Tài chính kế toán - Chapter 5: Process costing and operation costing

Chapter 5 Process costing and operation costing5-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineProcess costingProcess costing with work in process inventoryCalculation of equivalent unitsThe effects of beginning and ending work in process inventoriesProcess costing using the weighted average methodProcess costing using the first-in, first-out (FIFO) methodComparison of weighted average and FIFOProcess costing and spoilageOperation costingOther issues in process costing5-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProcess costingJob costing and process costing are two extremes of the continuum of conventional product costing systemsJob costing systems accumulate the costs of each jobProcess costing systems accumulate the cost of each process then average these costs across all units producedMany businesses use a combination of job and process costing; this is called hybrid costing5-3Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Process costing (cont.)Used by businesses that mass-produce one product or a small range of almost identical productsInvolves a number of processes that are performed repetitivelyUsed by oil refineries, food processors and manufacturers of tobacco, chemicals and paperAlso used by producers of repetitive services such as routine processing of cheques in banks and delivery of standard letters in Australia Post5-4(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProcess costing (cont.)Two main stepsEstimate the cost of the production processCalculate the average cost per unit by dividing the cost of the process by the number of units producedProcess costing can occur where there is no opening or closing WIP inventory (see Chapter 4)More complex process costing takes account of WIP inventoryNeed to calculate equivalent units to apportion cost between new production and inventory5-5Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProcess costing with work in process inventoriesWIP inventoryNot all products are complete at the beginning or end of the period (usually a month)Production costs will be calculated after taking into accountUnits started in the previous period and completed in current period (beginning WIP)Units started and completed in the periodUnits that are incomplete at the end of the period (ending WIP)5-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Process costing with work in process inventories (cont.)Partially completed goods at the beginning or end of the period change the way we allocate production costsEquivalent unitsThe amount of production inputs that have been applied to the physical units during productionPhysical units are all units currently in production whether complete or incompleteWIP inventory needs to be converted to equivalent units to provide the basis for calculating product cost5-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Process costing with work in process inventories (cont.)Materials are input into production at various stagesWe usually assume that labour and overhead are used uniformly throughout the production processTreat collectively as ‘conversion costs’Units in ending WIP are generally at different stages of completion with respect to material and conversion cost5-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithEquivalent unitsEquivalent units are used to calculated unit costs when there is WIPIf WIP is 50% complete for 10 000 litres on hand at the end of the month, it is100% complete for direct materials, which are added at the start of the process  10 000 equivalent units of material50% complete for conversion costs, assuming that conversion costs occur uniformly across the production process  5000 equivalent units of conversion cost5-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe effects of beginning and ending work in process inventoriesFour steps in process costing1. Analyse the physical flow of units2. Calculate the equivalent units3. Calculate the unit costs4. Analyse the total costsProducts are costed using one of two assumptions about product flowWeighted average methodFirst in, first out (FIFO) method5-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProcess costing using the weighted average methodStep one: analyse the physical flow of units5-11Physical units in beginning WIPPhysical units startedPhysical units completed and transferred outPhysical units in ending WIP=–+Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Process costing using the weighted average method (cont.)Step two: calculate the equivalent unitsThe equivalent units in beginning WIP are not identified separately; this is a key feature of the weighted average cost method5-12Equivalent units completed and transferred outEquivalent units in ending WIPTotal equivalent units+=Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Process costing using the weighted average method (cont.)Step three: calculate the unit costsThe cost per equivalent unit for direct material is the total direct material costs divided by the total equivalent unitsThe cost per equivalent unit for conversion cost is the total conversion cost divided by the total equivalent unitsUnder the weighted average method the cost per equivalent unit is based on the total costs incurred including the cost of beginning WIPStep four: analyse the total costsThe production cost of units are transferred to the next production process or to finished goodsCost of incomplete units remains in WIP 5-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith5-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith5-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith5-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProcess costing using the FIFO methodAssumes that the WIP inventory is completed before the production of new units commencesStep one: analyse the physical flow of unitsIdentical to the weighted average methodStep two: calculate the equivalent unitsUnder FIFO the equivalent units in opening WIP are subtracted from total equivalent units to give equivalent units of new production for the month5-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)5-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProcess costing using the FIFO method (cont.)Step three: calculate the unit costsCost per equivalent unit is calculated for direct material (or conversion cost) by dividing the direct material cost (or conversion cost) incurred during the current month by the new equivalent units added during the current monthCosts of opening inventory are not used in this calculationStep four: analyse the total costsAssumes that the units in beginning WIP are completed and transferred out firstCosts of the beginning WIP are not mixed with those new costs incurred during the current month5-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith5-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith5-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith5-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithComparison of weighted average and FIFO methodsKey difference is the treatment of the beginning WIPUnder the weighted average method the cost of beginning WIP and equivalent units of work done on WIP are included in the calculation of the average cost per equivalent unitUnder FIFO the cost per equivalent unit is based only on costs incurred in the current monthWeighted average is more commonly used than FIFOLess complex and WIP inventory may be negligibleCost of using FIFO may exceed the benefits5-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProcess costing and spoilageSpoilage cost: the cost of defective products and wasted resources that cannot be recovered by rework or recyclingWhen spoilage occurs there are three forms of outputUnits completed and transferred outSpoiled unitsUnfinished units remaining in WIPSpoiled units are costed using cost per equivalent unit along with the other two outputs5-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Process costing and spoilage (cont.)Spoilage is accounted for depending on whether it is normal or abnormalNormal spoilage: inherent in the production process and occurs even under efficient operating conditionsIncluded as part of the cost of good units completedAbnormal spoilage: should not occur under efficient operating conditionsCosts of abnormal spoilage are expensed5-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOperation costingSome businesses have repetitive production processes but produce a narrow range of products that differ in some significant aspectsDifferent material inputsDifferent combinations of specific production processesIn batch manufacturing processes individual product lines are produced in large batches and require specific combinations of direct materials and a specific sequence of production processes5-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)5-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOperation costing (cont.)Operation costing is a hybrid costing systemUsed in a batch manufacturing environmentContains features of both job costing and process costing Direct material assigned to individual batches, as in job costingConversion costs assigned to departments or processes using a predetermined application rate, as in process costing5-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith5-29Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOther issues in process costingStandard costs are more likely to be used than actual costsProcess costing and operation costs are consistent with concepts of responsibility accountingProcesses or operations are usually performed in different departmentsDepartmental managers may be held responsible for the department’s costs and output producedA predetermined overhead rate may be used in process costing and a predetermined conversion cost rate in operation costingUnderapplied or overapplied costs to be accounted for5-30Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Other issues in process costing (cont.)Production units are usually used as the cost driver in process costing and operation costingInputs such as machine hours or labour hours may be used as cost drivers in operation costing The percentage of completion is difficult to determine and is often only a rough estimateSometimes businesses will ignore WIP inventories for simplicityIn service firms some routine, repetitive or similar services can be costed using process or operation costing5-31Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummaryProcess costing suits businesses that mass-produce a small range of productsWeighted average or FIFO methods may be used to assign costs to products and inventoryThe presence of WIP inventory requires calculation of equivalent unitsSimple forms of process costing do not entail the costing of WIP inventoryOperation costing is a hybrid of job costing and process costing5-32Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith