Process Costing Chapter 17

Identify the situations in which process-costing systems Learning Objective 1 Identify the situations in which process-costing systems are appropriate.

Illustrating Process Costing Direct Materials, Direct Labor Indirect Manufacturing Costs Department A Department B Finished Goods Cost of Goods Sold

Describe the five steps Learning Objective 2 Describe the five steps in process costing.

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.

Calculate equivalent units and understand how to use them. Learning Objective 3 Calculate equivalent units and understand how to use them.

Physical Units (Step 1) Physical units Flow of Production Work in process, beginning 0 Started during current period 35,000 To account for 35,000 Completed and transferred out during current period 30,000 Work in process, ending (100%/20%) 5,000 Accounted for 35,000

Compute Equivalent Units (Step 2) Direct Conversion Flow of Production Materials Costs Completed and transferred out 30,000 30,000 Work in process, ending 5,000 (100%) 1,000 (20%) Current period work 35,000 31,000

Compute Equivalent Unit Costs (Step 3) Total production costs are $146,050. Direct Conversion Materials Costs $84,050 $62,000 Equivalent units 35,000 31,000 Cost per equivalent unit $2.4014 $2.00

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 materials 5,000 × $2.4014 12,007 Conversion costs 1,000 × $2.00 2,000 Total $146,050

Prepare journal entries for process-costing systems. Learning Objective 4 Prepare journal entries for process-costing systems.

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 Control 84,050 To record direct materials purchased and used

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?

Journal Entries Example Work in Process, Finishing 132,043 Work in Process, Assembly 132,043 To record cost of goods completed and transferred from Assembly to Finishing during the period

Flow of Costs Example Accounts Payable 84,050 WIP Assembly 84,050 132,043 62,000 14,007 Various Accounts 62,000 WIP Finishing 132,043

Use the weighted-average method of process costing. Learning Objective 5 Use the weighted-average method of process costing.

Physical Units (Step 1) Work in process, beginning: 100% material 60% conversion costs 1,000 Units started in process 35,000 36,000 Units transferred out: 31,000 Units in ending inventory: 20% conversion costs 5,000 36,000

Compute Equivalent Units (Step 2) Materials Conversion Completed and transferred 31,000 31,000 Ending inventory 5,000 1,000 Equivalent units 36,000 32,000 100% 20%

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

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

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

Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out: 31,000 × ($2.40 + $2.10) $139,500 Costs in ending inventory: Materials 5,000 × $2.40 12,000 Conversion 1,000 × $2.10 2,100 Total costs accounted for: $153,600

Journalizing: Weighted-Average What are the journal entries in the Assembly Department? Work in Process, Assembly 84,050 Accounts Payable Control 84,050 To record direct materials purchased and used Work in Process, Assembly 62,000 Various accounts 62,000 To record Assembly Department conversion costs

Journalizing: Weighted-Average Work in Process, Finishing 139,500 Work in Process, Assembly 139,500 To record cost of goods completed and transferred from Assembly to Finishing during the period

Key T-Account: Weighted-Average Work in Process Inventory, Assembly Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,500 Balance 14,100

Use the first-in, first-out (FIFO) method of process costing. Learning Objective 6 Use the first-in, first-out (FIFO) method of process costing.

Compute Equivalent Units (Steps 1 and 2) Quantity schedule (Step 1) is the same as the weighted-average method. Materials Conversion Completed and transferred: From beginning inventory 0 400 Started and completed 30,000 30,000 Ending inventory 5,000 1,000 35,000 31,400

Compute Equivalent Units (Step 2) Materials Conversion Completed and transferred: 31,000 31,000 Ending inventory 5,000 (100%) 1,000 (20%) 36,000 32,000 Beginning inventory 1,000 (100%) 600 (60%) Equivalent units 35,000 31,400

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

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

Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out: From beginning inventory: $7,550 Conversion costs added: 1,000 × 40% × $1.975 790 $ 8,340 From current production: 30,000 × $4.375 131,250 Total $139,590

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% × $1.975 1,975 Total $13,975

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

Key T-Account: FIFO Work in Process Inventory, Assembly Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,625 Balance 13,975

Comparison of Weighted-Average and FIFO Methods 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

Incorporate standard costs into a process-costing system. Learning Objective 7 Incorporate standard costs into a process-costing system.

