2. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 3 Process Costing

3. 3- 3 Describe the key features of a process costing system. Learning Objective 3-1

4. 3- 4 Basic Concepts in Process Costing Process costing is used by companies that produce homogeneous products or services using a series of standardized processes. Canned and bottled goods, frozen foods, paper products, and petroleum products are examples of homogeneous products that result from a standardized process. Although process costing is most often identified with manufacturing companies, it can also be used by service firms that perform routine processes, such as an insurance company that has a claims and reimbursement process or a financial institution that processes home refinance loans.

5. 3- 5 Flow of Costs in Process Costing

6. 3- 6 Process Costing Production Report The foundation of a process costing system is the production report. In the report we provide information about: 1.The number of units produced. 2.The manufacturing costs transferred into Work in Process Inventory. 3.The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory. 4.The number of units remaining in process at the end of the period. 5.The cost of units remaining in process at the end of the period. The foundation of a process costing system is the production report. In the report we provide information about: 1.The number of units produced. 2.The manufacturing costs transferred into Work in Process Inventory. 3.The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory. 4.The number of units remaining in process at the end of the period. 5.The cost of units remaining in process at the end of the period.

7. 3- 7 Reconcile the number of physical units using the weighted-average method. Learning Objective 3-2

8. 3- 8 Step 5: Prepare a Production Report. Preparing the Production Report (Weighted-Average Method) Step 4: Reconcile the total cost of work in process. Step 3: Calculate the cost per equivalent unit. Step 2: Translate the physical units into equivalent units. Step 1: Reconcile the number of physical units worked on during the period.

9. 3- 9 Prepare the Production Report (Weighted-Average Method) Step 1: Reconcile the number of physical units. (Unit = 1 Barrel of Wine)

10. 3- 10 Prepare the Production Report (Weighted-Average Method) Step 1: Reconcile the number of physical units. (Unit = 1 Barrel of Wine)

11. 3- 11 Calculate the number of equivalent units using the weighted-average method. Learning Objective 3-3

12. 3- 12 Process Costing Production Report Step 2: Convert Physical Units Into Equivalent Units The next step in preparing the production report is to calculate the number of equivalent units. An equivalent unit is a measure used to convert partially completed units into the equivalent of a full unit. Consider the information below.

13. 3- 13 Process Costing Production Report Step 2: Convert Physical Units Into Equivalent Units

14. 3- 14 Process Costing Production Report Step 3: Calculate Cost Per Equivalent Unit

15. 3- 15 Process Costing Production Report Step 4: Reconcile the total cost of Work in Process

16. 3- 16 Process Costing Production Report Completed and transferred to bottling ($715,200 + $868,800 ) = $1,584,000= Ending Inventory = ($178,800 + $130,320) = $309,120 Step 4: Reconcile the total cost of Work in Process

17. 3- 17 Process Costing Production Report Step 4: Reconcile the total cost of Work in Process

18. 3- 18 Prepare a process costing production report using the weighted-average method. Learning Objective 3-4

19. 3- 19 Step 5: Prepare a Production Report Section 1 of the Production Report

20. 3- 20 Step 5: Prepare a Production Report Section 2 of the Production Report

21. 3- 21 Additional Factors in Processing Costing 1.We have not discussed process costing when the FIFO method is applied. This material in covered in Supplement 3A to this chapter. The only difference between the two methods is how we treat beginning inventory. 2.We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department.

22. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Supplement 3A FIFO Method

23. 3- 23 Prepare a process costing production report using the first-in, first-out (FIFO) method. Learning Objective 3-S1

24. 3- 24 Step 1: Reconcile the Number of Physical Units FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period.

25. 3- 25 Units Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400 OR Units Started and Completed = Units Completed Beginning Units ‒ = 1,600 – 200 = 1,400 OR Units Started and Completed = Units Started Ending Units ‒ = 1,800 – 400 = 1,400 Step 1: Reconcile the Physical Units

26. 3- 26 Step 2: Convert Physical Units into Equivalent Units 400 units × 60% = 240 Beginning inventory is 100% complete as to materials and 70% complete as to conversion. Complete as to materials 200 units × 30% = 60

27. 3- 27 Step 3: Calculate Cost per Equivalent Unit = Cost per Equivalent Unit Current Period Costs Equivalent Units

28. 3- 28 Step 4: Reconcile the Total Cost of Work in Process

29. 3- 29 Step 4: Reconcile the Total Cost of Work in Process Inventory Section 1 of the Production Report

30. 3- 30 Step 5: Prepare a Production Report Section 2 of the Production Report

31. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Supplement 3B Journal Entries for Process Costing

32. 3- 32 Prepare journal entries to record the flow of manufacturing costs in a process cost system. Learning Objective 3-S2

33. 3- 33 Mondavi purchased $900,000 of materials on account. Purchase of Raw Materials Mondavi adds $810,000 of grapes to production. Issue of Raw Material into Production Journal Entries for Process Costing

34. 3- 34 Mondavi incurred $108,000 actual labor costs: Recording Actual Labor Costs Journal Entries for Process Costing

35. 3- 35 Record Manufacturing Overhead Costs Assume Mondavi applies $450 in manufacturing overhead to each barrel started in the CFA process. During the most recent period.1,800 barrels were started, resulting in $810,000 in applied overhead (1,800 barrels X $450 = $810,000). Journal Entries for Process Costing

36. 3- 36 Record Actual Overhead Costs Journal Entries for Process Costing Mondavi incurred $800,000 in actual manufacturing overhead costs during the period

37. 3- 37 Work in Process Bottling Work in Process (CFA) Manufacturing Overhead Applied Actual Raw Materials Beg. Bal. = 0 800.000810,000 Pur. = 900,000 Iss. = 810,000 Beg. Bal. = 0 Direct Mat. 810,000 MOH 810,000 Summary of Recorded Transactions Direct Labor DL = 108,000

38. 3- 38 Transfer from One Process to the Next Assume 1,800 barrels of wine are through the CFA process. At a cost of $990 per barrel, accountants would transfer $1,782,000 (1,800 X $990) from the Work in Process Inventory (CFA) account to the Work in Process Inventory (Bottling) account. Journal Entries for Process Costing

39. 3- 39 Record Cost of Goods Completed Journal Entries for Process Costing When the product is through the last production process, the total manufacturing cost is transferred out of the last Work in Process Inventory account and into Finished Goods Inventory. In our winery example, each bottle of wine completed accumulates $3.75 in total manufacturing cost. When 460,000 bottles are completed, a total of $1,725,000 (460,000 X $3.75) is transferred to Finished Goods Inventory.

40. 3- 40 Record Cost of Goods Sold and Sales Revenue Journal Entries for Process Costing When the product is sold, its total manufacturing cost is reported as cost of goods sold. If Mondavi sells 400,000 bottles, the total manufacturing cost of $1,500,000 (400,000 X $3.75) would be transferred from Finished Goods Inventory to Cost of Goods Sold. If the average sales price was $8.00 per bottle, the company would report $3,200,000 (400,000 X $8.00) in sales revenue.

41. 3- 41 Weighted-Average Vs. FIFO Process Costing

42. 3- 42 End of Chapter 3