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Chapter 3. Process Cost Accounting. Keep your eye on the goal of Cost Accounting!. +. Direct Material. Direct Labor. What did the Finished Goods cost???. +. Manufacturing Overheads. =. Job order costing One (or more) work in process account. Costs are determined for each job.

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keep your eye on the goal of cost accounting
Keep your eye on the goal of Cost Accounting!

+

Direct Material

Direct Labor

What did the Finished Goods cost???

+

Manufacturing Overheads

=

differences between job order and process costing
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.

Differences Between Job-Order and Process Costing
process costing
Process Costing

DirectMaterials

Direct labor costsmay be smallin comparison toother product

costs in processcost systems.

ManufacturingOverhead

Dollar Amount

DirectLabor

Type of Product Cost

process costing5
Process Costing

DirectMaterials

Direct labor costsmay be smallin comparison toother product

costs in processcost systems.

Conversion

Dollar Amount

Type of Product Cost

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

comparing job order and process costing
Comparing Job-Order and Process Costing

Direct Materials

FinishedGoods

Work inProcess

Direct Labor

ManufacturingOverhead

Cost of GoodsSold

comparing job order and process costing7
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job A

Dept 1

Dept 2

Dept 3

comparing job order and process costing8
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job A

Dept 1

Dept 2

Dept 3

comparing job order and process costing9
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job A

FinishedGoods

Dept 1

Dept 2

Dept 3

Cost of GoodsSold

Costs are traced andapplied to individualjobs in a job-ordercost system.

comparing job order and process costing10
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job B

Dept 1

Dept 2

Dept 3

comparing job order and process costing11
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job B

Dept 1

Dept 2

Dept 3

comparing job order and process costing12
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job B

FinishedGoods

Dept 1

Dept 2

Dept 3

Cost of GoodsSold

Costs are traced andapplied to individualjobs in a job-ordercost system.

comparing job order and process costing13
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job C

Dept 1

Dept 2

Dept 3

comparing job order and process costing14
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job C

Dept 1

Dept 2

Dept 3

comparing job order and process costing15
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

Job C

FinishedGoods

Dept 1

Dept 2

Dept 3

Cost of GoodsSold

Costs are traced andapplied to individualjobs in a job-ordercost system.

comparing job order and process costing16
Comparing Job-Order and Process Costing

Costs are traced and applied to departments in a process cost system.

Direct Materials

FinishedGoods

Processing

Department

Direct Labor

ManufacturingOverhead

Cost of GoodsSold

comparing job order and process costing17
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

WIP

Dept 1

WIP

Dept 2

WIP

Dept 3

FinishedGoods

Cost of GoodsSold

comparing job order and process costing18
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

WIP

Dept 1

WIP

Dept 2

WIP

Dept 3

FinishedGoods

Cost of GoodsSold

comparing job order and process costing19
Comparing Job-Order and Process Costing

Direct Labor

Raw Materials

ManufacturingOverhead

WIP

Dept 1

WIP

Dept 2

WIP

Dept 3

FinishedGoods

Cost of GoodsSold

process cost flows materials journal entry

Raw Materials or other overheads

(Purchase material)

A/P or Cash

WIP - Dept A

WIP – Dept B

Raw Materials

(Transfer direct material)

Manufacturing O/H

Raw Materials

(Transfer indirect material)

Process Cost FlowsMaterials Journal Entry
process cost flows
Process Cost Flows

Work in Process Department A

Raw Materials

  • DirectMaterials
  • DirectMaterials
  • Purchases
  • Indirect Materials

Work in Process Department B

Manufacturing Overhead

Actual

Applied

  • Direct Materials
  • OtherOverhead
  • Indirect Materials
process cost flows labor journal entry

Factory Wages

(Payroll)

Cash

WIP - Dept A

WIP – Dept B

Factory Wages

(Transfer direct labor)

Process Cost FlowsLabor Journal Entry

Manufacturing O/H

Factory Wages

(Transfer indirect labor)

slide23

Factory Wages

(Payroll)

Cash

OR

WIP - Dept A

WIP – Dept B

Manufacturing O/H

Factory Wages

(Transfer manufacturing labor)

process cost flows24
Process Cost Flows

Work in Process Department A

Factory Wages

  • Direct Materials
  • Direct Labor
  • Direct Labor
  • IndirectLabor

Work in Process Department B

Manufacturing Overhead

Actual

Applied

  • Direct Materials
  • OtherOverhead
  • Direct Labor
  • IndirectMaterials
  • IndirectLabor
process cost flows overhead journal entry

WIP - Dept A

WIP – Dept B

Manufacturing Overhead

(Apply overheads)

Process Cost FlowsOverhead Journal Entry
process cost flows26
Process Cost Flows

Work in Process Department A

Factory Wages

  • Direct Materials
  • Direct Labor
  • Direct Labor
  • IndirectLabor
  • AppliedOverhead

