process costing lecture 13 1 readings chapter 17,cost accounting, managerial emphasis, 14 th edition...

Chapter 17

Process Costing

Lecture 13

1

ReadingsChapter 17,Cost Accounting, Managerial Emphasis, 14th edition by HorengrenChapter 4, Managerial Accounting 12th edition by Garrison, Noreen, Brewer

Learning ObjectivesRecord the flow of materials, labor, and overhead through a

process cost system.Compute the equivalent units of production using the

weighted-average method.Compute the cost per equivalent unit using the weighted-

average method.Assign costs to units using the weighted-average method.Compute the equivalent units of production using the FIFO

method.Compute the cost per equivalent unit using the FIFO method.Assign costs to units using the FIFO methodAllocate service department costs to operating departments

using the direct method.To allocate service department costs to operating departments

using the step-down method.

Job-Costing and Process Costing: Opposite Ends of a Continuum

Job-Costing Systems

Distinct, identifiableunits of a product

or service

Examples:Custom-made

machines,Houses

Process-CostingSystems

Masses of identicalor similar units of aproduct or service

Examples:Food,

Chemical processing

Process-CostingProcess-costing is a system where the unit

cost of a product or service is obtained by assigning total costs to many identical or similar units

Each unit receives the same or similar amounts of direct materials costs, direct labor costs, and manufacturing overhead

Unit costs are computed by dividing total costs incurred by the number of units of output from the production process

Process-Costing AssumptionsDirect Materials are added at the beginning

of the production process, or at the start of work in a subsequent department down the assembly line

Conversion Costs are added equally along the production process

Five-Step Process-Costing Allocation1. Summarize the flow of physical units of

output2. Compute output in terms of equivalent units3. Compute cost per equivalent unit4. Summarize total costs to account for5. Assign total costs to units completed and to

units in ending Work-in-Process

Equivalent Units A derived amount of output units that:

1. Takes the quantity of each input in units completed and in unfinished units of work in process and

2. converts the quantity of input into the amount of completed output units that could be produced with that quantity of input

Are calculated separately for each input (direct materials and conversion cost)

Steps 1 & 2 Illustrated

Steps 3, 4 & 5, Illustrated

General Ledger Cost Flows Illustrated

Weighted-Average Process-Costing MethodCalculates cost per equivalent unit of all work

done to date (regardless of the accounting period in which it was done)

Assigns this cost to equivalent units completed & transferred out of the process, and to incomplete units in still in-process

Weighted-Average Process-Costing MethodWeighted-average costs is the total of all

costs in the Work-in-Process Account divided by the total equivalent units of work done to date

The beginning balance of the Work-in-Process account (work done in a prior period) is blended in with current period costs

Steps 1 & 2 Illustrated

Steps 3, 4 & 5 Illustrated

Result of the Process Two critical figures arise out of Step Five of

the cost allocation process:1. The amount of the Journal Entry transferring

the allocated cost of units completed and sent from Work-in-Process Inventory to Finished Goods Inventory

2. The ending balance of the Work-in-Process Inventory account that will appear on the Balance Sheet

First-in, First-Out Process-Costing MethodAssigns the cost of the previous accounting

period’s equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process

Assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to stat and complete new units, and lastly to units in ending work-in-process inventory

First-in, First-Out Process-Costing MethodThe beginning balance of the Work-in-Process

account (work done in a prior period) is kept separate from current period costs

Steps 1 & 2, Illustrated

Result of the Process (as before) Two critical figures arise out of Step Five of

the cost allocation process:1. The amount of the Journal Entry transferring

the allocated cost of units completed and sent from Work-in-Process Inventory to Finished Goods Inventory

2. The ending balance of the Work-in-Process Inventory account that will appear on the Balance Sheet

Standard Costing and Process Costing

Teams of design and process engineers, operations personnel, and management accountants work together to determine separate standard costs per equivalent unit on the basis of different technical processing specifications for each product

Standard costs replace actual costs in equivalent unit calculations

General Ledger Cost Flows Illustrated

Transferred-in CostsAre costs incurred in previous departments

that are carried forward as the products cost when it moves to a subsequent process in the production cycle

Also called Previous Department CostsJournal entries are made to mirror the

progress in production from department to department

Transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process

Hybrid Costing SystemsA Hybrid-Costing System blends

characteristics from both job-costing and process-costing systems

Many actual production systems are in fact hybrids

Examples include manufacturers of televisions, dishwashers and washing machines, as well as Adidas

Similarities Between Job-Order and Process CostingBoth systems assign material, labor and

overhead costs to products and they provide a mechanism for computing unit product cost.

Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.

The flow of costs through the manufacturing accounts is basically the same in both systems.

Both systems assign material, labor and overhead costs to products and they provide a mechanism for computing unit product cost.

Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.

The flow of costs through the manufacturing accounts is basically the same in both systems.

Differences Between Job-Order and Process Costing

Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each period.

Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.

Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.

Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs are worked on each period.

Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.

Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job cost sheet.

Process costing is used for products that are:

a. Different and produced continuously.

b. Similar and produced continuously.

c. Individual units produced to customer specifications.

d. Purchased from vendors.

Process costing is used for products that are:

a. Different and produced continuously.

b. Similar and produced continuously.

c. Individual units produced to customer specifications.

d. Purchased from vendors.

Quick Check

Processing DepartmentsAny unit in an organization where

materials, labor or overhead are added to the product.The activities performed in a processing

department are performed uniformly on allunits of production. Furthermore, the output of

a processing department must behomogeneous.

Comparing Job-Order and Process Costing

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold

Work inProcess

Direct Materials

Direct Materials

Direct LaborDirect Labor

ManufacturingOverhead


Comparing Job-Orderand Process Costing

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




JobsJobs

Costs are traced andapplied to individualjobs in a job-order

cost system.

Costs are traced andapplied to individualjobs in a job-order

cost system.Direct

Materials

Direct Materials

Comparing Job-Orderand Process Costing

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold




ProcessingDepartmentProcessingDepartment

Costs are traced and applied to departments

in a process cost system.

Costs are traced and applied to departments

in a process cost system.

Direct Materials

Direct Materials

T-Account and Journal Entry Views of Cost Flows

For purposes of this example, assume there

are two processing departments –

Departments A and B. We will use T-accounts

and journal entries.

Raw Materials

Process Cost Flows(in T-account form)

Work in Process Department B

Work in Process Department A

• DirectMaterial

s

• Direct

Materials

• Direct

Materials

Process Cost Flows(in journal entry form)

GENERAL JOURNAL Page 4

Date DescriptionPost. Ref. Debit Credit

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Raw Materials XXXXX

To record the use of direct material.



Work in Process Department A Wages Payable

• Direct

Materials

• Direct

Materials

• Direct Labor

• Direct Labor • Direct

Labor

Process Costing(in journal entry form)





Salaries and Wages Payable XXXXX

To record direct labor costs.



Work in Process Department A

Manufacturing Overhead

• OverheadApplied to

Work inProcess

• AppliedOverhea

d

• AppliedOverhea

d

• Direct Labor

• Direct

Materials

• Direct Labor

• Direct

Materials• Actual

Overhead

Process Costing(In journal entry form)





Manufacturing Overhead XXXXX

To apply overhead to departments.



Work in ProcessDepartment A

• Direct Materials• Direct

Labor• Applied

Overhead


Labor• Applied

Overhead

Transferred to Dept. B

• Transferred from Dept.

A






To record the transfer of goods from

Department A to Department B.

Finished Goods



• Cost of Goods

Manufactured


Labor• Applied

Overhead• Transferred

from Dept. A

• Cost of Goods

Manufactured




Finished Goods XXXXX


To record the completion of goods

and their transfer from Department B

to finished goods inventory.

Finished Goods

Cost of Goods Sold

Process Cost Flows(in journal entry form)


• Cost of Goods

Manufactured


Labor• Applied

Overhead• Transferred

from Dept. A

• Cost of GoodsSold

• Cost of GoodsSold

• Cost of Goods

Manufactured




Accounts Receivable XXXXX

Sales XXXXX

To record sales on account.

Cost of Goods Sold XXXXX

Finished Goods XXXXX

To record cost of goods sold.

End of Lecture 13

process costing lecture 13 1 readings chapter 17,cost accounting, managerial emphasis, 14 th edition...

Documents

equivalent units of

total equivalent units

number of units

incomplete units

unfinished units of

assign costs

completed output units

process cost system