Cost - Chapter 4, Chapter overviews Costing.pptx

So next time you want something done in a certain way, rather than telling people what to do, show them the behaviour you expect from them. This way, you will have more engaged, happier employees and clients.

6.Speaking of change, embrace it!

And one of my favourites — embrace change! Being a leader means knowing and accepting that nothing is forever. Even liking the idea: Change is a given in anything we do in life. In business, change brings with it opportunities and challenges more than it brings trouble.

So be flexible, be adaptable, enjoy change when it comes, and from time to time, search for it yourself — it will be worth it.

Misconceptions About Leadership

Like so many other things, leadership has its own myths and misconceptions.

I have found 3:

1.You can not be a leader if you aren’t in an authority position.

False! You can be a leader if you are a manager, but if you are a leader, you don’t have to be a manager as well. Setting positive examples, guiding the people around you, being their voice when the situation arises — that is the job of a true leader, no matter his daily job description.

2.You can not be a leader if you are an introvert.

False! Character traits are so different in people that we simply can not put a label on it and say that introverts aren’t good leaders. Sometimes, thinking more on the inside than on the outside proves even more beneficial than we think. Introverts aren’t masters of public speech, but that doesn’t mean they can not guide and inspire people toward great goals.

3.If everyone is a leader, who will follow?

False! The truth is, nobody leads in everything. The best leaders have their „specialties” and also, they step in and out of their role as leader gracefully.

The best estimates offered by research are that leadership is about one-third born and two-thirds made. How does this reflect into real life? Well, we can consider that leadership is a set of innate traits, completed by another set of qualities that are refined and perfected in time, with education, training, and experience.

I believe being a leader isn’t usually a job that you find, but rather one that finds you. Although it is not easy, it has a certain *je ne sais quoi* that draws one like a moth to a flame. As a leader, you need to make smart decisions about products and services, marketing, financing, and other operational issues, but you also have to maximize the full potential of your employees. There is a lot to do, but allow me to let you in on another little secret — leadership skills are great even for those who don’t want to lead. All the qualities I have depicted above will serve you well no matter your position at a job and in your personal life — you will be ready to step in, lead and make things smoother and better for many other people.

Once again remember “…be not afraid of greatness. Some are born great, some achieve greatness, and some have greatness thrust upon them”. Get your five buckets filled, and that wi

1. Chapter 4 Process Costing System 1

2. Learning Objectives Distinguish Process costing and Job –Costing Record the flow of materials, labor, and overhead through a process cost system. Compute the equivalent units and cost per equivalent unit( Primarily for WIP ending) Assign costs to units completed and units in process 2

3. Process Costing System Is a costing method most commonly used in industries that produce essentially homogeneous ( i.E. Uniform) products in mass on a continuous basis. Each unit receives the same amounts of direct materials costs, direct labor costs, and manufacturing overhead Unit costs are computed by dividing total costs incurred by the number of units of output from the production process

4. Similarities and differences between Job-Order and Process Costing

5. Similarities Both systems assign( trace and allocate) material, labor, and overhead costs assigned to products to compute unit costs. Both systems use the same manufacturing accounts: Raw Materials, Work in Process, and Finished Goods accounts . The flow of costs is basically the same in both systems .

6. Differences Process costing is used when a single identical product is produced is mass on a continuing basis , where as Job-order costing is used when many different jobs are worked on each period. Process costing systems accumulate costs by department . Job-order costing systems accumulated costs by individual jobs. Process costing systems use department production reports to accumulate costs. Job-order costing systems use job sheets to accumulate costs. Process costing systems compute unit costs by department . Job-order costing systems compute unit costs by job .

7. Examples firms using process costing Sugar factories Food processing firms , Chemical processing firms Soft drink and alcohol factories Cement factory soaps manufacturing firms Steel manufacturing firms Paper manufacturing firms Pharmaceutical firms 7

8. Cost Flow under Process –Costing 8 Assume a Coca-Cola Company with two subsequent production departments Mixing Department Bottling Department

9. Flow of cost under Job-Order and Process Costing Finished Goods Cost of Goods Sold Work in Process Direct Materials Direct Labor ManufacturingOverhead

10. Cost flow under Job-Order Costing Finished Goods Cost of Goods Sold Direct Labor ManufacturingOverhead Jobs Costs are traced and applied to individual jobs in a job-order cost system. Direct Materials

11. Finished Goods Cost of Goods Sold Direct Labor ManufacturingOverhead Processing Department Costs are traced and applied to departments in a process cost system. Direct Materials Cost flow under Process Costing

