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Process Costing

Process Costing. Chapter 21. Distinguish Between the Flow of Costs in Process Costing and Job Costing. Objective 1. Job Costing. Direct materials, Direct labor, Overhead. Job 100. Job 101. Job 102. Finished Goods. Cost of Goods Sold. Process Costing.

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Process Costing

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  1. Process Costing Chapter 21

  2. Distinguish Between the Flow of Costs in Process Costing and Job Costing. Objective 1

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

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

  5. 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?

  6. 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

  7. 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

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

  9. 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 labor and overhead cost of the Mixing & Bottling Department Recording Costs

  10. 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

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

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

  13. 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.

  14. Tracking the Flow of Costs Example • Key Largo Co. manufactures diving 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 Insertion Department.

  15. Tracking the Flow of Costs Example • Assume that during September, the Shaping Department incurs these costs in processing 25,000 masks: Direct materials $ 70,000 Conversion costs: Direct labor $12,250 Mfg. overhead 29,750 42,000 Costs to account for $112,000

  16. Tracking the Flow of Costs Example • Assume the shaping process is complete for all 25,000 masks. • What is the cost transferred to the Insertion Department? • $112,000 • What is the unit cost? • $112,000 ÷ 25,000 = $4.48/mask

  17. Compute Equivalent Units. Objective 2

  18. Equivalent Units Example • Assume that on September 30, the Key Largo Co.’s Shaping Department still had 5,000 masks that were only 20% of the way through the shaping process. • What are the conversion equivalent units in ending work in process inventory? • 5,000 × .20 = 1,000 masks

  19. Steps in Process Cost Accounting • 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 costs to units completed and to units in ending work in process.

  20. Summarize the Flow of Physical Units Physical Units Beginning inventory -0- + Started in production 25,000 = Total to account for 25,000 Completed and transferred 20,000 + Work in process 5,000 = Total accounted for 25,000

  21. Compute Output in Terms of Equivalent Units Flow of Physical Direct Conv. Units Mtls. Costs Units to account for: 25,000 Started and completed 20,000 20,000 20,000 Ending WIP 5,000 5,000 1,000 Equivalent units 25,000 21,000 100% 20%

  22. Summarize Total Coststo Account For Department 1 – Shaping For the Month Ended September 30, 20xx Physical UnitsDollars Beginning Inventory -0- -0- Production Started 25,000 Direct Materials $ 70,000 Conversion Costs 42,000 Total 25,000 $112,000

  23. Compute the Cost perEquivalent Unit Department 1 – Shaping For the Month Ended September 30, 20xx Direct Conversion MaterialsCosts Costs added this month $70,000 $42,000 ÷ Equivalent Units 25,000 21,000 = Cost per EU $2.80 $2.00

  24. Use Process Costing to Assign Costs to Units Completed and to Units in Ending Work in Process Inventory. Objective 3

  25. Assign Costs to Units Department 1 – Shaping For the Month Ended September 30, 20xx Units completed and transferred out: 20,000 × (2.80 + 2.00) $ 96,000 Units in ending inventory: Materials: 5,000 × 2.80 14,000 Conversion: 1,000 × 2.00 2,000 Total costs $112,000

  26. Work in Process Inventory – Shaping Balance, Aug. 31 -0- Transferred to Direct Materials 70,000 Insertion 96,000 Direct Labor* 12,250 Overhead* 29,750 Balance Sept. 30 16,000 Assign Costs to Units *Conversion costs: $12,250 + $29,750 = $42,000

  27. Use the Weighted-Average Method to Assign Costs to Units Completed and to Units in Ending Work in Process in a Second Department Objective 4

  28. Process Costing for a Second Department • A batch of swim masks were transferred out of the Shaping Department and into the Insertion Department at the end of July. • These masks did not make it completely through the Insertion Department during August. • They become the beginning inventory in September.

  29. Process Costing for a Second Department • Assume that the Insertion Department of Key Largo Co. had 4,000 units in beginning inventory on September 1, and 3,000 in inventory on September 30.

  30. Process Costing for a Second Department • The ending inventory was 90% complete for materials and 40% for conversion. • 20,000 units were transferred in from the Shaping Department.

