21a - 1 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix 21A: Process Costing Objectives 1.Distinguish between the flow of costs in process costing and job costs 2.Record process costing transactions 3.Calculate equivalent units 4.Assign costs to units completed and to units in ending work in process inventory.

21a - 2 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Distinguish between the flow of costs in process costing and job costing. Objective 1

21a - 3 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Direct materials, Direct labour, Overhead Job 100Job 101Job 102 Finished Goods Cost of Goods Sold Job Costing

21a - 4 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia WIP Chopping Department WIP Mixing & Bottling Department Finished Goods Cost of Goods Sold Process Costing Direct materials, Direct labour, Overhead

21a - 5 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Record process costing transactions. Objective 2

21a - 6 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Recording Costs Example l Assume that Pace Foods transfers $4,000 of partially completed items from the Chopping Department to the Mixing & Bottling Department. l What is the journal entry?

21a - 7 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Recording Costs Work in Process Inventory – Mixing & Bottling 4,000 Work in Process Inventory – Chopping 4,000 To transfer costs from the Chopping Department to the Mixing & Bottling Department

21a - 8 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Work-in-Process Inventory – Mixing & Bottling 3,000 Materials Inventory 3,000 To requisition materials Recording Costs l Assume that additional materials costing $3,000 were added in the Mixing & Bottling Department.

21a - 9 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Recording Costs l Manufacturing wages amounted to $6,000 and manufacturing overhead was $12,000 in the Mixing & Bottling Department. l What are the journal entries?

21a - 10 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Recording Costs Work in Process Inventory – Mixing & Bottling 6,000 Manufacturing Wages 6,000 Work in Process Inventory – Mixing & Bottling 12,000 Manufacturing Overhead 12,000 To record the additional labour and overhead cost of the Mixing & Bottling Department

21a - 11 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Finished Goods Inventory19,000 Work in Process Inventory – Mixing and Bottling19,000 To transfer the cost of goods completed Recording Costs l $19,000 worth of finished items were transferred to Finished Goods Inventory.

21a - 12 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Recording Costs l Assume $1,000 beginning Work in Process Inventory in the Mixing & Bottling Department. l What is the ending Work in Process Inventory?

21a - 13 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Recording Costs Work in Process Beg. Balance 1,000 Transferred In 4,000Transferred Out Materials 3,00019,000 Labour 6,000 Overhead12,000 End. Balance 7,000

21a - 14 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Tracking the Flow of Costs l In process costing, the accounting task is to track the flow of costs through the production process. 1 Account for the goods completed and transferred out. 2 Account for the cost of incomplete units that remain as a department’s ending work in process inventory.

21a - 15 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Tracking the Flow of Costs Example l SeaView manufactures swimming masks. l The Shaping Department shapes the masks. l Direct materials are added at the beginning of the process. l Conversion costs are incurred evenly throughout the shaping process. l The partially completed masks then move to the Finishing Department.

21a - 16 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Direct materials$ 140,000 Conversion costs: Direct labour$21,250 Mfg. overhead 46,750 68,000 Costs to account for$208,000 Tracking the Flow of Costs Example l Assume that during October, the Shaping Department incurs these costs in processing 50,000 masks:

21a - 17 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Tracking the Flow of Costs Example l Assume the shaping process is complete for all 50,000 masks. l What is the cost transferred to the Finishing Department? l $208,000 l What is the unit cost? l $208,000 ÷ 50,000 = $4.16/mask

21a - 18 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objective 3 Calculate equivalent units.

21a - 19 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Equivalent Units Example l Assume that on October 31, the SeaView’s Shaping Department still had 5,000 masks that were 80% of the way through the shaping process. l What are the conversion equivalent units in ending work in process inventory? l 5,000 ×.80 = 4,000 masks

21a - 20 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Steps in Process Cost Accounting 1 Summarise the flow of physical units. 2 Calculate output in terms of equivalent units. 3 Summarise total costs to account for. 4 Calculate the cost per equivalent unit. 5 Assign costs to units completed and to units in ending work in process.

21a - 21 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Physical Units Beginning inventory Started in production50,000 = Total to account for50,000 Completed and transferred40,000 + Work in process10,000 = Total accounted for50,000 Summarise the Flow of Physical Units

21a - 22 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Calculate Output in Terms of Equivalent Units Flow of PhysicalDirect Conv. Units Mtls. Costs Units to account for:50,000 Started and completed40,00040,00040,000 Ending WIP10,00010,000 2,500 Equivalent units50,00042, % 25%

21a - 23 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Summarise Total Costs to Account for Department 1 – Shaping For the Month Ended October 31, 2005 Physical Units Dollars Beginning Inventory Production Started50,000 Direct Materials$ 140,000 Conversion Costs 68,000 Total50,000$ 208,000

21a - 24 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Department 1 – Shaping For the Month Ended October 31, 2005 Direct Conversion Materials Costs Costs added this month$140,000$68,000 ÷ Equivalent Units 50,000 42,500 = Cost per EU$ 2.80$ 1.60 Calculate the Cost per Equivalent Unit

21a - 25 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Assign costs to units completed and to units in ending work-in-process inventory. Objective 4

21a - 26 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Assign Costs to Units Department 1 – Shaping For the Month Ended October 31, 2005 Units completed and transferred out: 40,000 × ($ $1.60)$ 176,000 Units in ending inventory: Materials:10,000 × $ ,000 Conversion:2,500 × $1.60 4,000 Total costs $208,000

21a - 27 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Work in Process Inventory – Shaping Balance, Sept Transferred to Direct Materials 140,000Finishing 176,000 Direct labour* 21,250 Overhead* 46,750 Balance Oct.31 32,000 *Conversion costs: $21,250 + $46,750 = $68,000 Assign Costs to Units

21a - 28 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia End of Chapter 21A