process cost accounting chapter 3. keep your eye on the goal of cost accounting! + = + direct...

Process Cost Accounting

Chapter

3

Keep your eye on the goal of Cost Accounting!

+

=

+

Direct Material Direct Labor

Manufacturing Overheads

What did the Finished Goods cost???

Job order costing

– One (or more) work in process account.

– Costs are determined for each job.

– Job cost sheet is the key document.

– Unit cost computed by costs added to job /units in the job.

Job order costing

– One (or more) work in process account.

– Costs are determined for each job.

– Job cost sheet is the key document.

– Unit cost computed by costs added to job /units in the job.

Process costing

– WIP account for each department.

– Costs are determined by department.

– Production cost report is the key document.

– Unit costs computed by total department costs/units produced.

Process costing

– WIP account for each department.

– Costs are determined by department.

– Production cost report is the key document.

– Unit costs computed by total department costs/units produced.

Differences Between Job-Order and Process Costing

Process CostingDirect

Materials Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

Direct labor costsmay be small



Type of Product Cost

Do

llar

Am

ou

nt

DirectLabor

ManufacturingOverhead

Process CostingDirect

Materials

Type of Product Cost

Do

llar

Am

ou

nt Conversion

So, direct labor and manufacturing overhead are oftencombined into one cost called conversion costs.

So, direct labor and manufacturing overhead are oftencombined into one cost called conversion costs.







Comparing Job-Order and Process Costing

Direct Materials

Direct Materials

FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold

Direct LaborDirect Labor



Work inProcess


Direct LaborDirect LaborManufacturing

Overhead


Raw Materials

Raw Materials

Job AJob A

Dept 1 Dept 2 Dept 3


FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold


Overhead


Raw Materials

Raw Materials

Job AJob A


Costs are traced andapplied to individualjobs in a job-order

cost system.


cost system.



Overhead


Raw Materials

Raw Materials

Job BJob B



FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold


Overhead


Raw Materials

Raw Materials

Job BJob B



cost system.


cost system.



Overhead


Raw Materials

Raw Materials

Job CJob C



FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold


Overhead


Raw Materials

Raw Materials

Job CJob C



cost system.


cost system.


FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold

Direct LaborDirect Labor



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


FinishedGoods

FinishedGoods

Cost of GoodsSold

Cost of GoodsSold


Overhead


Raw Materials

Raw Materials

WIPDept 1WIP

Dept 1WIP

Dept 2WIP

Dept 2WIP

Dept 3WIP

Dept 3

Process Cost FlowsMaterials Journal Entry

Raw Materials or other overheads A/P or Cash

(Purchase material)

(Transfer indirect material) Raw Materials

Manufacturing O/H

WIP – Dept B Raw Materials

WIP - Dept A

(Transfer direct material)

Raw Materials•Purchases •Direct

Materials

•OtherOverhead

Manufacturing Overhead

•Direct Materials

Process Cost Flows

Work in Process Department B

Work in Process Department A

•Indirect Materials

•Indirect Materials

Actual Applied

•DirectMaterials

Process Cost FlowsLabor Journal Entry

Factory Wages Cash

(Payroll)

(Transfer indirect labor) Factory Wages

Manufacturing O/H

WIP – Dept B Factory Wages

WIP - Dept A

(Transfer direct labor)

OR

Factory Wages Cash

(Payroll)

Manufacturing O/H WIP – Dept B WIP - Dept A

Factory Wages(Transfer manufacturing labor)

Factory Wages•Direct

Materials

•Direct Materials

Process Cost Flows



•Direct Labor •Direct

Labor

•Direct Labor

•IndirectLabor

•OtherOverhead


•IndirectMaterials

Actual Applied

•IndirectLabor

Process Cost FlowsOverhead Journal Entry

WIP – Dept B Manufacturing Overhead

WIP - Dept A

(Apply overheads)


Materials

•Direct Materials

Process Cost Flows



•Direct Labor •Direct

Labor

•Direct Labor

•IndirectLabor

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•OtherOverhead


Actual Applied

•IndirectMaterials•Indirect

Labor

Process Cost Flows

Next, transfer work from Dept. A to Dept. B.

