Copyright © 2008 Prentice Hall All rights reserved 4-1 Process Costing Chapter 4

Copyright © 2008 Prentice Hall All rights reserved 4-2 Objective 1 Distinguish between the flow of costs in process costing and job costing

Copyright © 2008 Prentice Hall All rights reserved 4-3 Cost of Goods Sold Manufacturing Wages Materials Inventory Finished Goods Manufacturing Overhead Job Order Costing Work in Process Job 90 Job 91 Job 92

Copyright © 2008 Prentice Hall All rights reserved 4-4 Cost of Goods Sold Manufacturing Wages Materials Inventory Finished Goods Process Costing Work in Process, Mixing Dept Work in Process, Molding Dept Work in Process, Packaging Dept Manufacturing Overhead

Copyright © 2008 Prentice Hall All rights reserved 4-5 Building Blocks of Process Costing Conversion costs  Costs incurred to convert raw materials into a finished product  Direct labor plus manufacturing overhead Equivalent unit of production  Amount of work done during a period in terms of fully complete units of output Inventory flow assumptions  Weighted average  First-in, first-out

Copyright © 2008 Prentice Hall All rights reserved 4-6 Objective 2 Compute equivalent units

Copyright © 2008 Prentice Hall All rights reserved 4-7 E4-28: Equivalent Units Calculation Example Step 1: Summarize the flow of physical units Units to account for Units accounted for Blending Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 08,0006,0002,

Copyright © 2008 Prentice Hall All rights reserved 4-8 Start Dyes added 100% complete 30% complete 2,000 units started but not finished 6,000 units completed and transferred out Step 2: Compute output in terms of equivalent units

Copyright © 2008 Prentice Hall All rights reserved 4-9 E4-28: Equivalent Units for Direct Materials and for Conversion Costs Equivalent units for direct materials: 8,000 units x 100% complete8,000 Equivalent units for conversion costs: 6,000 units x 100% complete6,000 2,000 units x 30% complete600 6,600

Copyright © 2008 Prentice Hall All rights reserved 4-10 Objective 3 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a first department

Copyright © 2008 Prentice Hall All rights reserved 4-11 E4-28: Assign manufacturing costs to units completed Step 3: Summarize total costs for which to account: Beginning work in process inventory $ 0 Costs added during May: Direct materials (dyes) 4,800 Direct labor 800 Manufacturing overhead 1,840 Total costs to account for$7,440

Copyright © 2008 Prentice Hall All rights reserved 4-12 E4-28 Blending Department Direct Materials Conversion Costs Beginning work in process$ 0 Costs added during period Divide by equivalent units Cost per equivalent unit Step 3: Compute the cost per equivalent unit $4,800 $0.40 $2,640 ÷ 6,600 Refer back to the calculation of equivalent units for Direct Materials.

Copyright © 2008 Prentice Hall All rights reserved 4-13 E4-28 Direct Materials Conversion Costs Total Completed and transferred out (6,000) Ending WIP (2,000) Direct materials Conversion costs Total cost of ending WIP Total costs accounted for Step 4: Assign costs to units completed and to units in ending work in process inventory 6,000 x ($ ) $6, x 0.40 $7,440 1, $1,200 Refer back to the equivalent cost per equivalent unit calculation to compute the total cost of direct materials.

Copyright © 2008 Prentice Hall All rights reserved 4-14 E4-28: General Journal Entry for WIP GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory blending department7,440 Materials inventory4,800 Manufacturing wages800 Manufacturing overhead1,840

Copyright © 2008 Prentice Hall All rights reserved 4-15 E4-28: General Journal Entry - WIP GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory packaging department6,000 Work in process inventory blending department6,000

Copyright © 2008 Prentice Hall All rights reserved 4-16 E4-28: T-account view of General Journal Entry for Transferred Out Work in process inventory - blending 7,4406,000 Bal. 1,440

Copyright © 2008 Prentice Hall All rights reserved 4-17 E4-28: Average Cost Used to assign cost to Transferred Out Average cost per gallon transferred out of blending is: $6,000 ÷ 6,000 gallons = $1.00 per gallon