12. Raw Materials Process Cost Flows-Material Cost (in T-account form) Work in Process-Bottling Department Work in Process- Mixing Department Direct Materials Direct Materials Direct Materials

13. Process Cost Flows-Material Cost (in journal entry form)

14. Process Cost Flows- Direct Labor Cost (in T-account form) Work in Process- Bottling Department Work in Process-Mixing Department Direct Materials Direct Materials Direct Labor Payroll Direct Labor

15. Process Cost Flows- Overhead cost (in T-account form) Work in Process-Bottling Department Work in Process-Mixing Department Manufacturing Overhead-Control Overhead Applied to Work in Process Applied Overhead Applied Overhead Direct Labor Direct Materials Direct Labor Direct Materials Actual Overhead

16. Process Cost Flows- Direct Labor Cost (in journal entry form)

17. Process Cost Flows- Overhead cost allocated ( In journal entry form)

18. Process Cost Flows- Transfer in Cost (in T-account form) Work in Process- Bottling Department Work in Process- Mixing Department Direct Materials Direct Labor Applied Overhead Direct Materials Direct Labor Applied Overhead Transferred to Bot.Dept . Transferred from Mix Dept.

19. Process Cost Flows- Transfer in Cost (in journal entry form)

20. Finished Goods Process Cost Flows- Storage (in T-account form) Work in Process- Bottling Department Cost of Goods Manufactured Direct Materials Direct Labor Applied Overhead Transferred from Mix Dept . Cost of Goods Manufactured

21. Process Costing- Storage (in journal entry form)

22. Finished Goods Cost of Goods Sold Process Cost Flows-Sales (in T account form) Work in Process Department B Cost of Goods Manufactured Direct Materials Direct Labor Applied Overhead Transferred from Dept. A Cost of Goods Sold Cost of Goods Sold Cost of Goods Manufactured

23. Process Costing- Sales (in journal entry form)

24. Process-Costing Assumptions Direct Materials are added at the beginning of the production process, or at the start of work Conversion Costs are added evenly along the production process 24

25. Five-Steps in Process-Costing Cost assignment Summarize the flow of physical units of output Compute output in terms of equivalent units Compute cost per equivalent unit Summarize total costs to account for Assign total costs to units completed and to units in ending Work-in-Process 25

26. Equivalent Units is an expression of the amount of work done on units of output that are partially completed at the end of the year. Is the expression the partially completed units(WIP ending units) in terms of fully completed units. Equivalent units = Number of physical units × Percentage of completion For example if four physical units of product are 50 percent complete at the end of the period, an equivalent of two units has been completed ( 2 equivalent units = 4 physical units × 50 percent). If four desks manufacturing is 50 percent complete at year end , an equivalent unit of two desks has been completed. 26

27. Equivalent Units Equivalent units of production is a term applied to the Work in process inventory at the end of the year Process costing requires partially completed units in ending work-in-process inventory to be converted to the equivalent completed units (called equivalent units ). Equivalent units = Number of physical units × Percentage of completion Therefore, For completed units, the percent of completion is 100% and hence, the equivalent units will be the same as the physical units…..100% X physical unit= Physical unit For WIP ending, the percent of completion is is less than 100 % and hence, the equivalent units will be less than the physical units. 27

28. Equivalent Units – The Basic Idea Two half-completed products are equivalent to one complete product. So, 2 units 50 % complete are equivalent to 1 complete units. + = 1

29. Illustrating Example -Process Costing Assume Coca-Cola Chemical Company Produces Coke and uses process costing system to account for its operation. The soft drink is produced in two processing departments: the Mixing Department and the Bottling Department. The product is bottled in 300ml bottles. 29

30. Part I: Mixing Department In the Mixing Department, various ingredients are added at the start of the process costs are accumulated in two pools, one for direct material and another for all conversion costs. Direct material is added at the beginning of the process conversion costs are applied evenly through out the process. Data for the first month of operation (September) of the Mixing Department is given below: 30

31. Case 1: Zero beginning and Zero ending work in process inventory that is all units are started and fully Completed by the end of the period. Beginning work in process 0 units Started during the month 1,000 units Completed during the month 1,000 units Direct material costs Br. 80,000 Conversion costs Br. 40,000 Ending work in process 0 units 31

32. 32 Solution - S tep-1- Summery of flow of physical unit Flow of Production flow of pysical Units Beginning Work in process   units Units started in September   1000 Units to account for 1,000 Units Completed and transferred out   1000 Ending Work in process   Units accounted for   1,000