Then complete and sell them.


Materials

•Direct Materials

Process Cost Flows



•Direct Labor

•Direct Labor

•Direct Labor

•IndirectLabor

•OverheadApplied to

Work inProcess

•AppliedOverhead

•AppliedOverhead

•OtherOverhead


Actual Applied

•IndirectMaterials•Indirect

Labor

Transferred to Dept. B

•Transferred from Dept. A

Finished Goods

Cost of Goods Sold

Process Cost Flows Work in Process Department B

•Cost of Goods

Manufactured

•Cost of Goods

Manufactured

•Direct Materials

•Direct Labor

•AppliedOverhead

•Transferred from Dept. A

•Cost of GoodsSold

•Cost of GoodsSold

Group Exercise

Take 10 minutes to doBE3-1, 2, & 3 on page 130

BE 3-1 Altex Manufacturing purchases $45,000 of raw materials on account, and it incurs $50,000 of factory labor costs. Journalize the two transactions on March 31 assuming the labor costs are not paid until April.

BE 3-2 Supporting records show that (a) the Assembly Department used $24,000 of raw materials and $30,000 of the factory labor, and (b) the Finishing Department used the remainder. Journalize the assignment of the costs to the two departments on March 31.

BE 3-3 Manufacturing overhead is assigned to departments on the basis of 200% of labor costs. Journalize the assignment of overhead to the Assembly and Finishing Departments.

Group Exercise

Schiller Company has unit costs of $5 for materials and $15 for conversion costs. There are 4,200 units in ending work in process which are 25% complete as to conversion costs, and fully complete as to materials cost. How much is the total cost assignable to the ending work in process?

a) $36,750b) $84,000c) $21,000d) $15,750

Try this problem:

$5 * 4,200 = $21,000$15 * 4,200 * 25% = $15,750 $36,750

Equivalent Units of Production

Equivalent units are partially completepartially complete and are part of work in process

inventory. Partially completed products are expressed in terms of a smaller

number of fully completed units.

Equivalent Units of Production

+ =

Two half completed products are equivalent to one completed product.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

So, 10,000 units 70 percent completeare equivalent to 7,000 complete units.

For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did Jones have for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000


a. 10,000

b. 11,500

c. 13,500

d. 15,000

Equivalent Units


a. 10,000

b. 11,500

c. 13,500

d. 15,000


a. 10,000

b. 11,500

c. 13,500

d. 15,000

10,000 units + (5,000 units × 0.30) = 11,500 equivalent units

Equivalent Units

Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Cost perequivalent

unit

=Costs for the period

Equivalent units of productionfor the period

Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Now assume that Jones incurred $27,600 in production costs for the 11,500 equivalent units of production. What was Jones’ cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Equivalent Units

Equivalent Units of Production –

Weighted Average Method

The weighted average method . . .– Makes no distinction between work done in prior

and current period.– Blends together units and costs from prior

period and current period.

Let’s see how this works!

Weighted Average Example

Smith Company reported the following activity in Department A for the month of June:

Percent Completed

Units Materials Conversion

Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400 of Department A during June

Work in process, June 30 900

@100%

Calculate the Equivalent Units of Production.

@100%

@60% @30%



Percent Completed




Units completed and transferred out 5,400 5,400 5,400 of Department A during June

Work in process, June 30 900 540 270

@100%

Equivalent Units of Production.

@100%

@60% @30%



Percent Completed




Units completed and transferred out 5,400 5,400 5,400 of Department A during June

Work in process, June 30 900 540 270

5,940 5,670

@100%

Equivalent Units of Production.

@100%

@60% @30%

Equivalent units of production always equals: Units completed and transferred out + Equivalent units remaining in work in process

Equivalent units of production always equals: Units completed and transferred out + Equivalent units remaining in work in process

Equivalent Units Exercise 3-6

E3-6 The Cutting Department of Thakur Manufacturing has the following production and cost data for July.

Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process.

(a) Determine the equivalent units of production for (1) materials and (2) conversion costs.



(a) Determine the equivalent units of production for (1) materials and (2) conversion costs.


