CH 17 Process-costing (SU10)

In a period of *falling prices,* the ____________ COGS under FIFO will lead to _______________ operating income and ______________ tax payments.

higher, lower, lower

A _____________-_________________ system blends characteristics from both job-costing and process-costing systems.

hybrid-costing

_______________ costing systems use both process-costing and job-costing. Name an example.

hybrid. Example: clothing manufacturing - process-costing (the cost per unit of each operation, such as cutting or sewing). - job-costing (different materials are used in different batches of clothing, such as wool vs cotton).

_______________-________________________ system works best for the distinct, identifiable units of a product or service (example: custom-made machines, houses).

job-costing system

Under the weighted-average method, relative to FIFO, the decline in the current period cost per EU results in a ________________ cost if units completed and transferred out and a _______________ EWIP inventory.

lower, higher

An ______________ is a standardized method or technique performed repetitively, often on different materials, resulting in different finished goods.

operation (aka department or process)

An _____________-_______________ system is a hybrid-costing system applied to batches of similar, not identical, products.

operation-costing

When a supervisor reports higher degree of completion during a period with very low performance, the operating income will be _______________________.

overstated

Managers find operation costing useful because it focuses on control of __________ processes (or operations) of a given production system.

physical

refer to the number of output units, whether completed or not during the period. (These are notated by part number, usually).

physical units

Managers use information from process-costing systems to make pricing and product-mix decisions, as well as understand ________________ performance.

process

In ________________-costing, there is one WIP account for each process. For example, WIP-Assembly and WIP-Testing

process-costing

In ______________-__________________ system, the unit cost of a product or service is obtained by assigning total costs to many identical or similar units of output.

process-costing system

_____________-________________________ system works best for the masses of identical or similar units of a product or service (for example: food or chemicals).

process-costing system

_____________-_________________ systems separate costs categories according to *when costs are introduced into the process.*

process-costing systems

Another name for "batches?"

production run

To find the equivalent units of output calculated: 1. Take _________________ of each input (factor of production) in complete AND incomplete units in WIP and 2. ____________________ the quantity of input into the amount of completed output units that could be produced with the quantity of inputs. Formula Example: 50 physical units started, 50 units in EWIP are 70% complete, conversion costs to make completed units instead, how many units are complete for conversion costs?

quantity, Convert Example answer: 35 units are 100% complete (these are the equivalent units of output).

When a supervisor reports lower degree of completion during a period with very good performance, the operating income will be _______________________.

reduced

Under FIFO, units carried *in* usually carry a ______________ average unit cost.

single

The ___________ department consists of: 1. transferred in costs and 2. DM and CC costs *added during testing.*

testing

The _____________ method merges unit costs from different accounting periods, obscuring period-to-period comparisons.

weighted-average

If a manager's compensation is based on operating income, the manager may prefer the ____________ method, which ___________ operating income and results in _______________ taxes (just to get a bonus).

weighted-average, increases, higher

An operation-costing system uses _________ ___________ that specify the needed direct materials and step-by-step operations.

work orders

Calculating product costs aka . . . (Steps 3, 4, 5)

. . . aka production worksheet

What are the 5 steps used to calculate: 1. cost of fully assembled units in period 2. costs of partially assembled units in process at the end of the month

1. *Track physical unit output,* whether complete or not (begin with units started, minus complete units transferred out for testing, equals units left in inventory, aka EWIP). 2. Calculate equivalent units (focus on *quantity not $*). 3. Managers summarize the total costs to account for (total charges to WIP-Assembly acct - DM + CC). 4. Managers compute the cost per equivalent unit *separately* for DM and CC. 5. Assign the total costs to the *units completed in the EWIP inventory.* (total cost to account for in Step 3 will always be the total cost accounted for in Step 5).

