Transcript CHAPTER 19
19-1 CHAPTER 19 PROCESS COST SYSTEMS 19-2 Process Costing 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. Similarities for Job and Process Costing Same objective: to determine the cost of products Same inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method: predetermined rate times actual activity 19-3 Differences for Job and Process Costing Job costing Costs accumulated by the job Work in process account for each job Many unique, high cost jobs Jobs are built to customer order Relatively large direct labor cost component 19-4 Process costing Costs accumulated by department or process Work in process account for each department or process A few identical, low-cost products Units continuously produced for inventory in automated process Relatively small direct labor cost component 19-5 Process Costing Dollar Amount Direct Material Direct Labor So, direct labor and manufacturing overhead are often Manufacturing combined into one Overhead product cost called conversion. Type of Product Cost Direct labor costs are small compared to other product costs because of the high level of automation. 19-6 Process Costing Dollar Amount Direct Material Conversion So, direct labor and manufacturing overhead are often combined into one product cost called conversion. Type of Product Cost Direct labor costs are small compared to other product costs because of the high level of automation. Comparing Cost Flows for Job and Process Costing From Previous Chapter Direct Material Direct Labor Manufacturing Overhead Work in Process Finished Goods Cost of Goods Sold 19-7 Comparing Cost Flows for Job and Process Costing The work in process account consists of individual jobs in a job cost system. Direct Material Direct Labor Manufacturing Overhead 19-8 Jobs Finished Goods Cost of Goods Sold Comparing Cost Flows for Job and Process Costing Direct Material Direct Labor Manufacturing Overhead 19-9 The work in process account consists of individual products in a process cost system. Products Finished Goods Cost of Goods Sold Comparing Cost Flows for Job and Process Costing Direct Material Direct Labor & Overhead (Conversion) Products When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead. Finished Goods Cost of Goods Sold 19-10 19-11 Process Costing Cost Flows Let’s examine the cost flows in a process cost system with two departments. We will start with materials. 19-12 Process Costing Cost Flows Raw Materials Work in Process-A Purchases Mfg. Overhead Work in Process-B Transferred from Dept. A 19-13 Process Costing Cost Flows Raw Materials Purchases Direct Material Mfg. Overhead Work in Process-A Direct Material Work in Process-B Transferred from Dept. A Direct Material 19-14 Process Costing Cost Flows Raw Materials Purchases Direct Material Indirect Material Mfg. Overhead Actual Overhead Costs Work in Process-A Direct Material Work in Process-B Transferred from Dept. A Direct Material 19-15 Process Costing Cost Flows Next, let’s add labor costs to the process cost flows. Are you with me? 19-16 Process Costing Cost Flows Payroll Summary Actual Wages Mfg. Overhead Actual Overhead Costs Work in Process-A Direct Material Work in Process-B Transferred from Dept. A Direct Material 19-17 Process Costing Cost Flows Payroll Summary Actual Wages Direct Labor Mfg. Overhead Actual Overhead Costs Work in Process-A Direct Material Direct Labor Work in Process-B Transferred from Dept. A Direct Material Direct Labor 19-18 Process Costing Cost Flows Payroll Summary Actual Wages Direct Labor Indirect Labor Mfg. Overhead Actual Overhead Costs Work in Process-A Direct Material Direct Labor Work in Process-B Transferred from Dept. A Direct Material Direct Labor 19-19 Process Costing Cost Flows Payroll Summary Actual Wages Direct Labor Indirect Labor Mfg. Overhead Actual Overhead Costs Overhead Applied to Work in Process Work in Process-A Direct Material Direct Labor Overhead Work in Process-B Transferred from Dept. A Direct Material Direct Labor Overhead 19-20 Process Costing Cost Flows Payroll Summary Actual Wages Direct Labor Indirect Labor Mfg. Overhead Actual Overhead Costs Overhead Applied to Work in Process Work in Process-A Direct Material Direct Labor Overhead Current Transfers to Dept. B Work in Process-B Transferred from Dept. A Direct Material Direct Labor Overhead 19-21 Process Costing Cost Flows Now, let’s