Copyright © 2008 Prentice Hall All rights reserved 4-18 Objective 4 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a second or later department

Copyright © 2008 Prentice Hall All rights reserved 4-19 E4-35 Step 1: Summarize the flow of physical units Units to account for Units accounted for Photolithography Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 8,00027,00026,0009,

Copyright © 2008 Prentice Hall All rights reserved 4-20 E4-35 Step 1: Summarize the flow of physical units Beg. Bal. 8,000 Transferred in 27,000 End Bal. 9,000 Work in process, Photolithography Dept (units) 26,000

Copyright © 2008 Prentice Hall All rights reserved 4-21 E4-35 Materials added Start 100% complete 80% complete Step 2: Compute output in terms of equivalent units 18,000 units started and completed 8,000 units in process & completed 70% complete 9,000 units started but not finished

Copyright © 2008 Prentice Hall All rights reserved 4-22 Step 1Step 2EquivalentUnits Flow of Physical Units Transferred InDirect MaterialsConversion Costs Units to account for: Beginning WIP8,000 Transferred In27,000 Total Physical Units to Account for 35,000 Units Accounted For: Completed and Transferred Out 26,00026,000*26,000 Ending WIP-70% Complete 9, *90006,300 Total Physical Units Accounted for 35,000 Equivalent Units35,000*35,00032,300

Copyright © 2008 Prentice Hall All rights reserved 4-23 E4-35 Equivalent units transferred in: Completed and transferred out26,000 Ending work in process9,000 Total units to account for35,000

Copyright © 2008 Prentice Hall All rights reserved 4-24 E4-35 Equivalent units: Direct materials Completed and transferred out26,000 Ending work in process 9,000 Total35,000

Copyright © 2008 Prentice Hall All rights reserved 4-25 E4-35 Equivalent units for conversion costs: Completed and transferred out26,000 Ending WIP -9,000 x 70%6,300 Total32,300

Copyright © 2008 Prentice Hall All rights reserved 4-26 Step 3: Compute the cost per equivalent unit E4-35 Costs to be Accounted For: Trans inDir. Mat. Conv. Costs Total Beginning WIP $ 20,050$20,250$19,816$60,116 Costs added 97,20074,25090,650262,100 Total costs $117,250$94,500$110,466 ÷ equivalent unit 35,000 32,300 Cost/equiv unit $3.35$2.70$3.42 Total costs to account for $322,216

Copyright © 2008 Prentice Hall All rights reserved 4-27 Step 3: Compute the cost per equivalent unit E4-35 Trans inDir. Mat.Conv CostsTotal Completed & transferred out 26,000 x ($3.35+$2.70+$3.42)$246,220 Ending WIP Transferred in 9,000x$3.35 $30,150 Direct materials 9,000 $ ,300 Conversion 6,300x$3.4221,546 Total WIP $75,996 Total costs accounted for $322,216

Copyright © 2008 Prentice Hall All rights reserved 4-28 E4-35 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT a.Raw materials inventory9,000 Accounts payable9,000 b.Work in process inventory Assembly 4,000 Work in process inventory Finishing2,000 Raw materials inventory6,000

Copyright © 2008 Prentice Hall All rights reserved 4-29 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT c.Manufacturing wages10,800 Wages payable10,800 d.Manufacturing overhead10,900 Property tax payable1,900 Utilities payable4,500 Prepaid insurance1,100 Accumulated depreciation3,400

Copyright © 2008 Prentice Hall All rights reserved 4-30 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT e.Work in process inventory- Assembly7,600 Manufacturing wages4,700 Manufacturing overhead2,900 f.Work in process inventory – Finishing10,600 Manufacturing wages4,400 Manufacturing overhead6,200

Copyright © 2008 Prentice Hall All rights reserved 4-31 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT g.Work in process inventory Finishing10,250 Work in process inventory Assembly10,250 h.Finished goods inventory15,600 Work in process inventory Finishing15,600

Copyright © 2008 Prentice Hall All rights reserved 4-32 End of Chapter 4