Chapter 18 Process Costing

Describe the flow of costs through a process costing system 18-2

How Do Costs Flow Through a Process Costing System? Job order costing system – Allocates costs by job – Used by companies that manufacture a unique product or provide specialized services Process costing system – Allocates costs by process – Used by companies manufacturing identical units – A process is one of the steps in manufacturing production 18-3

Job Order Costing Versus Process Costing 18-4 © 2016 Pearson Education, Inc.

Flow of Costs Through a Process Costing System Companies use process costing to determine the per unit cost in order to: – Control costs – Set selling prices – Calculate account balances for Work-in-Process Inventory Finished Goods Inventory Cost of Goods Sold 18-5

Flow of Costs Through a Process Costing System 18-6

Calculate equivalent units of production for direct materials and conversion costs 18-7

What Are Equivalent Units of Production, and How Are They Calculated? 18-8

Equivalent Units of Production Equivalent units of production (EUP) – Measures the amount of materials added to or work done on partially completed units during a period – Expressed in terms of fully complete units of output 18-9

Conversion Costs Direct labor is a small part of manufacturing costs for highly automated manufacturers. To simplify accounting, direct labor is combined with manufacturing overhead and called conversion costs. Conversions costs are the costs to convert raw materials into finished goods

Learning Objective 3 Prepare a production cost report using the weighted- average method 18-11

How Is a Production Cost Report Prepared? © 2016 Pearson Education, Inc.

Production Cost Report—First Process—Assembly Department A production cost report show the calculations for the physical flows and the cost flows of the products. 1.Summarize the flow of physical units. 2.Compute output in terms of equivalent units of production. 3.Compute the cost per equivalent unit of production. 4.Assign costs to units completed and units in process

Two unique terms are used on the production cost report: To account for includes the amount in process at the beginning of the period plus the amount started or added during the period. Accounted for shows what happened to the amounts to account for. They are either still in process or completed and transferred out Production Cost Report—First Process—Assembly Department

Data for Production Cost Report 18-15

18-16 Production Cost Report—First Process— Assembly Department

18-17 Production Cost Report—First Process— Assembly Department

18-18 Production Cost Report—First Process— Assembly Department

18-19 Production Cost Report—First Process— Assembly Department

The costs of materials from the Assembly Department are transferred into the Cutting Department. – The transferred costs are called transferred in costs. The weighted-average method combines the average cost of equivalent units of production by combining beginning inventory costs with current period costs Production Cost Report—Second Process—Cutting Department

Data for Production Cost Report 18-21

18-22 © 2016 Pearson Education, Inc. Production Cost Report—Second Process—Cutting Department

18-23 Production Cost Report—Second Process—Cutting Department Note: Material added at end of Process

18-24 Production Cost Report—Second Process—Cutting Department

18-25 Production Cost Report—Second Process—Cutting Department

18-26 Production Cost Report—Second Process—Cutting Department

Learning Objective 4 Prepare journal entries for a process costing system 18-27

What Journal Entries Are Required in a Process Costing System? Costs flow through the process costing system in four steps: – Accumulate – Assign – Allocate – Adjust Costs flow from one Work-in-Process Inventory account to the next and eventually to Finished Goods Inventory and Cost of Goods Sold

Transaction 1—Raw Materials Purchased During July, the company purchased materials on account for $175,000.

Transaction 2—Raw Materials Used in Production During July, direct materials were assigned to the two production departments: $140,000 to the Assembly Department and $19,000 to the Cutting Department; $2,000 in indirect materials were accumulated in Manufacturing Overhead.

18-31 Note: Overhead and materials account excluded from slide

Transaction 3—Labor Costs Incurred During the month, Puzzle Me incurred $20,000 in direct labor costs in the Assembly Department; $3,840 in direct labor costs in the Cutting Department; and $1,500 in indirect labor costs accumulated in Manufacturing Overhead.

18-33 Note: Overhead and wags payable accounts excluded from slide

Transaction 4—Additional Manufacturing Costs Incurred In addition to the indirect materials and indirect labor costs, Puzzle Me incurred $35,000 in machinery depreciation and $20,000 in indirect costs that were paid in cash, which included rent and utilities.

Transaction 5—Allocation of Manufacturing Overhead Puzzle Me used a predetermined overhead allocation rate to allocate indirect costs to the departments: $48,000 to the Assembly Department and $11,000 to the Cutting Department.

18-36 Note: Overhead account excluded from slide

Transaction 6—Transfer from the Assembly Department to the Cutting Department At the end of July, when the production cost report for the Assembly Department was prepared, Puzzle Me assigned $176,000 to the 40,000 units transferred from the Assembly Department to the Cutting Department.

18-38

Transaction 7—Transfer from Cutting Department to Finished Goods Inventory At the end of July, when the production cost report for the Cutting Department was prepared, Puzzle Me assigned $201,400 to the 38,000 units transferred from the Cutting Department to Finished Goods Inventory. This is the cost of goods manufactured.

18-40

Transaction 8—Puzzles Sold During July, Puzzle Me sold 35,000 puzzles. We have already determined from the production cost report for the Cutting Department that the cost of goods manufactured is $5.30 per puzzle. Therefore, the cost of 35,000 puzzles is $185,500 (35,000 puzzles × $5.30). The puzzles were sold on account for $8.00 each, which is a total of $280,000 (35,000 puzzles × $8.00)

18-42

Transaction 9—Adjust Manufacturing Overhead The actual manufacturing overhead costs incurred were $58,500, which includes the indirect materials in Transaction 2, the indirect labor in Transaction 3, and the accumulated depreciation and other indirect costs in Transaction 4. The amount of manufacturing overhead allocated to the two departments was $59,000, as shown in Transaction

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Learning Objective 5 Use a production cost report to make decisions 18-45

How Can the Production Cost Report Be Used to Make Decisions? Controlling costs Evaluating performance Pricing products Identifying the most profitable products Preparing the financial statements 18-46