©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Process Costing Chapter 17

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 1 Identify the situations in which process-costing systems are appropriate.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Illustrating Process Costing Direct Materials, Direct Labor Indirect Manufacturing Costs Department A Department B Finished GoodsCost of Goods Sold

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Describe the five steps in process costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Five Steps in Process Costing Step 1: Summarize the flow of physical units of output. Step 2: Compute output in terms of equivalent units. Step 3: Compute equivalent unit costs. Step 4: Summarize total costs to account for. Step 5: Assign total costs to units completed and to units in ending work in process inventory.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Calculate equivalent units and understand how to use them.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Physical Units (Step 1) Physical units Flow of Production Work in process, beginning 0 Started during current period35,000 To account for35,000 Completed and transferred out during current period30,000 Work in process, ending (100%/20%) 5,000 Accounted for35,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) Equivalent units Direct Conversion Flow of Production MaterialsCosts Completed and transferred out30,00030,000 Work in process, ending 5,000 (100%) 1,000 (20%) Current period work35,00031,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) Direct Conversion Materials Costs $84,050$62,000 Equivalent units 35,000 31,000 Cost per equivalent unit$ $2.00 Total production costs are $146,050.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Step 4: Total costs to account for: $146,050 Step 5: Assign total costs: Completed and transferred out 30,000 × $4.4014$132,043 Work in process, ending (5,000 units) Direct materials5,000 × $ ,007 Conversion costs1,000 × $2.00 2,000 Total$146,050

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Prepare journal entries for process-costing systems.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Example Assume that Omaha, Inc. has two processing departments – Assembly and Finishing. Omaha, Inc., purchases direct materials as needed. What is the journal entry for materials? Work in Process, Assembly 84,050 Accounts Payable Control84,050 To record direct materials purchased and used

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Example What is the journal entry for conversion costs? Work in Process, Assembly 62,000 Various accounts 62,000 To record Assembly Department conversion costs What is the journal entry to transfer completed goods from Assembly to Finishing?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Example Work in Process, Finishing 132,043 Work in Process, Assembly132,043 To record cost of goods completed and transferred from Assembly to Finishing during the period

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Flow of Costs Example Accounts Payable 84,050 Various Accounts 62,000 WIP Assembly 84, ,043 62,000 14,007 WIP Finishing 132,043

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Use the weighted-average method of process costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Physical Units (Step 1) Work in process, beginning: 100% material 60% conversion costs 1,000 Units started in process35,00036,000 Units transferred out:31,000 Units in ending inventory: 100% material 20% conversion costs 5,00036,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) Materials Conversion Completed and transferred31,00031,000 Ending inventory 5,000 1,000 Equivalent units36,00032, %20%

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) Materials Conversion Beginning inventory$ 2,350$ 5,200 Current costs 84,050 62,000 Total$86,400$67,200 Equivalent units 36,000 32,000 Cost per unit $2.40 $2.10

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Work in process beginning inventory: Materials$ 2,350 Conversion 5,200 Total beginning inventory$ 7,550 Current costs in Assembly Department: Materials$ 84,050 Conversion 62,000 Costs to account for$153,600

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) This step distributes the department’s costs to units transferred out: 31,000 units × $4.50 = $139,500 And to units in ending work in process inventory: $12,000 + $2,100 = $14,100

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out: 31,000 × ($ $2.10)$139,500 Costs in ending inventory: Materials5,000 × $ ,000 Conversion1,000 × $2.10 2,100 Total costs accounted for:$153,600

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journalizing: Weighted-Average What are the journal entries in the Assembly Department? Work in Process, Assembly84,050 Accounts Payable Control84,050 To record direct materials purchased and used Work in Process, Assembly62,000 Various accounts62,000 To record Assembly Department conversion costs

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journalizing: Weighted-Average Work in Process, Finishing 139,500 Work in Process, Assembly139,500 To record cost of goods completed and transferred from Assembly to Finishing during the period

