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Chapter 3

Learning Objectives

Process Costing

After studying this chapter, you should be able to: [1] Understand who uses process cost systems. [2] Explain the similarities and differences between job order cost and process cost systems. [3 Explain the flow of costs in a process cost system.

[4] Make the journal entries to assign manufacturing costs in a process cost system. [5] Compute equivalent units.

[6] Explain the four steps necessary to prepare a production cost report.
[7] Prepare a production cost report.
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Preview of Chapter 3

Managerial Accounting Sixth Edition Weygandt Kimmel Kieso
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Nature of Process Cost Systems
Uses of Process Cost Systems

Use to apply costs to similar products that are massproduced in a continuous fashion
Examples include the production of Cereal, Paint, Manufacturing Steel, Oil Refining and Soft Drinks
Illustration 3-1

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LO 1 Understand who uses process cost systems.

Nature of Process Cost Systems Process and Job Cost Comparison Illustration 3-2 3-4 LO 1 Understand who uses process cost systems. .

c. . it continues until the finished product emerges.Nature of Process Cost Systems Review Question Which of the following items is not a characteristic of a process cost system: a. labor. When the finished product emerges. The focus is on continually producing homogenous products. Once production begins. b. and overhead. The products produced are heterogeneous in nature. 3-5 LO 1 Understand who uses process cost systems. d. all units have precisely the same amount of materials.

. 3-6 LO 1 Understand who uses process cost systems.Nature of Process Cost Systems Process Costing for Service Companies Service companies that provide specific. Those that perform routine. nonroutine services will probably benefit from using a job order cost system. repetitive services will probably be better off with a process cost system.

 3-7 LO 2 Explain the similarities and differences between job order cost and process cost systems. Costs tracked through a series of connected manufacturing processes or departments. Products are uniform or relatively homogeneous and produced in a large volume.Nature of Process Cost Systems Similarities and Differences Between Job Order Cost and Process Cost Systems Job Order Cost   Process Cost  Costs assigned to each job. . Products have unique characteristics.

.Nature of Process Cost Systems Illustration 3-3 Job order cost and process cost flow Illustration 3-3 3-8 LO 2 Explain the similarities and differences between job order cost and process cost systems.

and overhead. Flow of costs. Unit cost computations. . Differences 1. Number of work in process accounts used. Manufacturing cost elements. 2. 3. 3. Point at which costs are totaled. 3-9 LO 2 Explain the similarities and differences between job order cost and process cost systems. 2. Accumulation of the costs of materials. labor.Nature of Process Cost Systems Similarities 1. Documents used to track costs. 4.

Nature of Process Cost Systems Illustration 3-4 Job order versus process cost systems 3-10 LO 2 Explain the similarities and differences between job order cost and process cost systems. .

LO 2 b. 3-11 .Nature of Process Cost Systems Review Question Indicate which of the following statements is not correct: a. whereas in a process cost system. c. multiple work in process accounts are used. and manufacturing overhead. only one work in process account is used. Both a job order and a process cost system track the same three manufacturing cost elements – direct materials. d. direct labor. Manufacturing costs are accumulated the same way in a job order and in a process cost system. Manufacturing costs are assigned the same way in a job order and in a process cost system. In a job order cost system.

False 3-12 4. False 3. True 2.Indicate whether the following statements are true or false. rather than when a product is completed. A manufacturer of paintballs is likely to use process costing. LO 2 . Process costing does not keep track of manufacturing overhead. Both job order and process costing determine product costs at the end of a period of time. False 1. A law firm is likely to use process costing for major lawsuits.

The Assembly Department assembles and packages the parts.Nature of Process Cost Systems Process Cost Flow Tyler Company manufactures roller blade and skateboard wheels that it sells to manufactures and retail outlets. . Manufacturing consists of two processes: machining and assembly. The Machining Department shapes. Illustration 3-5 3-13 LO 3 Explain the flow of costs in a process cost system. and drills the raw materials. hones.

 Assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system 3-14 LO 4 Make the journal entries to assign manufacturing costs in a process cost system.Nature of Process Cost Systems Assigning Manufacturing Costs  Accumulation of materials. labor. and overhead costs is same as in job order costing. ► ► Debit Manufacturing Overhead for overhead cost incurred. . ► Debit Raw Materials Inventory for purchases of raw materials. Debit Factory Labor for factory labor incurred.

Journal entry to record materials used: 3-15 LO 4 Make the journal entries to assign manufacturing costs in a process cost system. ► ► Requisitions are for larger quantities of materials. ► Materials are used for processes and not specific jobs. .Nature of Process Cost Systems Material Costs  A process cost system requires fewer material requisition slips than a job order cost system.

