Manufacturing Process Cost Accounting
Copyright © 2003 by M. Ray Gregg. All rights reserved. 2 Overview Which method for which industry? Similarities and Differences Allocation of Costs –Equivalent Units –FIFO vs. Weighted Average –Steps Cost of Goods –Finished –Not Finished
Copyright © 2003 by M. Ray Gregg. All rights reserved. 3 Comparison Job OrderProcess Wide variety of distinct products Homogenous products Costs accumulated by jobs Costs accumulated in departments Unit cost determined by dividing cost of job by # of units Unit cost determined by dividing process costs of period by units produced during period
Copyright © 2003 by M. Ray Gregg. All rights reserved. 4 Comparison Job OrderProcess Print ShopPublisher Auto MechanicAuto Manufacturer Furniture Upholster Furniture Manufacturer
Copyright © 2003 by M. Ray Gregg. All rights reserved. 5 Comparison Job OrderProcess
Copyright © 2003 by M. Ray Gregg. All rights reserved. 6
7 Same Account Names
Copyright © 2003 by M. Ray Gregg. All rights reserved. 8 Same Elements of Cost
Copyright © 2003 by M. Ray Gregg. All rights reserved. 9 Different Approach to Finished Goods
Copyright © 2003 by M. Ray Gregg. All rights reserved. 10
Copyright © 2003 by M. Ray Gregg. All rights reserved. 11 WIP - A WIP - BWIP - C Process Costs Accumulated by Departments Departments vs. Job Cost Sheets
Copyright © 2003 by M. Ray Gregg. All rights reserved. 12 WIP - A WIP - BWIP - C Process Costs Accumulated by Departments Departments vs. Job Cost Sheets
Copyright © 2003 by M. Ray Gregg. All rights reserved. 13
Copyright © 2003 by M. Ray Gregg. All rights reserved. 14 Equivalent Units of Production A measure of productive effort measured in fully completed units Becomes the basis for the allocation of costs
Copyright © 2003 by M. Ray Gregg. All rights reserved. 15 Equivalent Units of Production A measure of productive effort expressed in fully completed units Becomes the basis for the allocation of costs
Copyright © 2003 by M. Ray Gregg. All rights reserved. 16 Production Time Line Conversion Costs Added Throughout the Process Materials Added at the Beginning of the Process Unfinished Units Beginning Inventory
Copyright © 2003 by M. Ray Gregg. All rights reserved. 17 Production Time Line Materials Added at the Beginning of the Process Goods finished and “transferred out” Conversion Costs Added Throughout the Process Unfinished Units Beginning Inventory
Copyright © 2003 by M. Ray Gregg. All rights reserved. 18 EUP for Materials Materials Materials Added at the Beginning of the Process Materials EUP for Materials =
Copyright © 2003 by M. Ray Gregg. All rights reserved. 19 EUP for Conversion Costs Finished Materials Added at the Beginning of the Process Unfinished Units EUP for Conversion Costs = Beg Inv
Copyright © 2003 by M. Ray Gregg. All rights reserved. 20 Allocating Process Costs FIFO Method –For a long, long time! –Tied for 1 st place (with Bonds) for difficulty Weighted Average Method –6 th edition – 2003 –“It is the method most widely used in practice.” – W,K,K pg 909 –“…is simpler than the FIFO method…” – H,H,B pg 862 –“But W-A costs per EUP are not as useful for evaluating the efficiency [for the period] because they are affected by costs incurred [in the previous period].” -- H,H,B pg 865
Copyright © 2003 by M. Ray Gregg. All rights reserved. 21 Allocating Process Costs 1.Determine “physical flow” in units 2.Determine EUP for materials and for conversion costs 3.Determine unit costs for materials for conversion costs and total 4.Allocate costs incurred to goods Finished and Not Finished
Copyright © 2003 by M. Ray Gregg. All rights reserved. 22 Illustration X Company has several processing departments. Costs charged to Department 1 for February totaled $258,600 as follows: Work in Process, 2/1 Materials$12,000 Conversion Costs 9,000$21,000 Materials added72,000 Labor103,500 Overhead62,100 Records indicate that 3,000 units were in beginning Work in Process 30% complete as to conversion costs, 18,000 units were started into production, and 4,000 units were in ending work in process 60% complete as to conversion costs. Materials are entered at the beginning of each process. Instructions: (a) Determine the equivalent units of production and the unit costs for Department 1. (b) Determine the assignment of costs to goods transferred out and in process.
Copyright © 2003 by M. Ray Gregg. All rights reserved. 23 General Ledger
Copyright © 2003 by M. Ray Gregg. All rights reserved. 24 General Ledger Conversio n Costs $165,600
Copyright © 2003 by M. Ray Gregg. All rights reserved. 25 Step 1: Determine physical units
Copyright © 2003 by M. Ray Gregg. All rights reserved. 26 Determine EUP for M and CC Step 2: Determine EUP 4,000 x 60%
Copyright © 2003 by M. Ray Gregg. All rights reserved. 27 Determine EUP for M and CC Step 2: Determine EUP
Copyright © 2003 by M. Ray Gregg. All rights reserved. 28 Determine unit costs Step 3: Determine unit costs
Copyright © 2003 by M. Ray Gregg. All rights reserved. 29 Determine unit costs Step 3: Determine unit costs $84,000 21,000 = $4.00 M:
Copyright © 2003 by M. Ray Gregg. All rights reserved. 30 Determine unit costs Step 3: Determine unit costs $84,000 21,000 = $4.00 M: $174,600 19,400 = $9.00 CC:
Copyright © 2003 by M. Ray Gregg. All rights reserved. 31 Determine unit costs Step 3: Determine unit costs $84,000 21,000 = $4.00 M: $174,600 19,400 = $9.00 CC: $13.00
Copyright © 2003 by M. Ray Gregg. All rights reserved. 32 Determine unit costs Step 4: Allocate costs to goods
Copyright © 2003 by M. Ray Gregg. All rights reserved. 33 Determine unit costs Step 4: Allocate costs to goods
Copyright © 2003 by M. Ray Gregg. All rights reserved. 34 Determine unit costs Step 4: Allocate costs to goods Journalize and post the necessary journal entry: Work in Process – D2221,000 Work in Process – D1221,000
Copyright © 2003 by M. Ray Gregg. All rights reserved. 35 General Ledger
Copyright © 2003 by M. Ray Gregg. All rights reserved. 36 General Ledger
Copyright © 2003 by M. Ray Gregg. All rights reserved. 37 Determine unit costs Step 4: Allocate costs to goods
Copyright © 2003 by M. Ray Gregg. All rights reserved. 38 Determine unit costs Step 4: Allocate costs to goods
Manufacturing Process Cost Accounting
Copyright © 2003 by M. Ray Gregg. All rights reserved. 40 Sources Dell computer logo – Home Construction – – Accounting logos –Ernst & Young –Deloitte & Touche ts13.html ts13.html