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Process Costing

Chapter5

Objective 1

Distinguish between the flow of costs in process costing and job costing

Process Costing Benefits

Benefits

Cost trends

Budget to actual

Pricing

Financial statements

Job and Process Costing Differences?

Job Cost Systems

Individual job cost records

DM, DL, and MOH assigned to individual jobs

Cost of finished jobs flow into FG Inventory

Cost of sold jobs flow out of FG Inventory into COGS

Job Costing

Cost of Goods Sold

Direct labor

Direct materials

Finished Goods

Manufacturing

overhead

Work in Process

Job 100

Job 101

Job 102

Job Costing and Process Costing Differences?

Process Cost Systems

Series of manufacturing processes

Cost per process is accumulated and moved from one process to another process

Costs transferred to FG Inventory only from the WIP Inventory of the LAST manufacturing process

When units are sold, cost is transferred out of FG Inventory into COGS

Process Costing

Cost of Goods Sold

Manufacturing Wages

Finished Goods

Work in Process,

Centers Dept

Work in Process,

Shells Dept

Work in Process,

Packaging Dept

Manufacturing

Overhead

Materials Inventory

Building Blocks of Process Costing

Conversion costs

DL + MOH

Equivalent units

Inventory flow assumptions

Weighted average

FIFO (not covered in this textbook)

Objective 2

Compute equivalent units

Building Blocks of Process Costing

Equivalent units

Amount of work done during a period in terms of fully complete units of output

The Building Blocks of Process Costing

Inventory flow assumptions

Weighted average

FIFO (not covered in the textbook)

Cost-benefit standpoint

Objective 3

Use process costing in the first production department

How Does Process Costing Work

Using weighted average assumption

Five steps to process costing:

Summarize the flow of physical units.

Compute output in terms of equivalent units.

Summarize total costs to account for.

Compute the cost per equivalent unit.

Assign total costs to units completed and to units in ending WIP inventory.

Step 1: Summarize the Flow of Physical Units – Exhibit 5-5 on p. 264

Total physical units to account for?

How many individual (physical) units were worked on (completed or not)

Total physical units accounted for?

What happened to those products ? (Finished or still in process)

Now turn to S5-4

S5-4 Determine the Physical Flow of Units (Process Costing Step 1)

Flow of Production	Step 1 Flow of Physical Units
Units to account for:
Beginning work in process	21,000
Started in production during June 1	120,000
Total physical units to account for	Not given
Units accounted for:
Completed and transferred out during October	Not given
Ending work in process, June 31	28,000
Total physical units accounted for	Not given

S5-4 Determine the Physical Flow of Units (Process Costing Step 1)

Flow of Production	Step 1 Flow of Physical Units
Units to account for:
Beginning work in process	21,000
Started in production during June 1	120,000
Total physical units to account for	$141,000
Units accounted for:
Completed and transferred out during October	Not given
Ending work in process, June 31	28,000
Total physical units accounted for	Not given

S5-4 Determine the Physical Flow of Units (Process Costing Step 1)

Flow of Production	Step 1 Flow of Physical Units
Units to account for:
Beginning work in process	21,000
Started in production during June 1	120,000
Total physical units to account for	$141,000
Units accounted for:
Completed and transferred out during October	Not given
Ending work in process, June 31	28,000
Total physical units accounted for	$141,000

S5-4 Determine the Physical Flow of Units (Process Costing Step 1)

Flow of Production	Step 1 Flow of Physical Units
Units to account for:
Beginning work in process	21,000
Started in production during June 1	120,000
Total physical units to account for	141,000
Units accounted for:
Completed and transferred out during October	113,000
Ending work in process, June 31	28,000
Total physical units accounted for	141,000

Step 2: Compute Output in Terms of Equivalent Units – Exhibit 5-5

S5-6

		Step 2 Equivalent Units
		Direct Materials	Conversion Cost
Units to account for:
Beginning work in process
Started in production
Total physical units to account for
Units accounted for:
Completed and transferred out	1,100,000
Ending work in process	85,000
Total physical units accounted for	1,185,000
Total equivalent units

S5-6 (cont.)

		Step 2 Equivalent Units
		Direct Materials	Conversion Cost
Units to account for:
Beginning work in process
Started in production
Total physical units to account for
Units accounted for:
Completed and transferred out	1,100,000	1,100,000	1,100,000
Ending work in process	85,000	85,000	52,700
Total physical units accounted for	1,185,000
Total equivalent units		1,185,000	1,152,700

Step 3: Summarize Total Costs to Account For – Exhibit 5-7

Now turn to S5-7

S5-7

	Direct Materials	Conversion Costs	Total
Beginning work in process, May 1
Costs added during May:
Total costs to account for

S5-7

	Direct Materials	Conversion Costs	Total
Beginning work in process, May 1	$ 42,000	$ 21,000	$ 63,000
Costs added during May:	$101,000	$172,000	$273,000
Total costs to account for	$143,000	$193,000	$336,000

Step 4: Compute the Cost per Equivalent Unit – Exhibit 5-8

Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory – Exhibit 5-9

Now turn to S5-10

S5-10

Determine the total cost that should be assigned to the following:

Units completed and transferred out

370,000 x (5.00 + 2.25) = $2,682,500

S5-10 (cont.)

Determine the total cost that should be assigned to the following:

Units completed and transferred out

370,000 x (5.00 + 2.25) = $2,682,500

Units ending work in process inventory

(74,000 x 5.00) + (48,000 X 2.25) = $478,000

S5-10 (cont.)