. All labor costs incurred within a production department are a cost of processing.Nature of Process Cost Systems Factory Labor Costs   Time tickets may be used in both systems.  The journal entry to record factory labor costs: 3-16 LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

Use the activity that ―drives‖ or causes the costs.    Machine time used .Nature of Process Cost Systems Manufacturing Overhead Costs  Objective of assigning overhead is to allocate overhead to production departments on objective and equitable basis.primary driver. Journal entry to allocate overhead: 3-17 LO 4 Make the journal entries to assign manufacturing costs in a process cost system. .

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Nature of Process Cost Systems Transfers Monthly Entry to transfer goods to next department: Entry to transfer completed goods to Finished Goods: Entry to record Cost of Goods sold at the time of sale: 3-19 LO 4 .

c. The debit is often to two or more work in process accounts.Nature of Process Cost Systems Review Question In making the journal entry to assign raw materials costs: a. LO 4 Make the journal entries to assign manufacturing costs in a process cost system. b. d. The debit is to Finished goods Inventory. The credit is generally to two or more work in process accounts. The credit is to Finished Goods Inventory. 3-20 .

000 and Bottling $4.000 and Bottling $2. In June. raw materials used were Blending $18.000 in the Blending Department to the Bottling Department. .000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.Blue Diamond Company manufactures ZEBO through two processes: blending and bottling.000 and Bottling $5.500.000. The Bottling Department transfers units completed at a cost of $11. 3-21 LO 4 Make the journal entries to assign manufacturing costs in a process cost system. The company transfers units completed at a cost of $19. Factory labor costs were Blending $12.000. Manufacturing overhead costs were Blending $6.

Journalize the assignment of these costs to the two processes. To Record Materials Used: Work in Process—Blending Work in Process—Bottling 18.000 Raw Materials Inventory 22.000 Factory Labor 3-22 17.000 4.000 To Assign Factory Labor to Production: Work in Process—Blending Work in Process—Bottling 12.000 LO 4 .000 5.

500 Manufacturing Overhead 8. To Assign Overhead to Production: Work in Process—Blending Work in Process—Bottling 6.000 2.Journalize the assignment of these costs to the two processes. .500 3-23 LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

To Record Transfer of Units to the Bottling Department: Work in Process—Bottling Work in Process—Blending 19. .000 3-24 LO 4 Make the journal entries to assign manufacturing costs in a process cost system.000 To Record Transfer of Units to Finished Goods: Finished Goods Inventory 11.000 19.000 Work in Process—Bottling 11.Journalize the transfer of units as appropriate.

000 3-25 LO 5 Compute equivalents units.Equivalent Units Illustration: Suppose you have a work-study job in the office of your college’s president. Costs: Total cost of instruction Student population: Full-time students Part-time students 900 1. The college’s vice president for finance provides the following information. .000. and she asks you to compute the cost of instruction per full-time equivalent student at your college.000 Illustration 3-6 $9.

Illustration 3-7 Cost of instruction per full-time equivalent student = Total cost of instruction Number of full-time equivalent students / $ 3-26 $9.000. .Equivalent Units Illustration: Part-time students take 60% of the classes of a full-time student during the year. you would make the following computation.500 6.000 LO 5 Compute equivalents units.000 1. To compute the number of fulltime equivalent students per year.

. Beginning work in process not part of computation of equivalent units. Most widely used method. Illustration 3-8   3-27 LO 5 Compute equivalents units.Equivalent Units Weighted Average Method  Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process.

000 x 70%) 10.500 3-28 LO 5 Compute equivalents units. Completed units Work in process equivalent units (5. and 5. .000 3.000 units in ending work in process which are 70% completed. Calculate the equivalent units of production.000 units completed and transferred out.Equivalent Units Weighted Average Method Illustration: The output of Kori Company’s Packaging Department during the period consists of 10.500 13.

to make waffle batter. salt. . Baking. and baking powder. including eggs and vegetable oil. Illustration 3-9 provides information related to the Mixing Department at the end of June.Equivalent Units Refinements on the Weighted-Average Method Illustration: Kellogg Company has produced Eggo® Waffles since 1970. The Mixing Department combines dry ingredients. including flour. 3-29 LO 5 Compute equivalents units. Three departments produce these waffles: Mixing. with liquid ingredients. and Freezing/Packaging.

. Illustration 3-9 3-30 LO 5 Compute equivalents units.Equivalent Units Refinements on the Weighted-Average Method Illustration: Information related to the Mixing Department at the end of June.

 Beginning work in process is not part of the equivalentunits-of-production formula. 3-31 LO 5 Compute equivalents units.Equivalent Units Illustration 3-10  Conversion costs are labor costs plus overhead costs. .

Equivalent Units Illustration 3-11 Refined Equivalent Units of Production Formula 3-32 LO 5 Compute equivalents units. .

