Transcript Slide 1

Process Costing
Chapter 16
PowerPoint Editor:
Beth Kane, MBA, CPA
Wild, Shaw, and Chiappetta
Financial & Managerial Accounting
6th Edition
Copyright © 2016 McGraw-Hill Education. All rights reserved. No
reproduction or distribution without the prior written consent of
McGraw-Hill Education.
16-C1: Process Operations
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Process Operations
 Used for production of small,
identical, low-cost items.
 Mass produced in automated
continuous production process.
 Costs cannot be directly traced
to each unit of product.
C1
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16-A1: Comparing Process and
Job Order Costing Systems
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Comparing Job Order
and Process Operations
Job Order Systems
Process Systems
 Custom orders
 Repetitive operations
 Heterogeneous
products
 Homogeneous products
 Low production volume
 High production volume
 High product flexibility
 Low product flexibility
 Low to medium
standardization
 High standardization
A1
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Comparing Job Order
and Process Operations
A1
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NEED-TO-KNOW
Complete the following table with either a yes or no regarding the attributes of job order and
process costing systems.
Use direct materials, direct labor, and overhead costs
Use job cost sheets to accumulate costs
Typically use several Work in Process Inventory accounts
Yield a cost per unit of product
A1
Job Order Process
Yes
Yes
Yes
No
No
Yes
Yes
Yes
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16-C2: Equivalent Units of
Production
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Equivalent Units of Production
(EUP)
EUP must be
calculated
for the Work
in Process
account.
C2
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EUP for Materials and Conversion
Costs
C2
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Weighted Average versus FIFO
Weighted
Average
versus
FIFO
C2
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16-C3: Process Costing
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Process Costing Illustration
GenX uses a weighted average cost flow
system with the following four steps:
 Determine physical flow of units.
 Compute equivalent units of production.
 Compute cost per equivalent unit.
 Assign and reconcile costs.
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Overview of GenX Company’s Process
Operation
C3
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Process Operations – GenX
C3
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Step 1: Determine Physical Flow of Units
C3
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Step 2: Compute Equivalent Units of Production
C3
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NEED-TO-KNOW
A department began the month with 8,000 units in work in process inventory. These units were 100%
complete with respect to direct materials and 40% complete with respect to conversion. During the month,
the department started 56,000 units and completed 58,000 units. Ending work in process inventory includes
6,000 units, 100% complete with respect to direct materials and 70% complete with respect to
conversion. Use the weighted-average method of process costing to:
1. Compute the department’s equivalent units of production for the month for direct materials.
2. Compute the department’s equivalent units of production for the month for conversion.
64,000
62,200
Work in Process Inventory - Units
Beginning Units
Started
Total Units
8,000
56,000
64,000
Transferred out
Ending Units
6,000
Units Schedule (Physical Flow Reconciliation)
Units in Beginning Inventory
8,000
Units Started
56,000
Total Units to Account For
64,000
Transferred out
Ending Inventory
Total units
C3
Physical Units
58,000
6,000
64,000
58,000
Units completed and transferred out
Units in Ending Inventory
Total Units Accounted For
58,000
6,000
64,000
% Completion
EUP
Materials
Conversion Materials
Conversion
100%
100%
58,000
58,000
100%
70%
6,000
4,200
64,000
62,200
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Step 3: Compute Cost per Equivalent Unit
C3
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Step 4: Assign and Reconcile Costs
C3
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NEED-TO-KNOW
A department began the month with conversion costs of $65,000 in its beginning work in process inventory.
During the month, the department incurred $55,000 of conversion costs. Equivalent units of production
for conversion for the month was 15,000 units. The department completed and transferred 12,000
units to the next department.
1. Compute the department’s cost per equivalent unit for conversion for the month. $8.00
2. Compute the department’s conversion cost of units transferred to the next department for the month. $96,000
Work in Process Inventory
Beginning Inventory
DL and OH
65,000
55,000
120,000
Transferred out
Ending Inventory
Transferred out
Ending Inventory
Total units
Cost per Equivalent Unit
96,000
24,000
EUP
Conversion
12,000
3,000
15,000
Cost
per EUP
$8.00
$8.00
Cumulative Costs
Total EUP
Allocated
Cost
$96,000
24,000
$120,000
$120,000
15,000
$8.00 per equivalent unit of conversion
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Process Cost Summary
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Cost Data For GenX
C3
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16-P1: Accounting for
Materials Costs
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Accounting for Material Costs
P1
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16-P2: Accounting for Labor
Costs
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Accounting for Labor Costs
P2
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16-P3: Accounting for Factory
Overhead
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Accounting for Factory Overhead
P3
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NEED-TO-KNOW
Tower Mfg. estimates it will incur $200,000 of total overhead costs during the year. Tower allocates overhead
based on machine hours; it estimates it will use a total of 10,000 machine hours during the year. During
February, the assembly department of Tower Mfg. uses 375 machine hours. In addition, Tower incurred
actual overhead costs as follows during February: indirect materials, $1,800; indirect labor, $5,700;
depreciation on factory equipment, $8,000; factory utilities, $500.