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Key T-Account: Weighted-Average Work in Process Inventory, Assembly Beg. Inv. 7,550Transferred Materials84,050to Finishing Conversion62,000139,500 Balance14,100

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 6 Use the first-in, first-out (FIFO) method of process costing.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Steps 1 and 2) Materials Conversion Completed and transferred: From beginning inventory Started and completed30,00030,000 Ending inventory 5,000 1,000 35,00031,400 Quantity schedule (Step 1) is the same as the weighted-average method.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) MaterialsConversion Completed and transferred:31,00031,000 Ending inventory 5,000 (100%) 1,000 (20%) 36,00032,000 Beginning inventory 1,000 (100%) 600 (60%) Equivalent units35,00031,400

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) Materials Conversion Current costs$84,050$62,000 Equivalent units 35,000 31,400 Cost per unit$2.40$1.975

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Work in process beginning inventory:$ 7,550 Current costs: Material 84,050 Conversion 62,000 Total$153,600 Same as using weighted-average

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out: From beginning inventory:$7,550 Conversion costs added: 1,000 × 40% × $ $ 8,340 From current production: 30,000 × $ ,250 Total$139,590

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Work in process ending inventory: Materials: 5,000 × $2.40$12,000 Conversion: 5,000 × 20% × $ ,975 Total$13,975

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out$139,590 Cost in ending inventory$ 13,975 $153,565 ($35 rounding error) An alternative approach: Costs to account for$153,600 Cost in ending inventory$ 13,975 Costs transferred out$139,625 + = – =

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Key T-Account: FIFO Work in Process Inventory, Assembly Beg. Inv. 7,550Transferred Materials84,050to Finishing Conversion62,000139,625 Balance13,975

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Comparison of Weighted- Average and FIFO Methods Weighted Average FIFO Difference Costs of units completed and transferred out$139,500$139,625+$125 Work in process, ending 14,100 13,975–$125 Total costs accounted for$153,600$153,600 0

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 7 Incorporate standard costs into a process-costing system.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Standard-Costing Method of Process-Costing Example Process-costing systems using standard costs usually accumulate actual costs incurred separately from the inventory accounts. Assume that actual materials cost is $84,050 and standard materials cost is $84,250 What are the journal entries in the Assembly Department?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Standard-Costing Method of Process-Costing Example Direct Materials Control84,050 Accounts Payable Control84,050 Work in Process84,250 Direct Material Variances 200 Direct Materials Control84,050 To record direct materials purchased and used in production during the period and variances

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 8 Apply process-costing methods to cases with transferred-in costs.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Transferred-In Costs Weighted-Average Example Finishing Department beginning WIP inventory: 4,000 units (60% materials) (25% conversion) Ending work in process inventory: 2,000 units (100% materials) (40%) conversion) 31,000 units transferred-in from Assembly.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Physical Units (Step 1) Beginning inventory 4,000 Units started in process31,000 35,000 Units completed and transferred to finished goods33,000 Ending inventory 2,000 35,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) Equivalent units for transferred-in costs: Transferred to finished goods33,000 Ending inventory 2,000 35,000 Inventory is 100% complete for the work performed in the Assembly Department.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) Equivalent units for direct materials costs: Transferred to finished goods33,000 Ending inventory (100%) 2,000 35,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) Equivalent units for conversion costs (ending inventory 2,000): Transferred to finished goods33,000 Ending inventory (40%) ,800

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) Assume the following costs in the Finishing Department: Work in process beginning inventory from: Assembly Department$30,200 Direct materials 9,400 Conversion costs 8,000 Total cost in beginning inventory$47,600

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) Current costs in Finishing Department are as follows: Costs received from the Assembly Department$139,500 Direct materials 9,780 Conversion 42,640 Total$191,920

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) (Transferred-in costs $30,200 + Costs transferred in from the Assembly Department $139,500) ÷ 35,000 units$4.85 (Direct materials $9,400 + $9,780) ÷ 35,000 units$0.55 (Conversion costs $8,000 + $42,640) ÷ 33,800 units$1.50 Total unit cost$6.90