33. 33 Step 2 : Compute output in terms of equivalent units for DMC & CC Flow of Production flow of physical Units Equvalent unit DMC CC Units Completed and transferred out ( 100%,100%)   1000 units 1,000 1,000 Ending Work in process   0 unit Work done current period     1,000units 1,000units

34. 34 Step 3 &4 : flow of cost and Cost per Equivalent units Production cost report Total production cost DMC CC Cost of beginning WIP Br 0 Br0 Br 0 Costs added this period 120,000 80,000 40,000 Cost to account for 120,000 80,000 40,000 Equivalent units(step-2) 1,000 1,000 cost per equivalent unit 80 40

35. 35 Step 5 : Cost assignment to completed & transferred out units and units of WIP ending Production cost report Total production cost DMC CC Total Cost to account for Br 120,000 Cost Assignment : To Completed& transferred out :       Direct material Cost 80,000 1000*80   Conversion cost 40,000   1,000*40 Total 120,000   To WIP ending: 1,000*0 1,000*0 Total cost accounted for 120,000

36. Journal Entries- for production during September Work in Process- Mixing 80,000 RM -Inventory 80,000 (To record direct materials used in production) Work in Process- Mixing 40,000 Various accounts 18,600 (To record Mixing department conversion costs) Work in Process- Bottling 120,000 Work in Process- Mixing 120,000 (To record transfer of completed units in mixing department to bottling department) 36

37. Case2: Zero beginning but some ending work in process inventory Data for the second month of operation (October) of the Mixing Department is given below: Beginning work in process 0 units Started during the month 2,000 units Completed during the month 800 units Ending work in process (60% completed as to conversion costs.) 1,200 units Direct material costs Br. 160,000 Conversion costs Br. 91,200 Required: calculate the cost of fully completed units(800 ) and the cost of partially completed units still in process at the end of October(1200 )? 37

38. 38 Solution - S tep-1- Summery of flow of physical unit Flow of Production flow of pysical Units Beginning Work in process   units Units started in October   2,000 Units to account for 2,000 Units Completed and transferred out   800 units Ending Work in process   1,200 Units accounted for   2,000

39. 39 Step 2 : Compute output in terms of equivalent units for DMC & CC Flow of Production flow of physical Units Equvalent unit DMC CC Units Completed and transferred out ( 100%,100%)   800 units 800 800 Ending Work in process (100%,60%)   1,200 unit 1,200 720 Work done in current period (b/c Beg WIP is zero)     2,000U 1,520U

40. 40 Step 3 &4 : flow of cost and Cost per Equivalent units Production cost report Total production cost DMC CC Cost of beginning WIP Br 0 Br0 Br 0 Costs added this period 251,200 160,000 91,200 Cost to account for 251,200 160,000 91,200 Equivalent units(step-2) 2,000 1,520 cost per equivalent unit Br 80 Br 60

41. 41 Step 5 : Cost assignment to completed & transferred out units and units of WIP ending Production cost report Total prod. Cost DMC CC Total Cost to account for Br 251,200 Cost Assignment : To Completed& transferred out(800 units):       Direct material Cost 64,000 800*80   Conversion cost 48,000   800*60 Total Br.112,000   To WIP ending(1200 units): Direct material Cost 96,000 1,200*80 Conversion cost 43200 720*60 Total Br.139,200 Total cost accounted for Br 251,200

42. Journal Entries- for production during October Work in Process- Mixing 160,000 RM -Inventory 160,000 (To record direct materials used in production) Work in Process- Mixing 91,200 Various accounts 91,200 (To record Mixing department conversion costs) Work in Process- Bottling 112,000 Work in Process- Mixing 112,000 (To record transfer units completed to bottling department) 42

43. Case3: Process costing with some beginning and some ending work in process inventory . Data for the third month of operation (November) of the Mixing Department is given below: Weighted Average Method 43 Beginning work in process( from October/Case2 ) ( CC 60% complete ) 1,200 units Started during the month 1,000 units Completed during the month 1,600 units Ending work in process (50% completed as to conversion costs.) 600units Cost Current month Beg. WIP(Case2 ) Direct material costs Br. 69,000 Br. 96,000 Conversion costs 70,800 43,200

44. When both WIP beginning and ending have balances , there two methods of process costing accounting: Weighted Average Method FIFO Method 44

45. Weighted-Average -process costing method Makes no distinction between work done in prior( beginning WIP) or current periods(started new) It combines units and costs from prior and current periods Calculates the equivalent unit cost of the work done to date regardless of the period in which it was done Thus, its assigns cost to equivalent units completed and to equivalent units in ending work in process inventory. . 45

46. 46 Solution - S tep-1- Summery of flow of physical unit Flow of Production flow of pysical Units Beginning Work in process   1,200 units Units started in September   1,000 Units to account for 2,200 Units Completed and transferred out   1600 units Ending Work in process   600 Units accounted for   2,200

47. 47 Step 2 : Compute output in terms of equivalent units for DMC & CC Flow of Production flow of physical Units Equivalent Unit DMC CC Units completed & transferred out(100%,100%) 1,600 1,600 1,600 Ending Work in process(100%,50%) 600 600 300 Work done to date(cumulative) 2,200U 1,900U

48. 48 Step 3 &4 : flow of cost and Cost per Equivalent units Production cost report Total production cost DMC CC Cost of beginning WIP Br 139,200 Br96,000 Br 43,200 Current period cost 139,800 69,000 70,800 Cost to account for 279,000 165,000 114,000 Equivalent units(step-2) 2,200 1,900 cost per equivalent unit 75 60

49. 49 Step 5 : Cost assignment to completed units and to units of WIP ending Production cost report Total prod. Cost DMC CC Total Cost to account for Br 279,000 Cost Assignment : To Completed& transferred out(800 units):       Direct material Cost 120,000 1600*75   Conversion cost 96,000   1600*60 Total 216,000   To WIP ending(1200 units): Direct material Cost 45,000 600*75 Conversion cost 18,000 300*60 Total 63,000 Total cost accounted for Br 279,000

50. Journal Entries- for production during November Work in Process- Mixing 69,000 RM -Inventory 69,000 (To record direct materials used in production) Work in Process- Mixing 70,800 Various accounts 70,800 (To record conversion costs incurred ) Work in Process- Bottling 216,000 Work in Process- Mixing 216,000 (To record transfer of completed units in mixing department to bottling department) 50

51. First-in, First-out Method This method assumes that the earliest equivalent units in the work in process account are completed first. Work done in a prior period is kept separate from work done current period Similarly cost of beginning Work-in-Process is kept separate from current period cost. Equivalent unit is computed only for the work done in the current period. Costs per equivalent unit is also computed only for work done in the current period by dividing costs incurred in the current period by the current period equivalent unit In weighted average method, equivalent unit and cost per equivalent unit merges the units and costs in beginning WIP and costs of work done in the current period. 51

52. First-in, First-out Method cont… Cost Assignment Assigns the cost of beginning work-in process to completed units Assigns the cost of current period : First to cost to complete beginning WIP Next to completed units from new start Lastly to units of ending work in process Example : Assume the previous data of weighted average method 52

53. Case3: Process costing with some beginning and some ending work in process inventory . Data for the third month of operation (November) of the Mixing Department is given below: FIFO Method 53 Beginning work in process( from October/Case2 ) ( CC 60% complete ) 1,200 units Started during the month 1,000 units Completed during the month 1,600 units Ending work in process (50% completed as to conversion costs.) 600units Cost Current month Beg. WIP(Case2 ) Direct material costs Br. 69,000 96,000 Conversion costs Br. 70,800 43,200

54. 54 Solution - S tep-1- Summery of flow of physical unit Flow of Production flow of pysical Units Beginning Work in process   1,200 units Units started in September   1,000 Units to account for 2,200 Units Completed and transferred out(1,600) From beginning WIP From new start   1,200 400 Ending Work in process   600 Units accounted for   2,200

55. 55 Step 2 : Compute equivalent units for the w ork done in the current month Flow of Production flow of physical Units Equivalent unit DMC CC Units completed & transferred out From Beg. WIP( 0%,40%) From new start (100%,100%) 1,200 400 400 480 400 Ending Work in p rocess (100%,50%) 600 600 300 Work done only in the current month 1,000U 1,180U

56. 56 Step 3 &4 : flow of cost and Cost per Equivalent units for the w ork done only in the current month Production cost report Total production cost DMC CC Cost of beginning WIP Br 139,200 Br96,000 Br 43,200 Current period cost 139,800 69,000 70,800 Work done only in the current period (Equivalent units(step-2)) 1,000 1,180 cost per equivalent unit 69 60

