Professional Documents
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Learning Objectives
Process Costing
After studying this chapter, you should be able to: [1] Understand who uses process cost systems. [2] Explain the similarities and differences between job order cost and process cost systems. [3 Explain the flow of costs in a process cost system.
[4] Make the journal entries to assign manufacturing costs in a process cost system. [5] Compute equivalent units.
[6] Explain the four steps necessary to prepare a production cost report.
[7] Prepare a production cost report.
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Preview of Chapter 3
Use to apply costs to similar products that are massproduced in a continuous fashion
Examples include the production of Cereal, Paint, Manufacturing Steel, Oil Refining and Soft Drinks
Illustration 3-1
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Process Cost
Costs tracked through a series of connected manufacturing processes or departments. Products are uniform or relatively homogeneous and produced in a large volume.
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LO 2 Explain the similarities and differences between job order cost and process cost systems.
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LO 2 Explain the similarities and differences between job order cost and process cost systems.
Differences
1. Number of work in process accounts used.
3. Flow of costs.
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LO 2 Explain the similarities and differences between job order cost and process cost systems.
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LO 2 Explain the similarities and differences between job order cost and process cost systems.
b.
c. d.
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True
costing.
False 3. Both job order and process costing determine product costs at the end of a period of time, rather than when a
product is completed.
False
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Accumulation of materials, labor, and overhead costs is same as in job order costing.
Debit Raw Materials Inventory for purchases of raw materials. Debit Factory Labor for factory labor incurred.
Debit Manufacturing Overhead for overhead cost incurred. Assignment of the three manufacturing cost elements to
Work in Process in a process cost system is different from a job order cost system
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LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
A process cost system requires fewer material requisition slips than a job order cost system.
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LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
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LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Objective of assigning overhead is to allocate overhead to production departments on objective and equitable basis.
Use the activity that drives or causes the costs.
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LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
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LO 4
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Blue Diamond Company manufactures ZEBO through two processes: blending and bottling. In June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending $6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The Bottling Department transfers units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.
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LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
22,000
Factory Labor
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17,000
LO 4
Manufacturing Overhead
8,500
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LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Work in ProcessBottling
11,000
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LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Equivalent Units
Illustration: Suppose you have a work-study job in the office of your colleges president, and she asks you to compute the cost of instruction per full-time equivalent student at your college. The colleges vice president for finance provides the following information.
Costs: Total cost of instruction Student population: Full-time students Part-time students 900 1,000
Illustration 3-6
$9,000,000
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Equivalent Units
Illustration: Part-time students take 60% of the classes of a full-time student during the year. To compute the number of fulltime equivalent students per year, you would make the following computation.
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Cost of instruction per full-time equivalent student = Total cost of instruction Number of full-time equivalent students / $
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Equivalent Units
Weighted Average Method
Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process. Most widely used method.
Beginning work in process not part of computation of equivalent units.
Illustration 3-8
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Equivalent Units
Weighted Average Method
Illustration: The output of Kori Companys Packaging
Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending
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Equivalent Units
Refinements on the Weighted-Average Method
Illustration: Kellogg Company has produced Eggo Waffles
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Equivalent Units
Refinements on the Weighted-Average Method
Illustration: Information related to the Mixing Department at
Illustration 3-9
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Equivalent Units
Illustration 3-10
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Equivalent Units
Illustration 3-11 Refined Equivalent Units of Production Formula
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The fabricating department has the following production and cost data for the current month.
Beginning Work in Process 0 Units Transferred Out 15,000 Ending Work in Process 10,000
Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.
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The fabricating department has the following production and cost data for the current month.
Beginning Work in Process 0 Units Transferred Out 15,000 Ending Work in Process 10,000
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out Ending work in process units 15,000 10,000 25,000
LO 5 Compute equivalents units.
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The fabricating department has the following production and cost data for the current month.
Beginning Work in Process 0 Units Transferred Out 15,000 Ending Work in Process 10,000
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out Equivalent unit in ending WIP (10,000 x 30%) 15,000 3,000 18,000
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LO 6
Physical units - actual units to be accounted for during a period, regardless of work performed. Total units to be accounted for - units started (or transferred) into production during the period + units in production at beginning of period. Total units accounted for - units transferred out during period + units in process at end of period.
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Department adds materials at beginning of process and Incurs conversion costs uniformly during the process.
Illustration 3-15
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2. Conversion
3. Total Manufacturing
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LO 6
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LO 6
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$ 85,000
570,000 $655,000
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Illustration 3-22
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Illustration 3-23
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LO 7
In March, Rodayo Manufacturing had the following unit production costs: materials $6 and conversion costs $9. On March 1, it had zero work in process. During March, Rodayo transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process. Costs transferred out Work in process, March 31 Materials (800 x $6) Conversion costs (200 x $9) Total costs $4,800 1,800 $186,600 $180,000
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APPENDIX 3A
FIFO METHOD
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APPENDIX 3A
FIFO METHOD
Illustration 3A-1 Physical unit flow Assembly Department
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APPENDIX 3A
FIFO METHOD
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APPENDIX 3A
Illustration 3A-3 Unit and cost dataMixing Department
FIFO METHOD
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LO 8
APPENDIX 3A
FIFO METHOD
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APPENDIX 3A
FIFO METHOD
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LO 8
APPENDIX 3A
FIFO METHOD
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APPENDIX 3A
FIFO METHOD
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LO 8
APPENDIX 3A
FIFO METHOD
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APPENDIX 3A
FIFO METHOD
Illustration 3A-9
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APPENDIX 3A
FIFO METHOD
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APPENDIX 3A
FIFO METHOD
Illustration 3A-11
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LO 8
APPENDIX 3A
FIFO METHOD
Internal document for management that shows production quantity and cost data for a production department.
Provides a basis for evaluating the productivity of a department. Managers can use the cost data to assess whether unit costs and total costs are reasonable.
Top management can also judge whether current performance is meeting planned objectives.
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APPENDIX 3A
Prepare the Production Cost Report
FIFO METHOD
Illustration 3A-12
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LO 8
APPENDIX 3A
FIFO METHOD
Weighted-average is simple to understand and apply. In cases where prices do not fluctuate significantly, weighted-average will be very similar to FIFO. Conceptually, the FIFO method is superior because it measures current performance using only costs incurred in the current period. FIFO method provides current cost information, which the company can use to establish more accurate pricing strategies for goods manufactured and sold.
LO 8 Compute equivalent units using the FIFO method.
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Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for
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