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?

Standard-Costing Method of Process-Costing Example Direct Materials Control 84,050 Accounts Payable Control 84,050 Work in Process 84,250 Direct Material Variances 200 Direct Materials Control 84,050 To record direct materials purchased and used in production during the period and variances

Apply process-costing methods to cases with transferred-in costs. Learning Objective 8 Apply process-costing methods to cases with transferred-in costs.

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.

Physical Units (Step 1) Beginning inventory 4,000 Units started in process 31,000 35,000 Units completed and transferred to finished goods 33,000 Ending inventory 2,000 35,000

Compute Equivalent Units (Step 2) Equivalent units for transferred-in costs: Transferred to finished goods 33,000 Ending inventory 2,000 35,000 Inventory is 100% complete for the work performed in the Assembly Department.

Compute Equivalent Units (Step 2) Equivalent units for direct materials costs: Transferred to finished goods 33,000 Ending inventory (100%) 2,000 35,000

Compute Equivalent Units (Step 2) Equivalent units for conversion costs (ending inventory 2,000): Transferred to finished goods 33,000 Ending inventory (40%) 800 33,800

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

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

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

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

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

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

T-Account Finishing Department Work in Process Inventory, Finishing Beg. Inv. 47,600 Transferred to Transferred-in 139,500 Finished Goods Materials 9,780 227,700 Conversion 42,640 Balance 11,820

Transferred-In Costs FIFO Method The physical units (Step 1) is the same as in weighted-average. Beginning inventory 4,000 Units started in process 31,000 35,000 Units transferred to finished goods 33,000 Ending inventory 2,000 35,000

Compute Equivalent Units FIFO (Step 2) Equivalent units for transferred-in costs: From beginning work in process 0 Started and completed 29,000 Work in process, ending (100%) 2,000 Total equivalent units 31,000

Compute Equivalent Units FIFO (Step 2) Equivalent units for transferred-in costs: Transferred to finished goods 33,000 Ending work in process inventory 2,000 Total 35,000 Beg. work in process inventory – 4,000 Equivalent units 31,000 Inventories are 100% complete for the work performed in the Assembly Department.

Compute Equivalent Units FIFO (Step 2) Equivalent units for materials costs: From beginning work in process 1,600 Started and completed 29,000 Work in process, ending (100%) 2,000 Total equivalent units 32,600

Compute Equivalent Units FIFO (Step 2) Equivalent units for material costs (beginning inventory 4,000): Transferred to finished goods 33,000 Ending inventory (100%) 2,000 Total 35,000 Beginning inventory (60%) –2,400 Equivalent units 32,600

Compute Equivalent Units FIFO (Step 2) Equivalent units for conversion costs: From beginning work in process 3,000 Started and completed 29,000 Work in process, ending (40%) 800 Total equivalent units 32,800

Compute Equivalent Units FIFO (Step 2) Equivalent units for conversion costs (beginning inventory 4,000, ending inventory 2,000): Transferred to finished goods 33,000 Ending inventory (40%) 800 Total 33,800 Beginning inventory (25%) –1,000 Equivalent units 32,800

Compute Equivalent Unit Costs FIFO (Step 3) Cost per equivalent unit: Transferred-in: $139,590 ÷ 31,000 $4.50 Direct materials: $9,780 ÷ 32,600 0.30 Conversion: $42,640 ÷ 32,800 1.30 Total unit cost $6.10

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

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 × $0.30 600 Conversion: 800 × $1.30 1,040 Total $10,640

Summarize and Assign Total Costs FIFO (Steps 4 and 5) Costs transferred out: From beginning inventory: $47,600 Direct materials added: 4,000 × 40% × $0.30 480 Conversion costs added: 4,000 × 75% × $1.30 3,900 Total $51,980

Summarize and Assign Total Costs FIFO (Steps 4 and 5) Total costs transferred out: From beginning inventory $ 51,980 From current production: 29,000 × $6.10 176,900 Total $228,880

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

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

End of Chapter 17