copyright © 2013 pearson education, inc. publishing as prentice hall. process costing chapter5 1

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 1

Process Costing

Chapter5


Objective 1Distinguish 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– 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


Job Costing

Cost of GoodsSold

Direct labor

Direct materials

FinishedGoods

Manufacturing

overhead

Work in Process

Job 100Job 101

Job 102


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


Process Costing

Cost of GoodsSold

Manufacturing Wages

FinishedGoods

Work in Process,Centers Dept

Work in Process,Shells Dept

Work in Process,Packaging Dept

Manufacturing

Overhead

Materials Inventory


Building Blocks of Process Costing

• Conversion costs– DL + MOH

• Equivalent units

• Inventory flow assumptions– Weighted average– FIFO (not covered in this textbook)


Objective 2Compute equivalent units


Building Blocks of Process Costing

• Equivalent units – Amount of work done during a period in terms of

fully complete units of output


The Building Blocks of Process Costing

• Inventory flow assumptions– Weighted average – FIFO (not covered in the textbook)

• Cost-benefit standpoint


Objective 3Use process costing in the first

production department


How Does Process Costing Work

• Using weighted average assumption

• Five steps to process costing:1. Summarize the flow of physical units.2. Compute output in terms of equivalent units.3. Summarize total costs to account for.4. Compute the cost per equivalent unit.5. Assign total costs to units completed and to units

in ending WIP inventory.


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)


Now turn to S5-4


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

Flow of Production Step 1Flow of Physical Units

Units to account for:

Beginning work in process 21,000Started in production during June 1 120,000Total physical units to account for Not given

Units accounted for:

Completed and transferred out during October Not givenEnding work in process, June 31 28,000Total physical units accounted for Not given





Beginning work in process 21,000Started in production during June 1 120,000Total physical units to account for $141,000


Completed and transferred out during October Not givenEnding work in process, June 31 28,000Total physical units accounted for Not given





Beginning work in process 21,000Started in production during June 1 120,000Total physical units to account for $141,000


Completed and transferred out during October Not givenEnding work in process, June 31 28,000Total physical units accounted for $141,000





Beginning work in process 21,000Started in production during June 1 120,000Total physical units to account for 141,000


Completed and transferred out during October 113,000Ending work in process, June 31 28,000Total physical units accounted for 141,000


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


S5-6


S5-6Step 2

Equivalent UnitsDirect

MaterialsConversion

CostUnits to account for:

Beginning work in process

Started in production

Total physical units to account for


Completed and transferred out 1,100,000Ending work in process 85,000Total physical units accounted for 1,185,000

Total equivalent units


S5-6 (cont.)Step 2

Equivalent UnitsDirect

MaterialsConversion

CostUnits to account for:

Beginning work in process

Started in production

Total physical units to account for


Completed and transferred out 1,100,000 1,100,000 1,100,000Ending work in process 85,000 85,000 52,700Total physical units accounted for 1,185,000

Total equivalent units 1,185,000 1,152,700


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


Now turn to S5-7


S5-7Direct

MaterialsConversion

Costs Total

Beginning work in process, May 1

Costs added during May:

Total costs to account for


S5-7Direct

MaterialsConversion

Costs Total

Beginning work in process, May 1 $ 42,000 $ 21,000 $ 63,000

Costs added during May: $101,000 $172,000 $273,000

Total costs to account for $143,000 $193,000 $336,000


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


Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process

Inventory – Exhibit 5-9


Now turn to S5-10


S5-101. Determine the total cost that should be assigned to

the following:a. Units completed and transferred out

370,000 x (5.00 + 2.25) = $2,682,500


S5-10 (cont.)1. Determine the total cost that should be assigned to


370,000 x (5.00 + 2.25) = $2,682,500 b. Units ending work in process inventory

(74,000 x 5.00) + (48,000 X 2.25) = $478,000





(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





(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

2. What was Oscar’s average cost of making one unit of its product?

$5.00 + $2.25 = $7.25


Sustainability and Process Costing

• Employs lean and green practices

• Efficient and environmentally friendly?

