1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Process Costing Chapter 4

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Distinguish between the flow of costs in process costing and job order costing

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Cost of Goods Sold Manufacturing Wages Materials Inventory Finished Goods Manufacturing Overhead Job Order Costing Work in Process Job 90 Job 91 Job 92

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Cost of Goods Sold Manufacturing Wages Materials Inventory Finished Goods Process Costing Work in Process, Mixing Dept Work in Process, Molding Dept Work in Process, Packaging Dept Manufacturing Overhead

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Tracking Costs Account for the goods completed and transferred out Account for the cost of incomplete units that remain as a department’s ending work in process inventory

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Key Concepts Conversion costs –Costs incurred to convert raw materials into a finished product –Direct labor plus manufacturing overhead Equivalent unit of production –Amount of work done during a period in terms of fully complete units of output Inventory flow assumptions –Weighted average –First-in, first-out

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Objective 2 Compute equivalent units

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 E4-15 Step 1: Summarize the flow of physical units Units to account for Units accounted for Blending Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 08,0006,0002,000 ++ +

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 E4-15 Start Dyes added 100% complete 30% complete 2,000 units started but not finished 6,000 units completed and transferred out Step 2: Compute output in terms of equivalent units

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 E4-15 Equivalent units for direct materials: 8,000 units x 100% complete8,000 Equivalent units for conversion costs: 6,000 units x 100% complete6,000 2,000 units x 30% complete600 6,600

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Objective 3 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a first department

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 E4-15 Step 3: Summarize total costs to account for. Beginning work in process inventory $ 0 Costs added during May: Direct materials (dyes) 4,800 Direct labor 800 Manufacturing overhead 1,840 Total costs to account for$7,440

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 E4-15 Blending Department Direct Materials Conversion Costs Beginning work in process$ 0 Costs added during period Divide by equivalent units Cost per equivalent unit Step 3: Compute the cost per equivalent unit $4,800 ÷ 8,000 $0.40$0.6 0 $2,640 ÷ 6,600

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 E4-15 Direct Materials Conversi on Costs Total Completed and transferred out (6,000) Ending WIP (2,000) Direct materials Conversion costs Total cost of ending WIP Total costs accounted for Step 4: Assign costs to units completed and to units in ending work in process inventory 6,000 x ($0.60 + 0.40) $6,000 2,000 x $0.60 600 x 0.40 $7,440 1,440 240 $1,200

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 E4-16 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory blending department7,440 Materials inventory4,800 Manufacturing wages800 Manufacturing overhead1,840

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 E4-16 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory packaging department6,000 Work in process inventory blending department6,000

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 E4-16 Work in process inventory - blending 7,4406,000 Bal. 1,440

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 E4-16 Average cost per gallon transferred out of blending is: $6,000 ÷ 6,000 gallons = $1.00 per gallon

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 Objective 4 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a second department

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 E4-22 Step 1: Summarize the flow of physical units Units to account for Units accounted for Bottling Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 8,00027,00026,0009,000 ++ +

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 E4-22 Step 1: Summarize the flow of physical units Beg. Bal. 8,000 Transferred in 27,000 End Bal. 9,000 Work in process, bottling department (units) 26,000

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 E4-22 Materials added Start 100% complete 80% complete Step 2: Compute output in terms of equivalent units 18,000 units started and completed 8,000 units in process & completed 70% complete 9,000 units started but not finished

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 E4-22 Equivalent units transferred in: Completed and transferred out26,000 Ending work in process9,000 Total units to account for35,000

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 E4-22 Equivalent units: Direct materials Completed and transferred out26,000 Ending work in process 9,000 Total35,000

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 E4-22 Equivalent units for conversion costs: Completed and transferred out26,000 Ending WIP -9,000 x 70%6,300 Total32,300

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Step 3: Compute the cost per equivalent unit E4-22 Costs to be Accounted For: Trans inDir. Mat. Conv. Costs Total Beginning WIP $ 20,050$20,250$19,816$60,116 Costs added 97,20074,25090,650262,100 Total costs $117,250$94,500$110,466 ÷ equivalent unit 35,000 32,300 Cost/equiv unit $3.35$2.70$3.42 Total costs to account for $322,216

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 Step 3: Compute the cost per equivalent unit E4-22 Trans inDir. Mat.Conv CostsTotal Completed & transferred out 26,000 x ($3.35+$2.70+$3.42)$246,220 Ending WIP Transferred in 9,000x$3.35 $30,150 Direct materials 9,000 $2.70 24,300 Conversion 6,300x$3.4221,546 Total WIP $75,996 Total costs accounted for $322,216

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT a.Raw materials inventory9,000 Accounts payable9,000 b.Work in process inventory Assembly 4,000 Work in process inventory Finishing2,000 Raw materials inventory6,000

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT c.Manufacturing wages10,800 Wages payable10,800 d.Manufacturing overhead10,900 Property tax payable1,900 Utilities payable4,500 Prepaid insurance1,100 Accumulated depreciation3,400

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT e.Work in process inventory- Assembly7,600 Manufacturing wages4,700 Manufacturing overhead2,900 f.Work in process inventory – Finishing10,600 Manufacturing wages4,400 Manufacturing overhead6,200

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT g.Work in process inventory Finishing10,250 Work in process inventory Assembly10,250 h.Finished goods inventory15,600 Work in process inventory Finishing15,600

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 End of Chapter 4