Production Costs

1. Transferred out 9,000 units. Beginning work in process $ -0-

2. Started 3,000 units that are 60% complete as to conversion costs and 100% complete as to materials at July 31. 60%

Materials 45,000

Labor 16,200

Manufacturing overhead 18,900

Production Cost Report

ProductionReport

Shows the flowof units and coststhrough work inprocess

Becomes thejob cost sheetin job costing

Helps managerscontrol theirdepartments

Provides costinformation for

financial statements

Production Report

Section 1

Section 2

Section 3

Production Report A quantity schedule showing the flow of units and the computation of

equivalent units.

A quantity schedule showing the flow of units and the computation of

equivalent units.

Production Report

A computation ofcost per equivalent unit.

A computation ofcost per equivalent unit.

Section 1

Section 2

Section 3

Production Report

Production Report

Section 1

Section 2

Section 3

Production Report A reconciliation of cost flows for the period, including:

Total cost for units completed and transferred from the processing department.

Total cost for partially completed units remaining in work in process.

A reconciliation of cost flows for the period, including:

Total cost for units completed and transferred from the processing department.

Total cost for partially completed units remaining in work in process.

• Double Diamond Skis uses process costing to determine unit costs in its Milling Department.

• Double Diamond uses the weighted average cost procedure.

• Using the following information for the month of May, let’s prepare a production report for the Milling Department.

Production Report Example

Work in process, May 1: 200 units Materials: 50% complete. $ 3,000Conversion: 30% complete. 1,000

Units started into production in May: 5,000Units completed and transferred out in May: 4,800

Costs added to production in MayMaterials cost $ 74,000Conversion cost 70,000

Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.

Cost

Production Report Milling

Section 1: Quantity Schedule with Equivalent Units

Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200

Equivalent unitsMaterials Conversion

Units accounted for as follows: Completed and transferred 4,800 4,800 4,800





Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160

5,200 4,960





Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900


Section 2: Compute cost per equivalent unit

TotalCost Materials Conversion

Cost to be accounted for: Work in process, May 1 4,000$ 3,000$ 1,000$ Costs added in the Milling Dept 144,000 74,000 70,000

Total cost 148,000$ 77,000$ 71,000$

Equivalent units 4,960 4,900





Total cost 148,000$ 77,000$ 71,000$


Notice: The beginning % complete is irrelevant





Total cost 148,000$ 77,000$ 71,000$


Cost per equivalent unit 15.524$

$77,000 ÷ 4,960 units = $15.524 (rounded)





Total cost 148,000$ 77,000$ 71,000$


Cost per equivalent unit 15.524$ 14.490$

$71,000 ÷ 4,900 units = $14.490 (rounded)




Total cost 148,000$ 77,000$ 71,000$


Cost per equivalent unit 15.524$ 14.490$ Total cost per equivalent unit = $15.524 + $14.490 = $30.014



Section 3: Cost Reconciliation

Total Equivalent UnitsCost Materials Conversion

Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100

Total work in process, May 31

Total cost accounted for



Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100



4,800 units @ $30.014







160 units @ $15.524


$2,484






100 units @ $14.490


$2,484$1,449

$3,933$148,000




Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100

5,200 4,960 4,900


Total cost 148,000$ 77,000$ 71,000$

Cost per equivalent unit 30.014$ 15.524$ 14.490$

Cost accounted for as follows: Transferred out during May 144,067$ 4,800 4,800 Work in process, May 31: Materials 2,484 160 Conversion 1,449 100

Total work in process, May 31 3,933

Total cost accounted for 148,000$



(b) Compute unit costs and prepare a cost reconciliation schedule.



(b) Compute unit costs and prepare a cost reconciliation schedule.


Production Costs

1. Transferred out 9,000 units. Beginning work in process $ -0-

2. Started 3,000 units that are 60% complete as to conversion costs and 100% complete as to materials at July 31. 60%

Materials 45,000

Labor 16,200

Manufacturing overhead 18,900

process cost accounting chapter 3. keep your eye on the goal of cost accounting! + = + direct...

Documents

job order

job order

process slide

comparing joborder

job cost sheet

process costing slide

joborder cost system

raw materials job b