsThe typical firm that uses process costing employs a standardized production process (often mass production) to manufacture homogeneous productsProcess costing is used in industries such as chemicals, oil refining, textiles, paints, flour, canneries, rubber, steel, glass, cement, and sporting goodsChapter SummaryChapter Summary (continued)Each period, each department prepares a production cost report Five steps in preparing a production cost report:Analyze the physical flow of unitsCalculate equivalent units for each manufacturing cost element (FIFO or Weighted-average method)Determine total costs for each manufacturing cost element (FIFO or Weighted-average method)Compute cost per equivalent unit for each manufacturing cost elementAssign total manufacturing costs for the period to units completed and to ending WIP6-35Chapter Summary (continued) The weighted average method includes all costs in calculating unit costs, including both costs incurred during the period and those in the beginning WIP inventory (i.e., those costs brought forward from last period into the current period)Thus, prior period and current period costs are averaged together in the weighted-average method 6-36Chapter Summary (continued) The FIFO method includes in calculating equivalent unit cost only costs incurred during the current period; thus, the FIFO costs can be considered “current period manufacturing costs per equivalent unit” for each cost elementFor cost assignment purposes, the cost of units from the beginning WIP inventory will include a combination of last period’s costs + the current period’s (FIFO) cost to complete the unitsUnits that are both started and completed during the period are assigned the current period costs per equivalent unitEnding inventory is assigned the current (FIFO) period’s costs 6-37Chapter Summary (continued)Transferred-in costs, or prior department costs, are costs of work performed in an earlier department that are transferred into the present departmentThese costs are treated like an additional cost elementActivity-based costing (ABC), the contribution methods, and the theory of constraints are important enhancements to a process costing systemThere are two options when accounting for normal spoilage:Calculate the cost per spoiled unit and allocate it to the good unitsOmit the spoiled units from the computation 6-38Chapter Summary (continued)Abnormal Spoilage. When units are spoiled not under normal operating conditions, but instead is due to operator error or machine malfunction, or other preventable cause, it is accounted for as abnormal spoilage. Abnormal spoilage is calculated as the cost of lost materials, labor and overhead up to the inspection point where it is determined that the units are spoiled. The cost of abnormal spoilage is calculated and reported separately in the cost report so that abnormal spoilage gets the desired management attention. 6-39End of Process Costingmoving on6-40