process costing study guide

8/10/2019 Process Costing Study Guide

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CHAPTER 5 PROCESS COST ACCOUNTINGGENERAL PROCEDURES

Review Summary

1. Process costing is used when goods of a similar nature are manufactured in a continuousproduction operation. Costs are accumulated by department and divided by units produced toobtain the departmental average cost per unit. In a process cost system, materials and labor costsare charged to the departments in which they are incurred. Indirect materials and indirect laborthat cannot be identified with a specific department are charged to Factory Overhead. Actualoverhead costs are collected in a control account in the general ledger that is supported by asubsidiary ledger consisting of factory overhead analysis sheetsshowing the detailed allocationof costs to the various departments. Predetermined overhead rates are used in process costing toapply factory overhead to departments.

2. The primary problem in process costing is the allocation of production costs between the unitsfinished during the period and the units still in process at the end of the period. nder the averagecost methodof assigning costs to inventories, the cost of the wor! in process at the beginning of

the period is added to the production costs for the current period, and the total is divided by thee"uivalent production to determine the average unit cost. Equivalent productionis the number ofwhole units that could have been completed given the production costs incurred. To determinee"uivalent units using the average cost method, the stage of completion of units in process at theend of the period must be ascertained. Equivalent units for a period may be computed as followsunder the average cost method#

Units completed this period + (Units in Ending WIP ! of completion this period"

#. In cases where there is no beginning wor! in process inventory, the e"uivalent units of productioncan be divided into the total production costs for the period to obtain the average cost per unit$

Total production cost $ %"uivalent units of production

The inventory costs can then be allocated between &or! in Process and Finished 'oods asfollows#

nits transferredto finished goods

Cost of wor! (umber of units in Average costin process ending wor! in process per unit

&hen production costs are not incurred evenly throughout the production process, the amount ofmaterials, labor, and overhead have to be evaluated separately in estimating the stage ofcompletion.

%. A cost of production summaryaccumulates the materials, labor, and factory overhead costs for

which a department is accountable. It contains the calculation of e"uivalent production for theperiod that consists of the units finished during the month plus the e"uivalent units of wor! inprocess. It also includes the computations for the unit costs for material, labor, and factoryoverhead that are obtained by dividing the e"uivalent production into the respective productioncosts for each element. )ast, it summari*es the disposition of the production costs to either thecost of goods finished during the period or the cost of wor! in process at the end of the period.

The total costs to be accounted for during the period must e"ual the total production costsaccounted for during the period.

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+ Average cost perCost of finished goods

+ - of completion +


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&. A production reportsubmitted by the departmental supervisor to the cost accountant lists thenumber of units in process at the beginning of the month, the number of units finished during themonth, the number of units in process at the end of the month, and the estimated stage ofcompletion of the ending wor!inprocess inventory. After receiving the production report, the costaccountant prepares the cost of production summary by first collecting the period/s productioncosts from summaries of materials re"uisitions, payroll, and factory overhead analysis sheets. Theunits in process are then converted to e"uivalent units. The cost of production summary can becompleted with the computation of the unit costs and the ending inventory costs. After preparing

the cost of production summary, the accountant can debit Finished 'oods and credit &or! inProcess for the cost of the goods finished during the period, and the statement of cost of goodsmanufactured can be prepared.

'. If there is beginning wor!inprocess inventory, the accountant considers not only the currentmonth/s cost of material, labor, and factory overhead in determining the unit costs for the monthbut also the cost of each element carried over from the prior month. &hen there are twodepartments, the costs accumulated in the first department for those units completed andtransferred are transferred to the ne0t department. Although still in process, the transferred unitsand their related costs are treated as completed production in the first department and as rawmaterials added at the beginning of the process in the second department. The calculation of unitcost for the month in the second department considers only those costs incurred in that departmentand the e"uivalent units produced in the department. The transferredin costsand units from the

first department are not included in the computation. In determining the cost transferred tofinished goods and the cost of the ending wor! in process, however, the prior department costsmust be considered.

). If finished goods have been completed in a department but not yet transferred at the end of themonth, they are accounted for as 1goods completed and on hand2 and priced out at the full unitcost. For financial statement purposes, the goods still are considered to be wor! in processbecause they are complete as to the department but not as to the factory. Often the cost from priordepartments will change from one month to the ne0t, and these costs will have to be averaged on asubse"uent department/s cost of production summary for the purpose of assigning total costs.

