Appendix 21A: Process Costing

1. Appendix 21A: Process Costing Objectives 1. Distinguish between the flow of costs in process costing and job costs 2. Record process costing transactions 3. Calculate equivalent units 4. Assign costs to units completed and to units in ending work in process inventory.

2. Distinguish between the flow of costs in process costing and job costing. Objective 1

3. Job Costing Direct materials, Direct labour, Overhead Job 100 Job 101 Job 102 Finished Goods Cost of Goods Sold

4. Process Costing Direct materials, Direct labour, Overhead WIP Mixing & Bottling Department WIP Chopping Department Finished Goods Cost of Goods Sold

5. Record process costing transactions. Objective 2

6. Recording Costs Example • Assume that Pace Foods transfers $4,000 of partially completed items from the Chopping Department to the Mixing & Bottling Department. • What is the journal entry?

7. Work in Process Inventory – Mixing & Bottling 4,000 Work in Process Inventory – Chopping 4,000 To transfer costs from the Chopping Department to the Mixing & Bottling Department Recording Costs

8. Recording Costs • Assume that additional materials costing $3,000 were added in the Mixing & Bottling Department. Work-in-Process Inventory – Mixing & Bottling 3,000 Materials Inventory 3,000 To requisition materials

9. Recording Costs • Manufacturing wages amounted to $6,000 and manufacturing overhead was $12,000 in the Mixing & Bottling Department. • What are the journal entries?

10. Work in Process Inventory – Mixing & Bottling 6,000 Manufacturing Wages 6,000 Work in Process Inventory – Mixing & Bottling 12,000 Manufacturing Overhead 12,000 To record the additional labour and overhead cost of the Mixing & Bottling Department Recording Costs

11. Recording Costs • $19,000 worth of finished items were transferred to Finished Goods Inventory. Finished Goods Inventory 19,000 Work in Process Inventory – Mixing and Bottling 19,000 To transfer the cost of goods completed

12. Recording Costs • Assume $1,000 beginning Work in Process Inventory in the Mixing & Bottling Department. • What is the ending Work in Process Inventory?

13. Work in Process Beg. Balance 1,000 Transferred In 4,000 Transferred Out Materials 3,000 19,000 Labour 6,000 Overhead 12,000 End. Balance 7,000 Recording Costs

14. Tracking the Flow of Costs • In process costing, the accounting task is to track the flow of costs through the production process. • Account for the goods completed and transferred out. • Account for the cost of incomplete units that remain as a department’s ending work in process inventory.

15. Tracking the Flow of Costs Example • SeaView manufactures swimming masks. • The Shaping Department shapes the masks. • Direct materials are added at the beginning of the process. • Conversion costs are incurred evenly throughout the shaping process. • The partially completed masks then move to the Finishing Department.

16. Tracking the Flow of Costs Example • Assume that during October, the Shaping Department incurs these costs in processing 50,000 masks: Direct materials $ 140,000 Conversion costs: Direct labour $21,250 Mfg. overhead 46,750 68,000 Costs to account for $208,000

17. Tracking the Flow of Costs Example • Assume the shaping process is complete for all 50,000 masks. • What is the cost transferred to the Finishing Department? • $208,000 • What is the unit cost? • $208,000 ÷ 50,000 = $4.16/mask

18. Calculate equivalent units. Objective 3

19. Equivalent Units Example • Assume that on October 31, the SeaView’s Shaping Department still had 5,000 masks that were 80% of the way through the shaping process. • What are the conversion equivalent units in ending work in process inventory? • 5,000 × .80 = 4,000 masks

20. Steps in Process Cost Accounting • Summarise the flow of physical units. • Calculate output in terms of equivalent units. • Summarise total costs to account for. • Calculate the cost per equivalent unit. • Assign costs to units completed and to units in ending work in process.

21. Summarise the Flow of Physical Units Physical Units Beginning inventory -0- + Started in production 50,000 = Total to account for 50,000 Completed and transferred 40,000 + Work in process 10,000 = Total accounted for 50,000

22. Calculate Output in Terms of Equivalent Units Flow of Physical Direct Conv. Units Mtls. Costs Units to account for: 50,000 Started and completed 40,000 40,000 40,000 Ending WIP 10,000 10,000 2,500 Equivalent units 50,000 42,500 100% 25%

23. Summarise Total Coststo Account for Department 1 – Shaping For the Month Ended October 31, 2005 Physical UnitsDollars Beginning Inventory -0- -0- Production Started 50,000 Direct Materials $ 140,000 Conversion Costs 68,000 Total 50,000 $ 208,000

24. Calculate the Cost perEquivalent Unit Department 1 – Shaping For the Month Ended October 31, 2005 Direct Conversion MaterialsCosts Costs added this month $140,000 $68,000 ÷ Equivalent Units 50,000 42,500 = Cost per EU $ 2.80 $ 1.60

25. Assign costs to units completed and to units in ending work-in-process inventory. Objective 4

26. Assign Costs to Units Department 1 – Shaping For the Month Ended October 31, 2005 Units completed and transferred out: 40,000 × ($2.80 + $1.60) $ 176,000 Units in ending inventory: Materials: 10,000 × $2.80 28,000 Conversion: 2,500 × $1.60 4,000 Total costs $208,000

27. Work in Process Inventory – Shaping Balance, Sept. 30 -0- Transferred to Direct Materials 140,000 Finishing 176,000 Direct labour* 21,250 Overhead* 46,750 Balance Oct.31 32,000 Assign Costs to Units *Conversion costs: $21,250 + $46,750 = $68,000

28. End of Chapter 21A