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Total costs in beginning inventory$ 47,600 Current costs in Finishing Department 191,920 $239,520 Costs to account for: $47,600 + $ 191,920 =$239,520

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Costs in work in process ending inventory: Transferred-in costs: 2,000 × $4.85$ 9,700 Direct materials: 2,000 × $0.55 1,100 Conversion: 2,000 × 40% × $1.50 1,200 Total cost in ending inventory$12,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs (Steps 4 and 5) Costs to account for:$239,520 Costs transferred to finished goods inventory: 33,000 × $6.90$227,700 Costs in ending work in process inventory: $12,000 – $180 rounding error 11,820 Total$239,520

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster T-Account Finishing Department Work in Process Inventory, Finishing Beg. Inv. 47,600Transferred to Transferred-in139,500Finished Goods Materials 9, ,700 Conversion 42,640 Balance 11,820

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Transferred-In Costs FIFO Method The physical units (Step 1) is the same as in weighted-average. Beginning inventory 4,000 Units started in process31,000 35,000 Units transferred to finished goods33,000 Ending inventory 2,000 35,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units FIFO (Step 2) Equivalent units for transferred-in costs: From beginning work in process0 Started and completed29,000 Work in process, ending (100%) 2,000 Total equivalent units31,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units FIFO (Step 2) Equivalent units for transferred-in costs: Transferred to finished goods33,000 Ending work in process inventory 2,000 Total35,000 Beg. work in process inventory – 4,000 Equivalent units31,000 Inventories are 100% complete for the work performed in the Assembly Department.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units FIFO (Step 2) Equivalent units for materials costs: From beginning work in process 1,600 Started and completed29,000 Work in process, ending (100%) 2,000 Total equivalent units32,600

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units FIFO (Step 2) Equivalent units for material costs (beginning inventory 4,000): Transferred to finished goods33,000 Ending inventory (100%) 2,000 Total35,000 Beginning inventory (60%)–2,400 Equivalent units32,600

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units FIFO (Step 2) Equivalent units for conversion costs: From beginning work in process 3,000 Started and completed29,000 Work in process, ending (40%) 800 Total equivalent units32,800

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units FIFO (Step 2) Equivalent units for conversion costs (beginning inventory 4,000, ending inventory 2,000): Transferred to finished goods33,000 Ending inventory (40%) 800 Total33,800 Beginning inventory (25%)–1,000 Equivalent units32,800

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs FIFO (Step 3) Cost per equivalent unit: Transferred-in: $139,590 ÷ 31,000$4.50 Direct materials: $9,780 ÷ 32, Conversion: $42,640 ÷ 32, Total unit cost$6.10

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs FIFO (Steps 4 and 5) Current costs in Finishing Department:$192,010 Work in process beginning inventory: 47,600 Costs to account for: (same as weighted-average) $239,610

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs FIFO (Steps 4 and 5) Work in process ending inventory: Transferred-in: 2,000 × $4.50$ 9,000 Direct materials: 2,000 × $ Conversion: 800 × $1.30 1,040 Total$10,640

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs FIFO (Steps 4 and 5) Costs transferred out: From beginning inventory:$47,600 Direct materials added: 4,000 × 40% × $ Conversion costs added: 4,000 × 75% × $1.30 3,900 Total$51,980

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs FIFO (Steps 4 and 5) Total costs transferred out: From beginning inventory$ 51,980 From current production: 29,000 × $ ,900 Total$228,880

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs FIFO (Steps 4 and 5) Total costs accounted for: Transferred to finished goods: $176,900 + $51,980$228,880 Work in process ending inventory 10,640 Rounding error 90 Total$239,610

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Summarize and Assign Total Costs FIFO (Steps 4 and 5) Costs to account for$239,610 Work in process ending inventory – 10,640 Transferred to finished goods$228,970

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 17