• Many parties benefit


S5-8


S5-8

Direct Materials

ConversionCosts

Total costs to account for

Divided by total equivalent units

Cost per equivalent unit

$ 287,155 $ 468,547

52,210 45,490

$ 5.50 $ 10.30


Objective 4Prepare journal entries for a process

costing system

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

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.

Debit Credit

Oct. 31

Work-in-process – Department 1 140,000

Direct Materials 140,000Materials requisitioned to department 1


Journal entries usedLabor 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

Debit Credit

Oct. 31 Work-in-process – Department 1 46,750Manufacturing Overhead 46,750

Debit Credit

Oct. 31 Work-in-process – Department 1 21,250Wages Payable 21,250


T - AccountWork in Process Inventory—Department 1

Balance – Oct 1 $ 0Direct Materials 140,000Direct Labor. 21,250Manufacturing Overhead 46,750

$176,000

Debit Credit

Oct. 31 Work-in-process – Department 2 176,000Work-in-process – Department 1 176,000

$32,000


Turn to E5-28A


E5-28A, Req. 1Debit Credit

May 31 Work-in-process – Blending 5,980

Raw Materials Inventory 5,980To record direct materials used by Blending

Debit Credit

May 31 Work-in-process – Blending 850Wages Payable 850

To record direct labor used in Blending

Debit Credit

May 31 Work-in-process – Blending 1,733Manufacturing Overhead 1,733

To record Mfg overhead allocated to Blending


Debit Credit

May 31 Work-in-process – Packaging 6,600*Work-in-process – Blending 6,600*

To record transfer of cost out of Blending into Packaging

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


E5-28A, Req. 2Work in Process Inventory— Blending

Balance – May 1 $ 0Direct Materials 5,980Direct Labor 850Mfg Overhead 1,733

$6,600

$1,963


Objective 5Use process costing in a second or later

production department


Process Costing in a Second or Later Processing Department

• Same five-step process

• Include cost of units transferred in when calculating equivalent units (EU) and cost per EU

• Transferred-in costs$208,000 $176,000

$32,000


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


Step 1 Step 2: Equivalent UnitsFlow of

Physical Units Transferred In Direct Materials

Conversion Cost

Step 2: Compute Output in Terms of Equivalent Units – Exhibit 5-12

See Exhibit 5-12 on page 276 for additional details


Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit –

Exhibit 5-13

Transferred In

Direct Materials

Conversion Costs Total

Beginning work in process, October 1 $ 22,000

$ 0

$ 1,100 $ 23,100

Costs added during October 176,000 19,000 12,935 207,935Total costs to account for

Divide by total equivalent units

Cost per equivalent unit *


Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit –

Exhibit 5-13

Transferred In

Direct Materials

Conversion Costs Total

Beginning work in process, October 1 $ 22,000

$ 0.00

$ 1,100 $ 23,100

Costs added during October 176,000 19,000 12,935 207,935Total costs to account for $ 198,000 $ 19,000 $ 14,035 $ 231,035Divide by total equivalent units 45,000 38,000 40,100

Cost per equivalent unit $ 4.40 $ 0.50 $ 0.35


Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory –

Exhibit 5-14Transferred In Direct

MaterialsConversion

Cost Total

Units completed and transferred out to Finished Goods Inventory (38,000) [ 38,000 x ( 4.40 + 0.50 + 0.35) = $199,500

Ending work in process, October 31(7,000)

Transferred-in costs [ 7,000 x 4.40] 30,800

Direct materials [ 0 x 0.50 ] 0

Conversion costs [ 2,100 x 0.35] 735

Total ending work in process, October 31 $ 31,535

Total costs accounted for $ 231,035


End of Chapter 5

copyright © 2013 pearson education, inc. publishing as prentice hall. process costing chapter5 1

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