1. Compute the company’s predetermined overhead rate for the year.
Predetermined Overhead Rate =
=
Estimated Overhead Costs
Estimated Activity Base
$20 per machine hour
Machine Hours Used
Assembly Dept.
$20 per machine hour
375 hours
x Predetermined OH rate
x $20 per hour
$200,000
10,000 machine hours
= OH Applied
= $7,500 OH applied
Factory Overhead
Actual OH Incurred OH Applied to Production
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NEED-TO-KNOW
Tower Mfg. estimates it will incur $200,000 of total overhead costs during the year. Tower allocates overhead
based on machine hours; it estimates it will use a total of 10,000 machine hours during the year. During
February, the assembly department of Tower Mfg. uses 375 machine hours. In addition, Tower incurred
actual overhead costs as follows during February: indirect materials, $1,800; indirect labor, $5,700;
depreciation on factory equipment, $8,000; factory utilities, $500.
2. Prepare journal entries to record (a) overhead applied for the assembly department for the month and
(b) actual overhead costs used during the month.
a)
b)
General Journal
Work in Process Inventory
Factory Overhead (375 machine hours x $20 per MH)
Factory Overhead
Raw Materials Inventory
Factory Wages Payable
Accumulated Depreciation - Factory Equipment
Utilities Payable
Debit
7,500
Credit
7,500
16,000
1,800
5,700
8,000
500
Factory Overhead
Actual OH Incurred
Ind. Materials
Ind. Labor
Fact. Deprec.
Fact. Utilities
OH Applied to Production
1,800
5,700
8,000
500
16,000
7,500
Underapplied
P3
8,500
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16-P4: Accounting for Transfers
across Departments
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Accounting for Transfers
P4
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Trends in Process Operations
Process
design
Customer
orientation
Just-intime
production
Automation
Services
Continuous
Processing
P4
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Global View
As part of a series of global environmental goals,
Anheuser-Busch InBev set targets to reduce its water
usage. The company uses massive amounts of water in
beer production and in its cleaning and cooling
processes. To meet these goals, the company followed
recent trends in process operations. These included
extensive redesign of production processes and the use
of advanced technology to increase efficiency at
wastewater treatment plants. As a result water usage
decreased by almost 37 percent in its global
operations.
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16-C4: FIFO Method of
Process Costing
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Appendix 16A: FIFO Method
of Process Costing
C4
The same GenX data for April will also be used to illustrate the FIFO method.
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 Determine Physical
Flow of Units
C4
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 Compute Equivalent
Units of Production
C4
*Units completed this period
Less units in beginning goods in process
Units started and completed this period
100,000
30,000
70,000
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NEED-TO-KNOW
A department began the month with 50,000 units in work in process inventory. These units were 60%
complete with respect to direct materials and 40% complete with respect to conversion. During the month,
the department started 286,000 units; 220,000 of these units were completed during the month. The
Remaining 66,000 units are in ending work in process inventory, 80% complete with respect to direct materials
and 30% complete with respect to conversion. Use the FIFO method of process costing to:
1. Compute the department’s equivalent units of production for the month for direct materials. 292,800
2. Compute the department’s equivalent units of production for the month for conversion.
269,800
Work in Process Inventory - Units
Beginning Units
Started
Total units
Ending Units
50,000 Beginning Units
50,000
286,000 Started and Completed 220,000
336,000
Transferred out
270,000
66,000
Units Schedule (Physical Flow Reconciliation)
Units in Beginning Inventory
50,000
Units completed and transferred out
Units Started
286,000
Units in Ending Inventory
Total Units to Account For
336,000
Total Units Accounted For
270,000
66,000
336,000
Physical % Done in Current Month
EUP
Units
Materials
Conversion Materials
Conversion
Finish Beginning Inventory
50,000
40%
60%
20,000
30,000
Start and Complete
220,000
100%
100%
220,000
220,000
Start Ending Inventory
66,000
80%
30%
52,800
19,800
Total units
336,000
292,800
269,800
C4
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 Compute Cost Per
Equivalent Unit – FIFO
C4
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NEED-TO-KNOW
A department started the month with beginning work in process inventory of $130,000 ($90,000 for direct
materials and $40,000 for conversion). During the month, the department incurred additional direct materials
costs of $700,000 and conversion costs of $500,000. Assume that, using the FIFO method, equivalent units
for the month were computed as 250,000 for materials and 200,000 for conversion.
1. Compute the department’s cost per equivalent unit of production for the month for direct materials.
2. Compute the department’s cost per equivalent unit of production for the month for conversion.
Cost per Equivalent Unit of Direct Materials:
Direct Material costs added in the current month
Equivalent units of Production - Current Month
$700,000
250,000
$2.80 per equivalent unit of direct materials
Cost per Equivalent Unit of Conversion:
Conversion costs added in the current month
Equivalent units of Production - Current Month
$500,000
200,000
$2.50 per equivalent unit of conversion
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 Assign and Reconcile Costs
C4
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 Assign and Reconcile Costs
C4
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End of Chapter 16
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