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PRODUCT

COSTING

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JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.

• CONTACT:
• 0322-3385752
• 0312-2302870
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.
JOIN KHALID AZIZ
o CRASH CLASSES
o ICMAP STAGE 3

o FINANCIAL ACCOUNTING &


COST ACCOUNTING
PERFORMANCE APPRAISAL
o INDIVIDUAL & GROUPS
JOIN KHALID AZIZ

• CRASH CLASSES
• ICMAP STAGE 1 & 2

• FUNDAMENTALS OF
FINANCIAL ACCOUNTING &
COST ACCOUNTING
• INDIVIDUAL & GROUPS
JOIN KHALID AZIZ
• FRESH CLASSES
• CA MODULE B & D

• FINANCIAL ACCOUNTING &


COST ACCOUNTING

• INDIVIDUAL & GROUPS


Comparison of Job-Order Costing
and Process Costing
Process
Process Job-order
Costing
Costing Costing

✦ Used for production of small,


identical, low cost items.
✦ Mass produced in automated
continuous production process.
✦ Costs cannot be directly traced to
each unit of product.
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Comparison of Job-Order Costing
and Process Costing
Process
Process Job-order
Costing
Costing Costing

Typical process cost applications:


❖ Petrochemical refinery
❖ Paint manufacturer
❖ Paper mill

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Comparison of Job-Order Costing
and Process Costing
Job-order costing Process costing
– Costs accumulated by – Costs accumulated by
the job. department or process.
– Work in process has a – Work in process has a
job-cost sheet for each production report for
job. each batch of products.
– Many unique, high cost – A few identical, low cost
jobs. products.
– Jobs built to customer – Units continuously
order. produced for inventory
in automated process.

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Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual jobs in a
Direct Material
job-order cost system.

Finished
Direct Labor Jobs Goods

Manufacturing Cost of
Overhead Goods
Sold
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Differences Between Job-Order
and Process Costing
The work-in-process
account consists of
individual products in a
Direct Material
process cost system.

Direct Labor Finished


& Overhead Products Goods
(Conversion)

When direct labor is a relatively small amount Cost of


compared to material and overhead, it is often Goods
combined with overhead. Sold
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Process Cost Flows
One Production Department
Work-in-Process Finished Goods
Inventory Inventory Cost of Goods Sold
Direct material
Cost of goods completed Cost of goods sold
Direct labor
Applied manufacturing and transferred to during current
overhead finished goods period

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Process Cost Flows
Two Sequential Production Departments
Work-in-Process Inventory Work-in-Process Inventory
Production Department A Production Department B
Direct material Cost of goods completed
Direct labor in department A and Cost of goods completed
Applied manufacturing transferred to and transferred to
overhead department B finished goods

Direct material
Direct labor
Applied manufacturing
overhead

Finished Goods Inventory Cost of Goods Sold


Cost of goods sold
during current period

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Equivalent Units: A Key Concept

• Costs are accumulated for a period of time for


products in work-in-process inventory.
• Products in work-in-process inventory at the
beginning and end of the period are only
partially complete.
• Equivalent units is a concept expressing
these partially completed products as a
smaller number of fully completed products.

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Equivalent Units of Production

Equivalent units are partially complete


and are part of work in process
inventory. Partially completed
products are expressed in terms of a
smaller number of fully completed
units.

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Process Cost Flows

Work in Process
Department B Finished Goods
•Direct •Cost of •Cost of •Cost of
Materials Goods Goods Goods
•Direct Manufactured Manufactured Sold
Labor
•Applied
Overhead
•Transferred
from Dept. A Cost of Goods Sold
•Cost of
Goods
Sold

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Equivalent Units of Production

Two half completed products are


equivalent to one completed product.

+ = 1

So, 10,000 units 70 percent complete


are equivalent to 7,000 complete units.

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Quick Check 
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
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Quick Check 
For the current period, Jones started 15,000
units and completed 10,000 units, leaving
5,000 units in process 30 percent complete.
How many equivalent units of production did
Jones have for the period?
a. 10,000
10,000 units + (5,000 units × 0.30)
b. 11,500 = 11,500 equivalent units
c. 13,500
d. 15,000
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Calculating and Using Equivalent
Units of Production

To calculate the cost per


equivalent unit for the period:

Cost per
Costs for the period
equivalent = Equivalent units of production
unit for the period

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Quick Check 
Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent
unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90

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Quick Check 
Now assume that Jones incurred
$27,600 in production costs for the
11,500 equivalent units of production.
What was Jones’ cost per equivalent
unit for the period?
a. $1.84
$27,600 ÷ 11,500 equivalent units
b. $2.40
= $2.40 per equivalent unit
c. $2.76
d. $2.90

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Equivalent Units of Production –
Weighted Average Method
The weighted average method . . .
– Makes no distinction between work done in prior
and current period.
– Blends together units and costs from prior
period and current period.

Let’s see how this works!

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EXP 1: Production Report Example
• MVP Sports Equipment Company makes baseball gloves
in two departments, Cutting and Stitching.
• MVP uses the weighted-average cost procedure.
• Material is added at the beginning of the Cutting
Department, and conversion is incurred uniformly
throughout the process.
• Using the following information for the month of March,
let’s prepare a production report for the Cutting
Department.

