You are on page 1of 45

Chapter 14

Process-Costing Systems

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 14 - 1
Learning Objective 1

Explain the basic ideas


underlying process costing
and how they differ from
job costing.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Introduction to Process Costing

What is a process-costing system?


It is a costing system in which the cost
of a product or service is obtained by
assigning costs to masses of like or
similar units and then computing
unit costs on an average basis.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing Compared With
Job Costing
Direct Materials
Direct Labor
Indirect Resource Cost

Job 100 Job 101

Finished Cost
Cost of
of Goods
Goods
Goods Sold
Sold
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing Compared With
Job Costing
Direct Materials
Direct Labor
Indirect Resource Cost

Process A Process B Assembly

Finished Cost
Cost of
of Goods
Goods
Goods Sold
Sold
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 2

Compute output in terms


of equivalent units.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Physical Units and Equivalent
Units

Step 1
Track the physical flow in units.

Step 2
Compute output in terms of equivalent units.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Compute Output in Terms of
Equivalent Units
Step 2
Flow of
Step 1 Physical Direct Conv.
Units Mtls. Costs
Started and completed 20,000 20,000 20,000
Ending WIP 5,000 5,000 1,250
Units to account for: 25,000
Equivalent units 25,000 21,250
100% 25%

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 3

Compute costs and prepare


journal entries for the
principal transactions
in a process-costing system.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Calculation of Product Costs
Step 3
Summarize total costs to account for.
Step 4
Compute the cost per equivalent unit.
Step 5
Assign costs to units completed and
to units in ending work in process.
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Production Cost Report
Steps 3 and 4

Total Direct Conversion


Costs Materials Costs
Costs to account for $112,500 $70,000 $42,500
÷ Equivalent units 25,000 21,250
= Cost per EU $ 4.80 $ 2.80 $ 2.00

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Production Cost Report
Step 5
Units completed and transferred out:
20,000 × (2.80 + 2.00) $ 96,000
Units in ending inventory:
Materials: 5,000 × 2.80 14,000
Conversion: 1,250 × 2.00 2,500
Total costs $112,500

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Journal Entries

Work in Process – Forming 70,000


Direct-materials Inventory 70,000
Materials added to production during the month

Work in Process – Forming 10,625


Accrued Payroll 10,625
Direct labor during the month

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Journal Entries

Work in Process – Forming 31,875


Factory Overhead 31,875
Factory overhead applied during the month

Work in Process – Finishing 96,000


Work in Process – Forming 96,000
Costs of goods completed and transferred
during the month from Forming to Assembly
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Forming Department

Work in Process – Forming


Direct materials $ 70,000 Transferred
Direct labor 10,625 out to
Factory overhead 31,875 finishing $96,000
Costs to account for 112,500
Month-end balance $ 16,500

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objectives 4 and 5

Demonstrate how the presence


of beginning inventories affects
the computation of unit costs
under the weighted-average
method and the FIFO method.
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method

Focus is on the total work done to date


regardless of whether that work was
done during the period preceding or
during the current period.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
First-In, First-Out Method

Beginning inventory is treated as if it were


separate and distinct from goods started
and completed during the current period.

Equivalent units computations are for only


work done during the current period.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example

Consider the Cooking Department of


Ricky Foods, a food-processing company.
Beginning WIP: Ending WIP:
5,000 units 2,000 units
100% materials 100% materials
40% conversion costs 50% conversion costs

Started: 28,000 units


14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
Step 1
Physical
Units
Beginning WIP 5,000
Started 28,000
Units to account for: 33,000
Ending WIP 2,000
Completed 31,000

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
Step 2
Direct Conversion
Materials Costs
Completed 31,000 31,000
+ Ending WIP 2,000 1,000
= Equivalent units 33,000 32,000

