44 Transparency Master 2-1 JOB ORDER VS PROCESS COSTING Job Order Costing—used by manufacturers who make special or-ders, customized prod-ucts, or standard prod-ucts produced in batches. Process Costing—used by manufacturers who mass produce large quantities of identical units in a continuous flow.45 Transparency Master 2-2 SIMILARITIES IN JOB ORDER AND PROCESS COSTING Both systems determine a product cost by measuring the amount of direct materials and direct labor used and allocating over-head costs. Both systems allocate overhead using a predetermined overhead rate(s). Both systems maintain perpetual inventory records with subsidiary ledgers for materi-als, work in process, and finished goods.46 Transparency Master 2-3 DIFFERENCES IN JOB ORDER AND PROCESS COSTING Job Order: Costs are accumulated by job. Cost to Make One Unit = Cost of the Job No. of Units in the Job Process Costing: Costs are accumulated by department for a time period (for example, one month). Department’s Cost Cost to Make One Unit = for the Month in One Department No. of Units Produced during the Month To find the total unit cost, add the unit costs in-curred in each department.47 Transparency Master 2-4 FLOW OF COSTS IN A PROCESS COST SYSTEM Assume that Advanced Technologies, a computer manufacturer, makes its product in three departments: Assembly, Testing, and Pack-ing. Materials and component parts are added in the Assembly De-partment. Packing materials are added in the Packing Department. Materials WIP—Assembly Cost of Materials Materials Cost of units materials used in Direct Labor transferred purchased assembly Overhead to testing Materials (applied) used in packing WIP—Testing Costs from Cost of units assembly transferred Direct Labor to packing Overhead (applied) WIP—Packing Costs from Cost of testing completed Materials units Direct Labor Overhead (applied) Finished Goods Cost of Goods Sold Cost of Cost of Cost of completed units sold units sold units Transparency Master 2-548 PROCESS COSTING DEMONSTRATION PROBLEM ADVANCED TECHNOLOGIES —ASSEMBLY DEPARTMENT Advanced Technologies produces notebook computers in three de-partments: Assembly, Testing, and Packing. Prior to the start of the production process, all the materials and component parts needed to assemble a computer are placed into a “kit.” Manufacturing begins when the Assembly Department receives a kit and begins putting the computer together. Therefore, all materials are added at the beginning of work in the Assembly Department. Conversion costs are added evenly throughout the assembly process. Assume that the Assembly Department of Advanced Technologies be-gan April with 800 units in its work in process inventory. Assembly on these units was 3/4 complete at the beginning of the month. During the month, 3,000 units were started in the Assembly Department. At the end of the month, 300 of the units started were still in process; assem-bly on these units was 2/3 complete. The costs associated with production in assembly during April were as follows: Cost of units in beginning work in process inventory $228,000 Cost of materials used in April 630,000 Cost of direct labor and overhead for April 527,00049 Transparency Master 2-6 PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES —TESTING DEPARTMENT Advanced Technologies’ Testing Department receives completed computers from the Assembly Department. These computers are run through several diagnostic tests to ensure they work properly. The Testing Department began the month of April with 100 units in work in process. Testing on these units was 40% complete. During the month, 3,500 units were transferred in from assembly. There were 500 units in Testing’s ending work in process, which were 20% complete. The costs associated with production in the Testing Department during April were as follows: Cost of units in beginning work in process inventory $ 40,000 Direct materials (transferred in from assembly) 1,288,000 Cost of direct labor and overhead for April 158,00050 Transparency Master 2-7 PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES —TESTING DEPARTMENT Solution STEP 1: Determine the units to be assigned costs. Beginning Work in Process Inventory 100 Units Started and Completed During the Month (3,500 – 500) 3,000 Ending Work in Process Inventory 500 Total 3,60051 Transparency Master 2-8 PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES —TESTING DEPARTMENT Solution STEP 2: Calculate equivalent units of production. Materials equivalent units: Whole % Materials Equivalent Units Added in April Units Beginning WIP Inventory 100 0 0 Units Started and Completed 3,000 100% 3,000 Ending WIP Inventory 500 100% 500 3,500 Conversion equivalent units: Whole % Conversion Equivalent Units Added in April Units Beginning WIP Inventory 100 60% 60 Units Started and Completed 3,000 100% 3,000 Ending WIP Inventory 500 20% 100 3,16052 Transparency Master 2-9 PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES —TESTING DEPARTMENT Solution STEP 3: Determine the cost per equivalent unit. $1,288,000 Materials Cost/Equivalent Unit = = $368 3,500 equiv. units $158,000 Conversion Cost/Equivalent Unit = = $ 50 3,160 equiv. units53 Transparency Master 2-10 PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES —TESTING DEPARTMENT Solution STEP 4: Allocate costs to transferred and partially completed units. Cost assigned to the units in beginning work in process: Direct Conversion Total Materials Cost Cost Beginning WIP Balance $40,000 Cost to Complete: Equivalent Units for April 0 60 Cost per Equivalent Unit  $368  $50 0 $ 3,000 3,000 Total Cost Transferred to the Testing Department $43,000 (Continued)54 Transparency Master 2-11 PROCESS COSTING PRACTICE PROBLEM ADVANCED TECHNOLOGIES —TESTING DEPARTMENT Solution (Concluded) Cost