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Production Report Example
Work in process, March 1: 20,000 units Cost
Materials: 100% complete. $ 50,000
Conversion: 10% complete. 7,200

Units started into production in March: 30,000 units


Units completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 units


Materials 100% complete.
Conversion 50% complete.

Costs incurred during March


Materials cost 90,000
Conversion costs:
Direct labor $ 86,000
Applied manufacturing overhead 107,500
Total conversion costs 193,500
Total costs to account for $ 340,700

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Production Report Example
➊ Analysis of Physical Flow of Units

Physical
Units
Work in process, March 1 20,000
Units started during March 30,000
Total units to account for 50,000

Units completed and transferred out during March 40,000


Work in process, March 31 10,000
Total units accounted for 50,000

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Production Report Example
➋ Calculation of Equivalent Units

Conversion Equivalent Units


Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000


Units started during March 30,000
50% of 10,000 units
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000


Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

ginning inventory % is not used in weighted-average method.


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Production Report Example
➋ Calculation of Equivalent Units

Conversion Equivalent Units


Physical Percentage Direct
Units Complete Material Conversion

Work in process, March 1 20,000 10%


Units started during March 30,000
100% of 10,000 units, all
Total units to account for 50,000
material added at beginning
Units completed and transferred 40,000 100% 40,000 40,000
Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

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Production Report Example
➌ Computation of unit costs
Direct
Material Conversion Total
Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200
Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700
Equivalent units 50,000 45,000
Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

$140,000 ÷ 50,000 equivalent units


$2.80 + $4.46
$200,700 ÷ 45,000 equivalent units
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Production Report Example
➍ Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31


Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

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Production Report Example
➍ Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31


Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300
Total cost of March 31 work-in-process 50,300
Total costs accounted for $ 340,700

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Production Report Example
➍ Analysis of total costs
Cost of goods completed and transferred during March
40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31


Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000
Convserion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300


All costs
Total costs accounted for accounted for $ 340,700

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MVP SPORTS EQUIPMENT COMPANY
Production Report: Cutting Department
Percentage of
Completion Equivalent Units
Physical with Respect to Direct
Units Conversion Material Conversion

Work in process, March 1 20,000 10%


Units started during March 30,000
Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000


Work in process, March 31 10,000 50% 10,000 5,000
Total units accounted for 50,000
Total equivalent units 50,000 45,000

Direct
Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200


Costs incurred during March 90,000 193,500 283,500
Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000


Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March


40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31


Direct Material:
10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:
5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700


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EXP 2: Production Report Example

 Double Diamond Skis uses process costing to


determine unit costs in its Shaping and Milling
Department.
 Double Diamond uses the weighted average
cost procedure.
 Using the following information for the month of
May, let’s prepare a production report for
Shaping and Milling.

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Production Report Example

Work in process, May 1: 200 units


Materials: 55% complete. $ 9,600
Conversion: 30% complete. 5,575

Production started during May: 5,000 units


Production completed during May: 4,800 units

Costs added to production in May


Materials cost $ 368,600
Conversion cost 350,900

Work in process, May 31: 400 units


Materials 40% complete.
Conversion 25% complete.

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Production Report Example

Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400

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Production Report Example

Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160

5,200 4,960

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Production Report Example

Section 1: Quantity Schedule with Equivalent Units


Units to be accounted for:
Work in process, May 1 200
Started into production 5,000
Total units 5,200

Equivalent units
Materials Conversion
Units accounted for as follows:
Completed and transferred 4,800 4,800 4,800
Work in process, May 31 400
Materials 40% complete 160
Conversion 25% complete 100
5,200 4,960 4,900

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Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900


Cost per equivalent unit

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Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900


Cost per equivalent unit $ 76.25

$378,200 ÷ 4,960 units = $76.25


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Production Report Example
Section 2: Compute cost per equivalent unit
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, May 1 $ 15,175 $ 9,600 $ 5,575
Costs added in the Shipping
and Milling Department 719,500 368,600 350,900
Total cost $ 734,675 $ 378,200 $ 356,475

Equivalent units 4,960 4,900


Cost per equivalent unit $ 76.25 $ 72.75
Total cost per equivalent unit = $76.25 + $72.75 = $149.00

$356,475 ÷ 4,900 units = $72.75


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Production Report Example
Section 3: Cost Reconciliation

Total Equivalent Units


Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

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Production Report Example
Section 3: Cost Reconciliation

Total Equivalent Units


4,800 units @ $149.00 Cost Materials Conversion
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 160
Conversion 100
Total work in process, May 31
Total cost accounted for

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Production Report Example
Section 3: Cost Reconciliation

Total Equivalent Units


160 units @ $76.25 Cost Materials Conversion
100 units @ $72.75
Cost accounted for as follows:
Transferred out during May $ 715,200 4,800 4,800
Work in process, May 31:
Materials 12,200 160
Conversion 7,275 100
Total work in process, May 31 19,475
All costs
Total cost accounted for $ 734,675 accounted for

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Actual Costing vs. Normal Costing

Manufacturing
overhead is
Actual costs of applied
manufacturing overhead to Work-in-
are entered in Work-in- Process Inventory
Process Inventory using a
predetermined
overhead rate

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JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.

• CONTACT:
• 0322-3385752
• 0312-2302870
• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.