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Chapter Five Name ________________________________________

Part I

Instructins! Indicate your answer in the Answers column by writing a 1T2 for True or an 1F2 forFalse.Answers

1. 3ob order costing is appropriate when goods are manufactured in a continuous ormass production operation...........................................................................444444444

2. The focal point of process costing is the 5ob................................... .......... ....444444444

#. The main difference between 5ob order and process costing is the manner inwhich costs are accumulated..........................................................................................................................................................................444444444

%. A process cost system re"uires less clerical effort than a 5ob order cost systembecause costs are charged to departments rather than to individual 5obs..........................................................................................................444444444

&. In a process cost system, overhead is applied on the basis of products ratherthan departments...........................................................................................................................................................................................444444444

'. To compute average unit cost, the cost of the wor! in process at the beginningof the period is added to the production costs for the period, and the total isdivided by total e"uivalent production............................................................................................................................................................444444444

). The calculation of e"uivalent production under the average cost method re"uiresthe restatement of goods in process at the end of the period in terms of completedunits..............................................................................................................................................................................................................444444444

*. The primary purpose of process costing is to determine the cost of units finishedand transferred out of a department during the period and the cost of the units inwor! in process at the beginning of the period................................................................................................................................................444444444

. In computing e"uivalent production under average costing, the number of units inending wor! in process is multiplied by the percentage of their completion andthen added to the units finished this period................................... ..................................................................................................................444444444

1,. A cost of production summary presents the necessary information forinventory valuation and serves as the source for summary 5ournal entries... ..444444444

11. The cost accountant prepares the cost of production summary by first collectingthe period/s production costs from summaries of material re"uisitions, payroll,and factory overhead analysis sheets................................................... .........444444444

12. &hen the cost of production summary is completed, the total costs to beaccounted for should be e"ual to the total production costs accounted for.......444444444

1#. In computing unit cost for the month when there is beginning inventory, the costof the beginning inventory is added to the monthly production costs before

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dividing by e"uivalent production............................................................... .444444444

1%. In computing the unit cost of production in a department subse"uent to the first,the transferredin costs and units from the prior department are included in thecomputation................................................................................................444444444

1&. If at the end of the period, goods are completed and on hand in the firstdepartment of a production process that re"uires two departments, they would beincluded as finished goods for financial statement purposes...........................444444444

Part II

Instructins! In the Answers column, place the letter from the list below that identifies the term that

best matches the statement. (o letter should be used more than once.a. Average cost method f. Cost of production summary

b. Production report g. Process cost systemc. Cost center h. Transferredin costd. &or! in process i. 6tage of completione. %"uivalent production 5. 3ob order cost system

Answers

44444 1. This cost system is appropriate when products are manufactured on a specialorder basis.

44444 2. This is a unit of activity within the factory to which costs may be assigned practically ande"uitably.

44444 #. nder this method of process costing, the cost of the beginning wor! in process is addedto the production cost for the current period in the unit cost calculation.

44444 %. This is the number of units that could have been completed during a period using theproduction costs incurred during the period.

44444 &. This represents the fraction or percentage of materials, labor, and overhead costs of acompleted unit that has been applied during the period to goods that have not beencompleted.

44444 '. This is submitted by the department head indicating the number of units in process at thebeginning of the period, the number of units completed during the period, and the numberof units in process at the end of the period and their stage of completion.

44444 ). The cost of units received from a prior department.

44444 *. This cost system is appropriate when goods of a similar or homogeneous nature aremanufactured in a continuous or mass production operation.

44444 . This presents the necessary information for inventory valuation and can also serve as thesource for summary 5ournal entries.

44444 1,. This is what units finished but still on hand in a department at the end of the period areconsidered for financial statement purposes.

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Part III

Instructins! In the Answers column, place the letter of the choice that most correctly completeseach item.

Answers

44444 1. For a process cost system, procedures must be designed to#a. 7alue inventory of wor! still in processb. 8etermine a unit cost for each departmentc. Accumulate materials, labor, and factory overhead costs by departmentsd. All of the above

44444 2. A cost of production report for a department shows all of the following ecept#a. Total and unit costs transferred from a preceding departmentb. The cost per 5obc. nit costs added by the departmentd. Costs transferred to a successor department or to finished goods

44444 #. The beginning wor!inprocess inventory was 9: percent complete and the ending wor!

inprocess inventory was ;: percent complete. The dollar amount of the production costincluded in the ending wor!inprocess inventory a. ?:: percent c. @: percentb. ;: percent d. 9: percent

44444 %. An error was made in the computation of the percentageofcompletion of the currentyear/s ending wor!inprocess inventory. The error resulted in assigning a higherpercentageofcompletion to each component of the inventory than actually was thecase. &hat is the resultant effect of this error on#?. The computation of e"uivalent units in total>. The computation of costs per e"uivalent unit>

B. Costs assigned to cost of goods completed for the period>1 2 #

a. nderstate overstate overstateb. nderstate understate overstatec. Overstate understate understated. Overstate overstate understate

44444 &. Cru* Company had ?:,::: units in wor! in process at 3anuary ? that were 9: percentcomplete. 8uring 3anuary, B:,::: units were completed. At 3anuary B?, ?,::: unitsremained in wor! in process and were 9: percent complete. sing the average costmethod, the e"uivalent units for 3anuary were#a. ,::: c. BD,::b. B9,:: d. ;,::

44444 '. sing the data given for

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a. )abor that is transferred from another department within the same plant instead ofhiring temporary wor!ers from the outside

b. Costs of the product of a previous internal process that is subse"uently used in asucceeding internal process

c. 6upervisory salaries that are transferred from an overhead cost center to aproduction cost center

d. %nding wor!inprocess inventory of a previous process that will be used in asucceeding process