The equivalent units of production are: a. 23.000 units completed and transferred out.000 b.000 units. Beginning inventory is 1.000 3-33 LO 5 Compute equivalents units.Equivalent Units Review Question The Mixing Department’s output during the period consists of 20. and 5. d. 22.000 25.000 units in ending work in process 60% complete as to materials and conversions costs. c. 40% complete as to materials and conversion costs. .600 24.

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. Beginning Work in Process –0– Units Transferred Out 15.000 Materials are entered at the beginning of the process.000 Ending Work in Process 10. Compute the equivalent units of production for (a) materials and (b) conversion costs.The fabricating department has the following production and cost data for the current month. The ending work in process units are 30% complete as to conversion costs. 3-35 LO 5 Compute equivalents units.

000 25.000 10. Beginning Work in Process –0– Units Transferred Out 15.000 LO 5 Compute equivalents units.000 Ending Work in Process 10. 3-36 .000 Compute the equivalent units of production for (a) materials and (b) conversion costs.The fabricating department has the following production and cost data for the current month. Units transferred out Ending work in process units 15.

Beginning Work in Process –0– Units Transferred Out 15.000 3-37 LO 5 Compute equivalents units.000 3. Units transferred out Equivalent unit in ending WIP (10.The fabricating department has the following production and cost data for the current month. .000 x 30%) 15.000 18.000 Compute the equivalent units of production for (a) materials and (b) conversion costs.000 Ending Work in Process 10.

Prepared for each department and shows Production Quantity and Cost data.Production Cost Report A production cost report is the   Key document used to understand activities. .  Four steps in preparation: Step 1: Compute physical unit flow Step 2: Compute equivalent units of production Step 3: Compute unit production costs Step 4: Prepare a cost reconciliation schedule 3-38 LO 6 Explain the four steps necessary to prepare a production cost report.

.Production Cost Report Illustration 3-12 Flow of costs in making Eggo® Waffles 3-39 LO 6 Explain the four steps necessary to prepare a production cost report.

Production Cost Report Illustration 3-13 Unit and cost data—Mixing Department 3-40 LO 6 .

units transferred out during period + units in process at end of period. Total units to be accounted for .units started (or transferred) into production during the period + units in production at beginning of period.actual units to be accounted for during a period. regardless of work performed.Production Cost Report Compute the Physical Unit Flow (Step 1)  Physical units . Total units accounted for .   3-41 LO 6 Explain the four steps necessary to prepare a production cost report. .

.Production Cost Report Compute the Physical Unit Flow (Step 1) Illustration 3-14 3-42 LO 6 Explain the four steps necessary to prepare a production cost report.

Illustration 3-15 3-43 LO 6 Explain the four steps necessary to prepare a production cost report.Production Cost Report Compute Equivalent Units of Production (Step 2) Mixing Department   Department adds materials at beginning of process and Incurs conversion costs uniformly during the process. .

Materials  2. When equivalent units of production are different for materials and for conversion costs.Production Cost Report Compute Unit Production Costs (Step 3)  Costs expressed in terms of equivalent units of production. Total Manufacturing 3-44 LO 6 Explain the four steps necessary to prepare a production cost report. three unit costs are computed: 1. Conversion 3. .

000 Illustration 3-17 Cost added to production during June Direct material cost Total material costs 3-45 LO 6 .000 400.000 $450. June 1 Direct materials costs Illustration 3-16 $ 50.Production Cost Report Compute Unit Production Costs (Step 3) Compute total materials cost related to Eggo® Waffles: Work in process.

000 $205.000 Illustration 3-19 Costs added to production during June Conversion costs Total conversion costs 3-46 LO 6 . June 1 Conversion costs Illustration 3-18 $ 35.Production Cost Report Compute Unit Production Costs (Step 3) Compute total conversion costs related to Eggo® Waffles: Work in process.000 170.

Production Cost Report Compute Unit Production Costs (Step 3) Illustration 3-19 Compute total manufacturing costs per unit: Illustration 3-20 3-47 LO 6 Explain the four steps necessary to prepare a production cost report. .

Costs to be accounted for Illustration 3-21 Work in process. . June 1 Started into production Total costs $ 85.Production Cost Report Prepare a Cost Reconciliation Schedule (Step 4) Kellogg charged total costs of $655.000 to the Mixing Department in June.000 $655.000 3-48 LO 6 Explain the four steps necessary to prepare a production cost report. calculated as follows.000 570.

.Production Cost Report Illustration 3-22 3-49 LO 6 Explain the four steps necessary to prepare a production cost report.

Illustration 3-23 Production Cost Report Prepare the Production Cost Report 3-50 LO 7 .

3-51 $45. If there are 2. $55.000. $75. d. LO 7 Prepare a production cost report.000. .Production Cost Report Review Question Largo Company has unit costs of $10 for materials and $30 for conversion costs.000.500 units in ending work in process. 40% complete as to conversion costs and fully complete as to materials cost. c.000. the total cost assignable to the ending work in process inventory is: a. b. $100.

