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Process Costing

Process Costing. Chapter 5. 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

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Process Costing

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  1. Process Costing Chapter5

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

  3. Process Costing Benefits • Benefits • Cost trends • Budget to actual • Pricing • Financial statements

  4. 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

  5. Job 102 Job 101 FinishedGoods Job 100 Cost of GoodsSold Job Costing Direct materials Direct labor Work in Process Manufacturing overhead

  6. 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

  7. Cost of GoodsSold Process Costing Materials Inventory Work in Process, Centers Dept Manufacturing Wages Work in Process, Shells Dept FinishedGoods Manufacturing Overhead Work in Process, Packaging Dept

  8. Building Blocks of Process Costing • Conversion costs • DL + MOH • Equivalent units • Inventory flow assumptions • Weighted average • FIFO (not covered in this textbook)

  9. Objective 2 Compute equivalent units

  10. Building Blocks of Process Costing • Equivalent units • Amount of work done during a period in terms of fully complete units of output

  11. The Building Blocks of Process Costing • Inventory flow assumptions • Weighted average • FIFO (not covered in the textbook) • Cost-benefit standpoint

  12. Objective 3 Use process costing in the first production department

  13. 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.

  14. 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)

  15. Now turn to S5-4

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

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

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

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

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

  21. S5-6

  22. S5-6

  23. S5-6 (cont.)

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

  25. Now turn to S5-7

  26. S5-7

  27. S5-7

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

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

  30. Now turn to S5-10

  31. 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

  32. 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

  33. 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

  34. 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

  35. Sustainability and Process Costing Employs lean and green practices Efficient and environmentally friendly? Many parties benefit

  36. S5-8

  37. S5-8 $ 287,155 $ 468,547 52,210 45,490 $ 5.50 $ 10.30

  38. Objective 4 Prepare journal entries for a process costing system

  39. 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.

  40. 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

  41. 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 $32,000

  42. Turn to E5-28A

  43. E5-28A, Req. 1

  44. 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

  45. E5-28A, Req. 2 Work in Process Inventory— Blending $6,600 Balance – May 1 $ 0 Direct Materials 5,980 Direct Labor 850 Mfg Overhead 1,733 $1,963

  46. Objective 5 Use process costing in a second or later production department

  47. Process Costing in a Second or Later Processing Department $208,000 $176,000 $32,000 Same five-step process Include cost of units transferred in when calculating equivalent units (EU) and cost per EU Transferred-in costs

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

  49. Step 2: Compute Outputin Terms of Equivalent Units – Exhibit 5-12 See Exhibit 5-12 on page 276 for additional details

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

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