44444 *. An e"uivalent unit of material or conversion cost is e"ual to#a. The amount of material or conversion cost necessary to complete one unit of

productionb. A unit of wor!inprocess inventoryc. The amount of material or conversion cost necessary to start a unit of production in

wor! in processd. Fifty percent of the material or conversion cost of a unit of finished goods inventory

44444 . &hich of the following characteristics applies to process costing but not to 5ob ordercosting>a. Identifiable batches of productionb. %"uivalent units of production

c. &or!inprocess inventoriesd. Factory overhead applied to production

44444 1,. In the computation of manufacturing cost per e"uivalent unit, the weighted averagemethod of process costing considers#a. Current costs onlyb. Current costs plus cost of beginning wor!inprocess inventoryc. Current costs plus cost of ending wor!inprocess inventoryd. Current costs less cost of beginning wor!inprocess inventory

Part I"

-ournal entries using process costing.

From the following list of accounts, record the account


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/ransaction 0eit redit

1. aterials and suppliespurchased on account...

2. 8irect materials issued toboth departments and

supplies issued to thefactory.........................

#. 8irect labor costincurred in bothdepartments and indirectlabor in the factory...... .

%. Other factory costsincurred.......................

&. Factory overheaddistributed to bothdepartments..................

'. Factory overhead appliedto production in bothdepartments..................

). nits transferred fromi0ing to Glending......

*. nits completed in

Glending and transferred

. nits sold


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Part "

ost of production summary using average costing.

Cobb anufacturing Company uses a process cost system and average costing. The followingproduction data is for the month of 3une :??.

Production osts

&or! in process, beginning of month#aterials..................................................................... HB,:::)abor.......................................................................... ?,@::Factory overhead......................................................... @::

H @,:::

Costs incurred during month#aterials..................................................................... H@:,:::)abor.......................................................................... B:,:::Factory overhead......................................................... :,::: ?::,:::

Total..................................................................... H?:@,:::

Production 3eport

UnitsIn process, beginning of month................................................................ ?,:::Finished and transferred during month..................................................... ?,:::In process, end of month.......................................................................... 9,:::6tage of completion for materials, labor, and overhead


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.............................................................................

.............................................................................

...........................................................................H

.............................................................................

nit output for month#

Finished during month...............................................

%"uivalent units of wor! in process, end of month


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....................................................................................................................................................................................................................................................................................................................

Total production costs accounted for........................................................................................................................................................................................

...........................................................................H.............................................................................

Part "I

ost of production summary using average costing 4ith t4o departments.

ilton Products manufactures one product in two departments on a continuous basis and uses theaverage method of process cost accounting. The following information was reported for the month ofay :??.

Production osts

5achining ssemly&or! in process, beginning of month#

Cost in achining................................. J:J H D,:::aterials........................................... H 9,::: H ::

)abor................................................ B,::: 9::Factory overhead............................... ,:::

H K,:::

;::

?,::Cost incurred during month#

aterials........................................... H;,::: H99,:::)abor................................................ @?,::: ,:::Factory overhead............................... B9,::: ?@B,::: BB,::: KK,:::

Total............................................. H?;,::: H?@,@;:

Production 3eport5achining ssemly

(Units" (Units"In process, beginning of month..................................... ... ... ... . ?,::: ?,:::Finished and transferred during month.................................. .. @,::: 9,:::In process, end of month................................ ... ... ... ... ... .... ... .. ,::: ,:::6tage of completion as to materials, labor, overhead............... Onehalf Onehalf

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Chapter Five Name ________________________________________Instructins! Prepare a cost of production summary for each department for the month. 6howcomputations in the spaces provided.

ilton ProductsCost of Production 6ummaryEachining

For the onth %nded ay B?, :??

Cost of wor! in process, beginning of month#

aterials.............................................................................................................................................H

)abor........................................................................

Factory overhead...........................................................................................................................................................................................................................................................................................H

Cost of production for month#

aterials.............................................................................................................................................H

)abor........................................................................Factory overhead......................................................

....................................................................................................................................................................................................................................................................................................................

Total costs to be accounted for............................................................................................................................................................................................................................................................................H.............................................................................

nit output for month#Finished and transferred to Assembly during month.. .

%"uivalent units of wor! in process, end of month


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.............................................................................

.............................................................................

..........................................................................................................................................................

Total...............................................................................................................................................................................................................................

...........................................................................H.............................................................................

Inventory costs#

Cost of goods finished and transferred to Assembly duringmonth


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ilton ProductsCost of Production 6ummaryEAssembly

For the onth %nded ay B?, ::

Cost of wor! in process, beginning of month#

Cost in achining........................................................................................................................................H

Cost in Assembly#

aterials......................................... H

)abor..............................................

Factory overhead.................................................................................... H

Cost of goods received from achining during month........

Cost of production for month#

aterials......................................................................................................................................................H

)abor............................................................................

Factory overhead...............................................................................................................................................................................................................................................................................................................................................................................................

Total cost to be accounted for.............................................................................................................................................................................................................................................................................................H.................................................................................

nit output for month#

Finished and transferred to stoc!room during month..... .%"uivalent units of wor! in process, end of month


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process costing study guide

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