complete the goods and sell them. Still with me? 19-22 Process Costing Cost Flows Work in Process-B Finished Goods Transferred from Dept. A Direct Material Direct Labor Overhead Cost of Goods Sold 19-23 Process Costing Cost Flows Work in Process-B Transferred Cost of from Dept. A Goods Direct Mfg. Material Direct Labor Overhead Finished Goods Cost of Goods Mfg. Cost of Goods Sold 19-24 Process Costing Cost Flows Work in Process-B Transferred Cost of from Dept. A Goods Direct Mfg. Material Direct Labor Overhead Finished Goods Cost of Goods Mfg. Cost of Goods Sold Cost of Goods Sold Cost of Goods Sold 19-25 Process Costing Equivalent Units Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of equivalent units produced in the period. 19-26 Process Costing Equivalent Units Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Equivalent Units Example Two one-half full pitchers are equivalent to one full pitcher. + = So, 10,000 units 70 percent complete is the equivalent of 7,000 complete units. 19-27 Equivalent Units Question For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 19-28 Equivalent Units Question For the current period, PencilCo 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 PencilCo have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units 19-29 19-30 Cost Per Equivalent Unit Cost per equivalent unit Product costs for the period = Equivalent units for the period Equivalent Units Question Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. b. c. d. $1.84 $2.40 $2.76 $2.90 19-31 Equivalent Units Question Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. b. c. d. $1.84 $2.40 $2.76 $2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit 19-32 19-33 Production Cost Report Shows the flow of units and costs through work in process. Shows division of costs between units transferred and units remaining in process. Production Cost Report Provides cost information for financial statements. Helps managers control their departments. 19-34 Production Cost Report Preparation includes four major steps: Trace the physical flow of units Convert actual units to equivalent units Compute cost per equivalent unit for each cost element (material, conversion) Use unit costs to determine cost of ending Work in Process (WIP) inventory and cost of goods transferred to Finished Goods. 19-35 Production Cost Report At this point, we need to look at an example to illustrate the concepts. 19-36 Production Cost Report Example Sipp-Fizz Cola uses process costing to determine unit costs. It has only one processing department. Sipp-Fizz uses the average cost procedure: The number of equivalent units for each cost element equals the number of units completed and transferred to finished goods plus the number of equivalent units in ending work in process inventory for that cost element. 19-37 Production Cost Report Example The following information is from SippFizz records for the month of August. Using this information, compute: Equivalent units. One 12-can case Cost per equivalent unit. equals one unit. Cost of goods completed and transferred. Cost of ending work in process inventory. 19-38 Production Cost Report Example Beginning work in process, August 1 Units, conversion 50% complete 4,000 cases/units Costs: Direct materials $ 12,000 Direct labor $ 6,120 Manufacturing overhead applied $ 8,000 12,000 units were started in August. Costs incurred in August Direct materials Direct labor Manufacturing overhead applied $ 36,000 $ 48,000 $ 60,000 Ending work in process inventory, August 31 Units, conversion 70% complete 6,000 cases/units All materials are added at the beginning of processing 19-39 Production Cost Report Example Our first two steps are . . . Trace the physical flow of units. Convert actual units to equivalent units. Because material is added at the beginning of the process, the Sipp-Fizzies are 100 percent complete as to material when the process starts. 19-40 Production Cost Report Example 1 Trace the Physical Flow of Units Units in beginning inventory Units started during month Units to account for Less: Units in ending inventory Units completed & transferred 4,000 12,000 16,000 6,000 10,000 19-41 Production Cost Report Example 2 Convert Actual Units to Equivalent Units Actual Units Units completed & transferred 10,000 Units in ending inventory* 6,000 Units accounted for 16,000 Equivalent Units Materials Conversion *Units in ending inventory are 100% complete as to materials and 70%complete as to conversion. 