Determine the total cost that should be assigned to the following:

Units completed and transferred out

370,000 x (5.00 + 2.25) = $2,682,500

Units ending work in process inventory

(74,000 x 5.00) + (48,000 X 2.25) = $478,000

What was the total costs accounted for? $2,682,500 + $478,000 = $3,160,500

S5-10 (cont.)

Determine the total cost that should be assigned to the following:

Units completed and transferred out

370,000 x (5.00 + 2.25) = $2,682,500

Units ending work in process inventory

(74,000 x 5.00) + (48,000 X 2.25) = $478,000

What was the total costs accounted for? $2,682,500 + $478,000 = $3,160,500

What was Oscar’s average cost of making one unit of its product?

$5.00 + $2.25 = $7.25

Sustainability and Process Costing

Employs lean and green practices

Efficient and environmentally friendly?

Many parties benefit

S5-8

	Direct Materials	Conversion Costs
Total costs to account for
Divided by total equivalent units
Cost per equivalent unit

$ 287,155

$ 468,547

52,210

45,490

$ 5.50

$ 10.30

Objective 4

Prepare journal entries for a process costing system

Journal entries used in a process costing system

Similar to job order system except:

The manufacturing costs (direct materials, direct labor, and manufacturing overhead) are assigned to processing departments, rather than jobs.

At the end of the month a journal entry must be made to transfer cost to the next processing department.

Example:

Direct materials were requisitioned for use by department 1.

		Debit	Credit
Oct. 31	Work-in-process – Department 1	140,000
	Direct Materials		140,000
	Materials requisitioned to department 1

Journal entries used

Labor time records show that $21,250 of direct labor was used in department 1 during October, resulting in this journal entry

Manufacturing overhead is allocated to the department using the company’s predetermined overhead rate. department’s overhead rate is $50 per machine hour and the department used 935 machine hours

		Debit	Credit
Oct. 31	Work-in-process – Department 1	46,750
	Manufacturing Overhead		46,750

		Debit	Credit
Oct. 31	Work-in-process – Department 1	21,250
	Wages Payable		21,250

T - Account

Work in Process Inventory—Department 1

Balance – Oct 1 $ 0

Direct Materials 140,000

Direct Labor. 21,250

Manufacturing

Overhead 46,750

$176,000

		Debit	Credit
Oct. 31	Work-in-process – Department 2	176,000
	Work-in-process – Department 1		176,000

$32,000

Turn to E5-28A

E5-28A, Req. 1

		Debit	Credit
May 31	Work-in-process – Blending	5,980
	Raw Materials Inventory		5,980
	To record direct materials used by Blending

		Debit	Credit
May 31	Work-in-process – Blending	850
	Wages Payable		850
	To record direct labor used in Blending

		Debit	Credit
May 31	Work-in-process – Blending	1,733
	Manufacturing Overhead		1,733
	To record Mfg overhead allocated to Blending

		Debit	Credit
May 31	Work-in-process – Packaging	6,600*
	Work-in-process – Blending		6,600*
	To record transfer of cost out of Blending into Packaging

E5-28A, Req. 1 (cont.)

*Average cost per unit from Req. 4 of E5-27A is $1.00 per gallon; 6,600 gallons are being transferred

E5-28A, Req. 2

Work in Process Inventory— Blending

Balance – May 1 $ 0

Direct Materials 5,980

Direct Labor 850

Mfg Overhead 1,733

$6,600

$1,963

Objective 5

Use process costing in a second or later production department

Process Costing in a Second or Later Processing Department

Same five-step process

Include cost of units transferred in when calculating equivalent units (EU) and cost per EU

Transferred-in costs

$208,000

$176,000

$32,000

Step 1: Summarize Flow of Physical Units – Exhibit 5-12

	Step 1	Step 2: Equivalent Units
	Flow of Physical Units	Transferred In	Direct Materials	Conversion Cost

Step 2: Compute Output in Terms of Equivalent Units – Exhibit 5-12

See Exhibit 5-12 on page 276 for additional details

Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit – Exhibit 5-13

	Transferred In	Direct Materials	Conversion Costs	Total
Beginning work in process, October 1	$ 22,000	$ 0	$ 1,100	$ 23,100
Costs added during October	176,000	19,000	12,935	207,935
Total costs to account for
Divide by total equivalent units
Cost per equivalent unit *

Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit – Exhibit 5-13

	Transferred In	Direct Materials	Conversion Costs	Total
Beginning work in process, October 1	$ 22,000	$ 0.00	$ 1,100	$ 23,100
Costs added during October	176,000	19,000	12,935	207,935
Total costs to account for	$ 198,000	$ 19,000	$ 14,035	$ 231,035
Divide by total equivalent units	45,000	38,000	40,100
Cost per equivalent unit	$ 4.40	$ 0.50	$ 0.35

Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory – Exhibit 5-14

	Transferred In	Direct Materials	Conversion Cost	Total
Units completed and transferred out to Finished Goods Inventory (38,000)	[ 38,000 x ( 4.40 + 0.50 + 0.35) =			$199,500
Ending work in process, October 31(7,000)
Transferred-in costs	[ 7,000 x 4.40]			30,800
Direct materials	[ 0 x 0.50 ]			0
Conversion costs	[ 2,100 x 0.35]			735
Total ending work in process, October 31				$ 31,535
Total costs accounted for				$ 231,035

End of Chapter 5