ACC 3200

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ACC 3200. Process Costing. Learning Objectives. Describe the key features of a process costing system. Reconcile the number of physical units using the weighted average method Calculate equivalent units using the weighted average method.

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### ACC 3200

Process Costing

Learning Objectives
• Describe the key features of a process costing system.
• Reconcile the number of physical units using the weighted average method
• Calculate equivalent units using the weighted average method.
• Calculate equivalent units using the weighted average method
• Prepare a process costing production report using the weighted average method
• Prepare Journal Entries for Process Costing

3-5

Process Costing Production Report

The foundation of a process costing system is the production report. In the report we provide information about:

The number of units produced.

The manufacturing costs transferred into Work in Process Inventory.

The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory.

The number of units remaining in process at the end of the period.

The cost of units remaining in process at the end of the period.

3-6

Process Costing Production Report

Section 1 of Example Production Report

(Unit = 1 Barrel of Wine)

The report tells managers about the total number of units worked on and where they are in the process.

Equivalent units are used to convert partially complete units into the equivalent number of full units.

3-7

Process Costing Production Report

The costs are either transferred out with the units completed, or kept in the processing department.

Section 2 of Example Production Report

(Costs)

The second part of the production report shows the total manufacturing costs incurred during the period.

3-13

1

Step 2: Translate Physical Units into Equivalent Units

We need to calculate equivalent units because a process usually has some partially completed unitsin its beginning and ending inventory.

+

=

3-14

Step 2: Translate Physical Units into Equivalent Units

Direct materials are added at the beginning of the process. So, once a unit is started, it will have 100% of the required direct materials.

Conversion costs are incurred uniformly in the process.

The 1,600 units that were transferred to bottling during the period are100% complete for material and conversion.

The 400 units in ending inventory are 60% complete as to conversion costs.

3-20

Step 5: Prepare a Production Report

Section 1 of the Production Report

3-21

Step 5: Prepare a Production Report

Section 2 of the Production Report

3-22

We have not discussed process costing when the FIFO method is applied. This material in covered in the Supplement to this chapter. The only difference between the two methods is how we treat beginning inventory.

We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department.

3-23

Journal Entries for Process Costing

Purchase of Raw Materials

Mondavi purchased \$35,000 of materials on account.

Issue of Raw Material into Production

Mondavi adds \$20,000 of grapes to production.

3-24

Journal Entries for Process Costing

Recording Actual Conversion Costs

Mondavi incurred the following actual conversion costs:

3-25

Journal Entries for Process Costing

Recording Applied Conversion Costs

Mondavi applies conversion costs to work in process based on a predetermined rate, using direct materialscost as the allocation base. The rate is 125% ofdirect materials cost.

3-26

Summary of Recorded Transactions

Raw Materials

Work in Process (CFA)

Beg. Bal. = 0

Beg. Bal. = 0

Pur. = 35,000

Work in Process Bottling

Conversion Cost

Actual

Applied

36,250

3-27

Journal Entries for Process Costing

Transfer of Cost from CFA to Bottling

Mondavi transfers the entire balance, \$45,000, from the work in process (CFA) account to the Bottlingwork in process account.

3-28

Journal Entries for Process Costing

Issue of Raw Material into the Bottling Process

Mondavi issues an \$10,000 worth of directmaterials into Bottling Department.

3-29

Journal Entries for Process Costing

Recording Applied Conversion Costs

Mondavi applies conversion costs to the BottlingDepartment using direct materials cost as theallocation base. The rate is 87.5 percent ofdirect materials cost.

3-30

Updated Summary of Recorded Transactions

Raw Materials

Work in Process CFA

Beg. Bal. = 0

Beg. Bal. = 0

Pur. 35,000

Trans. 45,000

5,000

0

Work in Process Bottling

Conversion Cost

Beg. Bal. = 0

Actual

Applied

36,250

2,500

63,750

3-31

Journal Entries for Process Costing

Transferring to Finished Good Inventory

Mondavi transfers the entire balance from Bottlingand Packaging to Finished Goods Inventory.

Unit costs for the 1,250 cases (15,00 bottles) produced:

3-32

Journal Entries for Process Costing

Sales of Finished Goods.

Mondavi sold 12,000 bottles in the winery gift shop forfor \$8.00 per bottle. The entry to record the sale is:

The entry to record the cost of goods sold is:

3-33

Journal Entries for Process Costing

Conversion Cost

Actual

Applied

36,250

25,000

8,750

Underapplied 2,500

Cost of Goods Sold

Finished Goods

Beg. Bal. = 0

Goods Comp. 63,750

12,750

### Supplement

FIFO Method

3-35

Step 1: Reconcile the Number of Physical Units

PhysicalUnits

Beginning Units in Process

Units Started and Completed

Ending Units in Process

+

+

FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period.

3-36

Step 1: Reconcile the Physical Units

Units Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400

OR

Units Startedand Completed

Units Completed

BeginningUnits

=

= 1,600 – 200 = 1,400

OR

Units Startedand Completed

UnitsStarted

EndingUnits

=

= 1,800 – 400 = 1,400

3-37

Step 2: Translate Physical Units into Equivalent Units

Beginning inventory is 100% complete as to materials and 70% complete as to conversion.

400 units × 60% = 240

Complete as to materials

200 units × 30% = 60

3-40

Step 5: Prepare a Production Report

Section 1 of the Production Report

3-41

Step 5: Prepare a Production Report

Section 2 of the Production Report