Steps to weighted-average cost (5):

1. Summarize flow of physical units of output 2. Compute output in terms of equivalent units 3. Summarize total costs to account for 4. Compute the cost per equivalent unit 5. Assign costs to units completed and to units in EWIP

By focusing on *work done* and *the costs of work done during the period,* the __________ method provides valuable information for these planning and control purposes.

FIFO

*Two key methods to assign costs* to each below: 1. cost of units completed and transferred out 2. the cost of EWIP

1. weighted-average process-costing method 2. FIFO method

Formula for weighted-average cost:

= All costs entering WIP/ total equivalent units done to date Note: "All costs" which entered WIP can be BWIP or entered started during the period).

Formula for (operation-costing) Budgeted Conversion-cost Rate:

= Budgeted Conversion-costs for Year/ Budgeted Product Units for Year = $ per unit

Formula for conversion costs for equivalent units = (Step 2)

= amount of unfinished units X % complete

In Step 5, formula to assign the total costs to the *units completed in the EWIP inventory.*

= multiplying the equivalent output units for each input X the cost per equivalent unit.

In Step 3, formula for how managers summarize the total costs to account for:

= total charges to WIP-Assembly acct - (DM + CC).

Formula for Unit Cost in process-costing system:

= total costs incurred/# units of output from production

_______________________ costs are all manufacturing costs other than direct material costs, including: 1. manufacturing labor 2. energy 3. plant depreciation, etc. (The costs usually consist of a number of operations, each for a specified period of time, at various steps in the production process.

Conversion costs

Company type example for *zero BWIP and some EWIP inventory.* What are % of costs of DM and conversion costs?

Example: semiconductor manufacturing, textile industry (such as shirts). DM - Because all costs are added at the beginning, DM costs should be 100% satisfied from the beginning of production so even unfinished product will have the DM added to it. Conversion - Since conversion costs are added evenly throughout, an estimator will need to gauge degree of completion.

Company type example for *zero BWIP and EWIP inventory*: Formula to find total cost per unit?

Example: Service-sector, such as a bank which processes deposits. All work is completed in month. Formula: DM + conversion costs (CC)/ # units produced (deposits)

A distinctive feature to _____________ process-costing method is that work done on the BWIP inventory *before* the current period is kept separate from work *done in* the current period.

FIFO

_____________ method provides managers with information about changes in the _________ per unit from one period to the next.

FIFO, costs

FIFO process-costing method: 1. assigns the cost of the previous period's EU in BWIP to the __________ units completed and transferred out and 2. assigns the cost of EU *worked on during current period first* to complete the BWIP, then the started/completed new units, and finally to units in EWIP.

FIRST!

True or False: Equivalent units and physical units are the same thing.

False

What kind of company would a hybrid-costing system be good for?

Firms that manufacture *closely related standardized products (for example, various types of televisions, dishwashers, washing machines, and shoes).

In Step 4, formula for how managers compute the cost per equivalent unit *separately* for DM and CC:

For DM = DM costs/equivalent # units (this is always ALL units) For CC = CC/related equivalent units (completed and transferred out + WIP)

DM and CC Formula for cost of equivalent unit:

For DM = DM costs/equivalent units (always all for DM) For CC = CC costs/total completed and transferred plus % complete

Formula for *some BWIP and some EWIP inventory*:

Formula: = (BWIP + Newly started units) - units completed and transferred = EWIP

Weighted-average cost formula - How to complete Step 1: *"Summarize flow of physical units of output."*

Step 1: Physical units = BWIP + Units started = Units accounted for Units accounted for - units completed and transferred = EWIP

Weighted-average cost formula - How to complete Step 2: *"Compute output in terms of equivalent units."*

Step 2: EU in BWIP + EU of word done in period = EU completed and transferred out in period EU completed and transferred out in period = EU in EWIP

Weighted-average cost formula - How to complete Step 3: *"Summarize total costs to account for."*

Step 3: BWIP (DM + CC) XXX Costs added during period +XXX Total costs to account for in period = XXX

Weighted-average cost formula - How to complete Step 4: *"Compute the cost per equivalent unit."*

