Process Costing: A Comparison of Job-order Costing and Process

School: Gwinnett Technical College - Course: MARKETING 2555 - Subject: Accounting

Process Costing I. Comparison of Job-order Costing and Process Costing 1. Similarities a) Both systems have the same purpose - b) Both systems have the same basic manufacturing accounts - c) The flow of costs through the manufacturing accounts is basically the same. 2. Differences Job-order CostingProcess Costing II. Process Cost Flows 1. Processing departments - The activity performed in a processing department is performed uniformly on all of the units passing through that department. - The output of a processing department is homogeneous. (1) Sequential pattern ° (2) Parallel pattern 2. Overview of cost flows - A separate Work In Process account is maintained for each processing department. - The completed production of the prior department is transferred to the subsequent department for further processing. - Materials, labor, and overhead costs can be added in any department. 3. Materials costs 4. Labor costs 5. Overhead costs 6. Transfer between departments 7. Cost of goods manufactured and cost of goods sold [Example] Exercise 4-1 ° III. Equivalent Units of Production 1. Concept Equivalent units of production = (#of partially completed units)×(% completion of those units) 2. Weighted-average Method (1) If WIP inventories are at different stages of completion in terms of materials cost and conversion cost, two equivalent unit figures must be computed. [Example] Smith Company reported the following activity in Department A for August: Percentage completed Units MaterialsConversion WIP, 8/130040%20% Units started into production in August6,000 Units completed and transferred out ofDepartment A during August 5,400 WIP, 8/3190060%30% (2) Treatment of beginning WIP inventory IV. Product cost 1. Computation of equivalent units [Example] Smith Company computed equivalent units for Department A: UnitsEquivalent Units Units to be accounted for: WIP, 8/1 Units started into production Total units to be accounted for 300 6,000 Units accounted for as follows:Transferred to the next department WIP, 8/31 Total units accounted for 5,400 900 MaterialsConversion 2. Computation of costs per equivalent unit [Example] Smith Company had the following cost information for Department A: Materials cost Conversion cost WIP, 8/1$6,000$3,600 Costs added to production in August$41,520$47,430 Computation of cost per equivalent unit: Cost to be accounted for: WIP, 8/1 Costs added to production Total cost to be accounted for Equivalent units Cost per equivalent unit Total CostMaterialsConversionWhole Unit ° 3. Cost reconciliation [Example] Cost reconciliation for Department A of Smith Company: TotalCostEquivalent Units Costaccounted for as follows:Transferred to the next department - Conversion Total cost accounted for MaterialsConversion 4. The overall process - see next page °Smith Company- Department AEquivalent units ofproduction=Units transferred to the nextdepartment or finished goods+Equivalent units in ending WIP inventory