Work in Process Department B

Manufacturing Overhead

Actual

Applied

  • Direct Materials
  • OtherOverhead
  • OverheadApplied to Work inProcess
  • Direct Labor
  • IndirectMaterials
  • AppliedOverhead
  • IndirectLabor
process cost flows27
Process Cost Flows

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

Then complete and sell them.

process cost flows28
Process Cost Flows

Work in Process Department A

Factory Wages

  • Direct Materials
  • Direct Labor
  • Direct Labor

Transferred to Dept. B

  • AppliedOverhead
  • IndirectLabor

Work in Process Department B

Manufacturing Overhead

Actual

Applied

  • Direct Materials
  • OtherOverhead
  • OverheadApplied to Work inProcess
  • Direct Labor
  • AppliedOverhead
  • IndirectMaterials
  • Transferred from Dept. A
  • IndirectLabor
process cost flows29
Process Cost Flows

Work in Process Department B

Finished Goods

  • Direct Materials
  • Cost of Goods Manufactured
  • Cost of GoodsManufactured
  • Cost of GoodsSold
  • Direct Labor
  • AppliedOverhead
  • Transferred from Dept. A

Cost of Goods Sold

  • Cost of GoodsSold
group exercise
Group Exercise

Take 10 minutes to do

BE3-1, 2, & 3 on page 130

group exercise31
Group Exercise

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.

try this problem
Try this problem:
  • 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?
    • $36,750
    • $84,000
    • $21,000
    • $15,750

$5 * 4,200 = $21,000

$15 * 4,200 * 25% = $15,750

$36,750

equivalent units of production
Equivalent Units of Production

Equivalent unitsare partially 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 production34
Equivalent Units of Production

Two half completed products areequivalentto one completed product.

+

=

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

equivalent units
Equivalent 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

equivalent units36
Equivalent 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

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

calculating and using equivalent units of production
Calculating and Using Equivalent Units of Production

To calculate the cost perequivalent unit for the period:

Costs for the periodEquivalent units of productionfor the period

Cost perequivalent unit

=

slide38

Equivalent Units

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

equivalent units of production weighted average method
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
Weighted Average Example

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

@100%

@100%

@30%

@60%

Calculate the Equivalent Units of Production.

weighted average example41
Weighted Average Example

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

@100%

@100%

@30%

@60%

Equivalent Units of Production.

weighted average example42
Weighted Average Example

Equivalent units of production always equals:

Units completed and transferred out

+ Equivalent units remaining in work in process

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

@100%

@100%

@30%

@60%

Equivalent Units of Production.

slide44

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.

production cost report

ProductionReport

Production Cost Report

Shows the flowof units and coststhrough work inprocess

Provides costinformation forfinancial statements

Becomes thejob cost sheetin job costing

Helps managerscontrol theirdepartments

production report

Production Report

Section 1

Section 2

Section 3

Production Report
  • A quantity schedule showing the flow of units and the computation of equivalent units.
production report47

Production Report

Section 1

Section 2

Section 3

Production Report
  • A computation ofcost per equivalent unit.
production report48

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.
production report example
Production Report Example
  • 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 milling
Production Report Milling

Cost

Work in process, May 1: 200 units

Materials: 50% complete. $ 3,000

Conversion: 30% complete. 1,000

Units started into production in May: 5,000

Units completed and transferred out in May: 4,800

Costs added to production in May

Materials cost $ 74,000

Conversion cost 70,000

Work in process, May 31: 400 units

Materials 40% complete.

Conversion 25% complete.

production report milling51
Production Report Milling

Section 1: Quantity Schedule with Equivalent Units

production report milling52
Production Report Milling

Section 1: Quantity Schedule with Equivalent Units

production report milling53
Production Report Milling

Section 1: Quantity Schedule with Equivalent Units

production report milling54
Production Report Milling

Section 2: Compute cost per equivalent unit

production report milling55
Production Report Milling

Section 2: Compute cost per equivalent unit

Notice: The beginning % complete is irrelevant

production report milling56
Production Report Milling

Section 2: Compute cost per equivalent unit

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

production report milling57
Production Report Milling

Section 2: Compute cost per equivalent unit

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

production report milling58
Production Report Milling

Section 2: Compute cost per equivalent unit

production report milling59
Production Report Milling

Section 3: Cost Reconciliation

production report milling60
Production Report Milling

Section 3: Cost Reconciliation

4,800 units @ $30.014

production report milling61
Production Report Milling

Section 3: Cost Reconciliation

160 units @ $15.524

$2,484

production report milling62
Production Report Milling

Section 3: Cost Reconciliation

100 units @ $14.490

$2,484

$1,449

$3,933

$148,000

slide65

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.

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

slide66

End of Chapter 3

Are we smart now?

Or WHAT???