Step 4: Total CC (BWIP + work done in current period)/ total EU of work done to date (EU in BWIP + work done in current period) = Weighted-average cost per EU

Weighted-average cost formula - How to complete Step 5: *"Assign costs to units completed and to units in EWIP."*

Step 5: DM: EU X weighted-average per EU unit XXX CC: EU X weighted-average per EU unit +XXX Total costs of EWIP =XXX

Complex Case: Process-costing with *both some BWIP and EWIP inventory.*

This case adds more complexity and illustrates effects the weighted-average and FIFO methods have on the *cost of units completed and the cost of WIP inventory.*

Complex Case: Process-costing with *zero BWIP and some EWIP inventory.* (That is *some units* started during the accounting period are incomplete at the end of the period.

This case introduces the *5 steps of process costing and the concept of equivalent units.*

Complex Case: Process-costing with *zero BWIP and zero EWIP inventory*. (That is *all* units are started and completed within the accounting period).

This case represents the most basic concepts of process costing and illustrates the *averaging of costs.*

Why is FIFO applied within each department?

To compile the cost of units transferred out.

When DM costs are "transferred-in," are they called DM costs or "transferred-in" costs?

Transferred-in costs

FIFO METHOD ASSUMPTION #1: True or False: All the higher-cost units from the previous period in BWIP are the first to be completed and transferred out of the process.

True

FIFO METHOD ASSUMPTION #2: True or False: The EWIP consists of only lower-cost current period units.

True

True or False: If manufacturing labor costs are added to the process at different times compared to other conversion costs, and additional category, *DML costs* would be needed to assign these costs to products.

True

True or False: If two different DM (such as circuit board and microphone) are added to process at *different* times, then two different DM categories would be needed to assign costs to these products.

True

True or False: In an operation-costing system, a single average conversion cost per unit is calculated for each operation.

True

True or False: The journal entries under FIFO are the same as the weighted-average method.

True

True or False: Transferred in costs are treated as a separate type of direct material added at the beginning of the process.

True

True or False: total cost to account for in Step 3 will always be the total cost accounted for in Step 5.

True

WEIGHTED-AVERAGE ASSUMPTION #1: True or False: Smooths out the costs by assuming that more of the lower-cost units are completed and transferred out.

True

WEIGHTED-AVERAGE METHOD ASSUMPTION #2: True or False: Smooths out the costs by assuming that some of the higher-cost units are placed in EWIP.

True

True or False: Equivalent units will always be the amount of units started for DM, whether completed or not.

True. All DM costs are added at the beginning of the process.

In the testing department, DM are introduced at the __________ of the process.

end (because DM costs have a zero degree of completion in both BWIP and EWIP).

When some units are fully assembled and some are not, a common metric is needed to compare the work that's been done on them and obtain a total measure of the work done.

equivalent units

The main difference between job-costing and process-costing is the _________________ of __________________ used to compute the unit costs of products and services.

extent of averaging -In job-costing, individual jobs use different quantities of resources so incorrect to cost each job as same average production cost. -In process-costing, mass produced similar or identical products or services CAN use an average production cost for all units or services.

______________ method costs are relatively easy to compute, therefore results in a more representative average cost per unit when input prices fluctuate from month-to month.

Weighted-average

This method calculates the cost per equivalent unit of all *work done to date,* regardless of what accounting period it was done in, and assigns this cost to: 1. equivalent units completed and transferred out of the process 2. equivalent units in EWIP inventory.

Weighted-average cost

transferred-in costs (aka previous department costs)

costs incurred in previous departments that are carried forward as the product cost moves through the production cycle.

In a period of rising prices, the weighted-average method will ___________ taxes because COGS will be ______________ and operating income will be _____________.

decrease, higher, lower

ALL Direct materials are added at the (beginning/evenly during) the production process while ALL conversion costs are added (beginning/evenly during) the production process.

direct materials - beginning conversion costs - evenly during