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
Steps 3 and 4
Total Direct Conversion
Costs Materials Costs
Beginning WIP $ 9,360 $ 8,060 $ 1,300
Costs added 56,140 41,440 14,700
Costs to account for $65,500 $49,500 $16,000
÷ Equivalent units 33,000 32,000
= Cost per EU $ 2.00 $ 1.50 $ .50
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Weighted-Average Method
Example
Step 5

Units completed and transferred out:


31,000 × (1.50 + .50) $62,000
Units in ending inventory:
Materials: 2,000 × 1.50 3,000
Conversion: 1,000 × .50 500
Total costs $65,500
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 1
Physical
Units
Beginning WIP 5,000
Started 28,000
Units to account for: 33,000
Ending WIP 2,000
Completed 31,000

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 2
Direct Conversion
Materials Costs
Completed 31,000 31,000
+ Ending WIP 2,000 1,000
– Beginning WIP 5,000 2,000
= Equivalent units 28,000 30,000

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 3

Current direct materials cost $41,440


Current conversion costs 14,700
Total current costs $56,140

+ Beginning work in process $9,360

= Total costs $65,500


14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 4 Cost per equivalent unit

Direct materials cost: $41,440 ÷ 28,000 = $1.48

Conversion costs: $14,700 ÷ 30,000 = $ .49

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
FIFO Method Example
Step 5

Units in ending inventory:


Materials: 2,000 × 1.48 $ 2,960
Conversion: 1,000 × .49 490
Total $ 3,450
Transferred out: ($65,500 – $3,450) $62,050

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Differences Between FIFO and
Weighted-Average Methods

The key difference is how equivalent units


are computed.

Another difference is the definition of cost.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Transferred-in Costs in
Process Costing...
– treat transfers from a previous department
similar to direct material added at the
beginning of processing.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Learning Objective 6

Use backflush costing with a


JIT production system.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing in a JIT System

JIT is a philosophy about when to do something.

The “something” is a
The “when” is
production, purchasing,
as needed.
or delivery activity.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Industry Characteristics
– Sequential arrangement of production
activities
– Reduction of set-up times
– Scheduling of production as needed, by use
of a “demand-pull” system
– Cross-training of employees

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Process Costing in a JIT System
 In just-in-time production systems,
inventory of work in process is typically
small compared to the costs of goods
produced and sold.
 The cost of tracking work in process
exceeds the benefits for many companies.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing
 What is backflush
costing?
 It is an accounting
system that applies
costs to products
only when the
production is
complete.
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Principles of Backflush Costing

Backflush costing has only two categories of costs:

Materials Conversion

There is no work in process account.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example
Speaker Technology, Inc., recently
introduced backflush costing and JIT.
Model AX27 Standard material cost: $14
Standard conversion cost: $21
Actual production for the month: 400 units
Actual materials purchased: $5,600
Actual conversion costs: $8,400

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example
 The backflush costing system has only three
accounts related to production:
1 Materials and parts inventory
2 Conversion costs
3 Finished goods inventory

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example

What are the journal entries?


Materials Inventory 5,600
Accounts Payable or Cash 5,600
To record material purchases
Conversion Costs 8,400
Accrued Wages 8,400
To record conversion costs incurred
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example

Finished Goods Inventory 14,000


Material Inventory 5,600
Conversion Costs 8,400
To record costs of completed production

Cost of Goods Sold 14,000


Finished Goods Inventory 14,000
To record costs of 400 units sold
14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Backflush Costing Example

Cost of Goods Sold 14,000


Material Inventory 5,600
Conversion Costs 8,400

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Objective 7

Understand how a process-


costing system tracks costs
to products.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
How Process-Costing Systems
Track Costs to Products

A process-costing system tracks costs


to products using broad averages.

These averages represent equivalent


unit costs incurred in each of
several departments or processes.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
How Process-Costing Systems
Track Costs to Products

Unit costs from one department or process


becomes the transferred-in material for
downstream departments or processes
until the product is finished.

14 -
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
End of Chapter 14

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 14 - 45

You might also like