19-42 Production Cost Report Example 2 Convert Actual Units to Equivalent Units Actual Units Units completed & transferred 10,000 Units in ending inventory* 6,000 Units accounted for 16,000 Equivalent Units Materials Conversion 10,000 10,000 6,000 4,200** 16,000 14,200 *Units in ending inventory are 100% complete as to materials and 70%complete as to conversion. ** 6,000 units x 70%complete = 4,200 19-43 Production Cost Report Example Now that we have calculated equivalent units for Sipp-Fizz, let’s calculate the cost per equivalent unit. 19-44 Production Cost Report Example Our next two steps are . . . Using equivalent units for each cost item, compute the cost per equivalent unit for Materials Conversion Total Use cost per equivalent unit from 3 to determine cost of goods completed and transferred and cost of ending work in process inventory. 19-45 Production Cost Report Example Beginning inventory Cost added in August Costs to account for Materials $ 12,000 36,000 $48,000 Conversion $ 14,120 108,000 $ 122,120 Total $ 26,120 144,000 $ 170,120 19-46 Production Cost Report Example Beginning inventory Cost added in August Costs to account for Equivalent units Materials $ 12,000 36,000 $48,000 16,000 Conversion $ 14,120 108,000 $ 122,120 14,200 Equivalent units from 1 and 2 Total $ 26,120 144,000 $ 170,120 19-47 Production Cost Report Example Materials $ 12,000 36,000 $48,000 Beginning inventory Cost added in August Costs to account for Equivalent units Cost per unit Conversion $ 14,120 108,000 $ 122,120 16,000 3 $ 3.00 Total $ 26,120 144,000 $ 170,120 14,200 $ 8.60 $ 11.60 Cost per unit for each cost element = Cost to account for ÷ Equivalent units 19-48 Production Cost Report Example Materials $ 12,000 36,000 $48,000 Beginning inventory Cost added in August Costs to account for Equivalent units Cost per unit Cost transferred out Conversion $ 14,120 108,000 $ 122,120 16,000 3 4 $ Total $ 26,120 144,000 $ 170,120 14,200 3.00 $ 8.60 $30,000 $ 86,000 $ 11.60 $ 116,000 Cost per unit for each cost element = Cost to account for ÷ Equivalent units Cost transferred out = 10,000 units completed × cost per unit 19-49 Production Cost Report Example Materials $ 12,000 36,000 $48,000 Beginning inventory Cost added in August Costs to account for Equivalent units Cost per unit Cost transferred out Ending WIP inventory cost Costs accounted for Conversion $ 14,120 108,000 $ 122,120 16,000 3 4 $ Total $ 26,120 144,000 $ 170,120 14,200 3.00 $ $30,000 18,000 $48,000 $ 8.60 86,000 36,120 $ 122,120 $ 11.60 $ 116,000 54,120 $ 170,120 Cost per unit for each cost element = Cost to account for ÷ Equivalent units Cost transferred out = 10,000 units completed × cost per unit Ending WIP inventory cost = equivalent units in ending inventory × cost per unit 19-50 Process Costing Spoilage Cost of goods lost during production Normal spoilage is an expected amount in an efficient process. Abnormal spoilage exceeds the expected amount in an efficient process. Cost is part of cost of good units produced Cost is a loss in the period of production 19-51 Process Costing I see some journal entries for process costing on the horizon! 19-52 Process Costing Typical Accounting Entries GENERAL JOURNAL Page: Date Description Materials Inventory Accounts Payable PR Debit 1 Credit xxxxxx xxxxxx To record purchase of material Work in Process Inventory Manufacturing Overhead Materials Inventory To record use of material xxxxxx xxxxxx xxxxxx 19-53 Process Costing Typical Accounting Entries GENERAL JOURNAL Page: Date Description Work in Process Inventory Manufacturing Overhead Payroll Summary PR Debit 1 Credit xxxxxx xxxxxx xxxxxx To record labor cost Work in Process Inventory Manufacturing Overhead To assign overhead to Work in Process xxxxxx xxxxxx 19-54 Process Costing Typical Accounting Entries GENERAL JOURNAL Page: Date Description Finished Goods Work in Process Inventory To record completion of work PR Debit 1 Credit xxxxxx xxxxxx 19-55 Process Costing Typical Accounting Entries GENERAL JOURNAL Page: Date Description Accounts Receivable Sales PR Debit 1 Credit xxxxxx xxxxxx To record sales Cost of Goods Sold Finished Goods Inventory To record cost of goods sold xxxxxx xxxxxx 19-56 THE END It’s been a long day. I’m ready to process some leisure time.