  31. Summarize the Flowof Physical Units Physical Units Beginning inventory 4,000 + Transferred in from Shaping 20,000 = Total to account for 24,000 Total units completed 21,000 + Units in ending inventory 3,000 = Total units accounted for 24,000

  32. Compute Output in Termsof Equivalent Units • What are the equivalent units for transferredin? Completed and transferred 21,000 Ending inventory 3,000 Equivalent units 24,000

  33. Compute Output in Termsof Equivalent Units Flow of Physical Direct Conv. Units Mtls. Costs Units to account for: 24,000 Completed 21,000 21,000 21,000 Ending WIP 3,000 2,700 1,200 Equivalent units 23,700 22,200 90% 40%

  34. Summarize Total Costs Information given now Beginning work in process inventory cost consists of: Transferred in: $18,960 Materials: 8,877 Conversion: 2,003 Total $29,840

  35. Compute the CostPer Equivalent Unit Transferred in: ($18,960 + $96,000) ÷ 24,000 = $4.79 Materials: ($ 8,877 + $55,350) ÷ 23,700 = $2.71 Conversion: ($ 2,003 + $42,400) ÷ 22,200 = $2.00 Total $9.50

  36. Assign Total Cost to Units Units completed: 21,000 × $9.50 = $199,500 Transferred in: 3,000 × $4.79 = $14,370 Materials: 2,700 × $2.71 = 7,317 Conversion: 1,200 × $2.00 = 2,400 Total $24,090 ($3 difference due to rounding)

  37. Account for a second processing department by the FIFO method. FIFO METHOD

  38. Process Costing for a Second Department – FIFO • A batch of swim masks were transferred out of the Shaping Department and into the Insertion Department at the end of July. • These masks did not make it completely through the Insertion Department during August. • They become the beginning inventory in September.

  39. Process Costing for a Second Department – FIFO • Assume that the Insertion Department of Key Largo Co. had 4,000 units in beginning inventory on September 1, and 3,000 in inventory on September 30.

  40. Process Costing for a Second Department – FIFO • The beginning inventory was 80% complete for materials and 25% for conversion. • The ending inventory was 90% complete for materials and 40% for conversion. • 20,000 units were transferred in from the Shaping Department.

  41. Summarize the Flowof Physical Units Physical Units Beginning inventory 4,000 + Transferred in from Shaping 20,000 = Total to account for 24,000 From beginning inventory 4,000 Started and completed 17,000 Total units completed 21,000 Units in ending inventory 3,000 Total units accounted for 24,000

  42. Compute Output in Termsof Equivalent Units • What are the equivalent units for transferred in? Started and completed 17,000 Ending inventory 3,000 Equivalent units 20,000

  43. Compute Output in Termsof Equivalent Units Flow of Physical Direct Conv. Units Mtls. Costs Units to account for: 24,000 Beginning inventory 4,000 800 3,000 Started and completed 17,000 17,000 17,000 Ending WIP 3,000 2,700 1,200 Equivalent units 20,500 21,200 90% 40%

  44. Summarize Total Costs Information given now Costs added during September are: Transferred in $ 96,000 Materials 55,350 Conversion 42,400 Total $193,750

  45. Summarize Total Costs Information given now Costs in the beginning work in process: $ 29,840 Costs added during September: 193,750 Total $223,590

  46. Compute the CostPer Equivalent Unit Transferred in: $96,000 ÷ 20,000 = $4.80 Materials: $55,350 ÷ 20,500 = $2.70 Conversion: $42,400 ÷ 21,200 = $2.00 Total $9.50

  47. Assign Costs toUnits Completed Cost in beginning inventory: $ 29,840 Cost to complete the units in beginning inventory: Direct materials (800 × $2.70) $ 2,160 Conversion (3,000 × $2.00) 6,000 Cost of the units started and completed (17,000 × $9.50) 161,500 Total $199,500

  48. Assign Costs to Unitsin Ending Inventory Transferred in: 3,000 × $4.80 = $14,400 Materials: 2,700 × $2.70 = 7,290 Conversion: 1,200 × $2.00 = 2,400 Total $24,090

  49. Cost Reconciliation Cost in beg. inventory $ 29,840 + Costs added during September 193,750 = Total to account for $223,590 Costs transferred out $199,500 + Cost in ending inventory 24,090 = Total accounted for $223,590

  50. End of Chapter 21

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