During March. On March 1.800 1.600 $180. Rodayo transferred out 12. . 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process.000 3-52 LO 7 Prepare a production cost report. As of March 31.In March.000 units. Costs transferred out Work in process. it had zero work in process. Assign the costs to the units transferred out and in process. March 31 Materials (800 x $6) Conversion costs (200 x $9) Total costs $4. Rodayo Manufacturing had the following unit production costs: materials $6 and conversion costs $9.800 $186.

 At the same time. the product may have some customized. 3-53 LO 7 Prepare a production cost report.Production Cost Report Costing Systems – Final Comments  Companies often use a combination of a process cost and a job order cost system.  Called operations costing. this hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product. . individual features that require the use of a job order cost system.

2. Complete the units started into production during the period (referred to as the units started and completed). but only partially complete.APPENDIX 3A FIFO METHOD Equivalent Units Under FIFO Equivalent units are the sum of the work performed to: 1. 3-54 LO 8 Compute equivalent units using the FIFO method. . the units in ending work in process inventory. Finish the units of beginning work in process inventory. 3. Start.

.APPENDIX 3A FIFO METHOD Illustration 3A-1 Physical unit flow— Assembly Department Equivalent Units Under FIFO 3-55 LO 8 Compute equivalent units using the FIFO method.

.APPENDIX 3A FIFO METHOD Equivalent Units Under FIFO Illustration 3A-2 Computation of equivalent units—FIFO method 3-56 LO 8 Compute equivalent units using the FIFO method.

APPENDIX 3A Illustration 3A-3 Unit and cost data—Mixing Department FIFO METHOD 3-57 LO 8 .

APPENDIX 3A

FIFO METHOD

Compute the Physical Unit Flow (1)

Illustration 3A-4 Physical unit flow— Mixing Department

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LO 8 Compute equivalent units using the FIFO method.

APPENDIX 3A

FIFO METHOD

Compute the Physical Unit Flow (1)

Illustration 3A-5 Physical unit flow (FIFO)— Mixing Department

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APPENDIX 3A

FIFO METHOD

Compute Equivalent Units of Production (2)
Equivalent Units For Materials
Kellogg adds materials at the beginning of the process. 100% of the materials costs has been incurred on ending WIP.
Illustration 3A-6

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LO 8 Compute equivalent units using the FIFO method.

000 units of ending work in process were 60 percent complete in terms of conversion costs.APPENDIX 3A FIFO METHOD Compute Equivalent Units of Production (2) Equivalent Units For Conversion Costs The Mixing Department required 30. the 200. In addition.000 equivalent units (30% 100. Illustration 3A-7 3-61 LO 8 .000 units) of conversion costs to complete the beginning inventory.

APPENDIX 3A FIFO METHOD Compute Unit Production Costs (3) Under the FIFO method. . Illustration 3A-8 Costs incurred during production in June 3-62 LO 8 Compute equivalent units using the FIFO method. the unit costs of production are based entirely on the production costs incurred during the month.

Illustration 3A-9 3-63 LO 8 Compute equivalent units using the FIFO method.APPENDIX 3A FIFO METHOD Compute Unit Production Costs (3) Compute unit materials cost. unit conversion costs. . and total unit cost.

Illustration 3A-10 Costs charged to Mixing Department 3-64 LO 8 Compute equivalent units using the FIFO method.APPENDIX 3A FIFO METHOD Prepare a Cost Reconciliation Schedule (4) Kellogg is now ready to determine the cost of goods transferred out of the Mixing Department to the Baking Department and the costs in ending work in process. . The total costs charged to the Mixing Department in June are as follows.

APPENDIX 3A FIFO METHOD Prepare a Cost Reconciliation Schedule (4) Illustration 3A-11 Illustration 3A-11 3-65 LO 8 .

APPENDIX 3A FIFO METHOD Prepare the Production Cost Report  Internal document for management that shows production quantity and cost data for a production department.    Top management can also judge whether current performance is meeting planned objectives. . Managers can use the cost data to assess whether unit costs and total costs are reasonable. Provides a basis for evaluating the productivity of a department. 3-66 LO 8 Compute equivalent units using the FIFO method.

APPENDIX 3A Prepare the Production Cost Report FIFO METHOD Illustration 3A-12 3-67 LO 8 .

FIFO method provides current cost information. which the company can use to establish more accurate pricing strategies for goods manufactured and sold.APPENDIX 3A FIFO METHOD FIFO and Weighted-Average   Weighted-average is simple to understand and apply. the FIFO method is superior because it measures current performance using only costs incurred in the current period.   3-68 . weighted-average will be very similar to FIFO. LO 8 Compute equivalent units using the FIFO method. Conceptually. In cases where prices do not fluctuate significantly.

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