57. 57 Step 5 : Cost assignment Production cost report Total Cost DMC CC Total Cost to account for Br 279,000 Cost Assignment : To Completed& transferred out(1600 units):       From Beginning WIP(1,200U ) Cost carried forward 139,200 96,000 43,200 Cost to complete them 28,800 0*69 480*60 From new start (400U) 51,600 400*69 400*60 Total 219,600   To WIP ending(600 units): Direct material Cost 41,400 600*69 Conversion cost 18,000 300*60 Total 59,400 Total cost accounted for Br 279,000

58. Journal Entries- for production during November Work in Process- Mixing 69,000 RM -Inventory 69,000 (To record direct materials used in production) Work in Process- Mixing 70,800 Various accounts 70,800 (To record Mixing department conversion costs) Work in Process- Bottling 219,600 Work in Process- Mixing 219,600 (To record transfer of completed units in mixing department to bottling department) 58

59. Transferred-in Costs-Bottling Department Transferred-in Costs are costs incurred in previous departments that are carried forward as the products cost when it moves to a subsequent process in the production cycle Also called Previous Department Costs Transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process . However , they are called transferred-in costs, not direct material costs. 59

60. Bottling Department In the Bottling Department the product is bottled, labeled, and placed in cartons Costs are accumulated in the three cost pools Transferred-in cost (mixing department cost) Direct materials cost – bottling department and Conversion cost - bottling department Assumption- Bottling department Direct material is added at the end of the process and WIP ending is zero percent complete as to DMC Conversion costs are incurred evenly through-out the process. 60

61. Example –Bottling Department Assume the following data for Coca-Cola Company during the month of November in the Bottling department ( Case 3) Transferred in cost during the month(November): Weighted average method 216,000 First-in, first-out method 219,600 61

62. 62 Physical Unit and Percentage of completion   Physical units Transferred in costs DMC CC Beginning work in process 1,200 units 100% complete 0% complete 75% complete Transferred-in during the month 1,600 units       Completed during the month 2,000 units       Ending work in process 800 units 100% complete 0% complete 50% complete Cost Beginning work in process cost :   Transferred in costs (1,200 x Br. 170) Br. 204,000 Direct material costs Conversion costs 90,000 Transferred in cost during the month:   Weighted average 216,000 First-in, first-out 219,600 Direct material costs incurred during the month 60,000 Conversion costs incurred during the month 150,000

63. 63 Solution - Weighted average method- Bottling Dept. S tep-1- Summery of flow of physical unit Flow of Production flow of pysical Units Beginning Work in process 1,200 units Transferred-in   during the month 1,600 Units to account for 2,800 Units Completed and become FG 2,000 Ending Work in process   800 Units accounted for   2,800

64. 64 Step 2 : Compute equivalent units for the w ork done to date Flow of Production flow of physical Units Equivalent unit Transfer in cost DMC CC Units completed & become FG( 100%,100,100%) 2,000 2,000 2,000 2,000 Ending Work in p rocess (100%,0%, 50%) 800 800 400 Work done to date 2,800U 2,000U 2,400U

65. 65 Step 3 &4 : cost summery and Cost per Equivalent units for the w ork done to date Production cost report Total production cost Transfer in cost DMC CC Cost of beginning WIP Br.294,000 Br. 204,000 Br. Br. 90,000 Current period cost 426,000 216,000 60,000 150,000 Cost to account for (TC) 720,000 420,000 60,000 240,000 Work done to date (Equivalent units(step-2)) 2,800U 2,000U 2,400U cost per equivalent unit 150 30 100

66. 66 Step 5 : Cost assignment Production cost report Total prod. Cost Transfer in cost DMC CC Total Cost to account for Br 720,000 Cost Assignment : To Completed ( FG) units (2000):       Transfer in cost 300,000 2,000*150   DMC 60,000 2,000*30 Conversion cost 200,000   2000*100 Total 560,000   To WIP ending(800 units): Transfer in cost 120,000 800*150 Direct material Cost 0*30 Conversion cost 40,000 400*100 Total 160,000 Total cost accounted for Br 720,000

67. Journal Entries- for production during November Work in Process- Bottling 216,000 Work in Process- Mixing 216,000 (To record transfer in during current period) Work in Process- Bottling 60,000 RM -Inventory 60,000 (To record bottling department material costs) Work in Process- Bottling 150,000 Various accounts 150,000 (To record bottling department conversion costs) FG inventory - 560,000 Work in Process- Bottling 560,000 (To record completion and transfer to FG store) 67

68. Example – Cont…. Bottling Department and Fifo method 68