1. Job Order and Process Costing
Chapter 17
Chapter 17 explains job order and process costing. 1 1

2. Learning Objectives Distinguish between job order costing and
process costing
Record materials and labor in a job order
costing system
Record overhead in a job order costing system
The objectives for this chapter include to:
Distinguish between job order costing and process costing.
Record materials and labor in a job order costing system.
Record overhead in a job order costing system.

3. Learning Objectives
Record completion and sales of finished goods and the adjustment for under- or overallocated overhead
Calculate unit costs for a service company
Allocate costs using a process costing system—weighted-average method (see Appendix 17A)
Additional objectives include to:
4. Record completion and sales of finished goods and the adjustment for under- or overallocated overhead.
5. Calculate unit costs for a service company.
6. Allocate costs using a process costing system—weighted-average method (see Appendix 17A).

4. Distinguish between job order costing and process costing1
Distinguish between job order costing and
process costing
The first learning objective is to distinguish between job order costing and process costing.

5. Cost Accounting Systems
Gather information to determine the production cost per unit
Help managers:
set selling prices that will lead to profits
compute cost of goods sold for the income statement
compute the cost of inventory for the balance sheet
Assign these costs to the company’s product or service using:
Job order costing
Process costing
Cost accounting systems accumulate cost information so that managers can measure how much it costs to produce each unit of merchandise. For example, Intel must know how much each processor costs to produce. FedEx knows its cost of flying each pound of freight one mile.
These unit costs help managers:
● set selling prices that will lead to profits.
● compute cost of goods sold for the income statement.
● compute the cost of inventory for the balance sheet.
If a manager knows the cost to produce each product, then the manager can plan and control the cost of resources needed to create the product and deliver it to the customer. A cost accounting system assigns these costs to the company’s product or service.

6. Job Order vs. Process Costing
Job Order Costing
Process Costing
For manufactured batches of unique products or specialized services
Accounting firms
Music studios
Building contractors
Health-care providers
Accumulates cost per batch or job
More prevalent with service-based companies and with ERP systems
For companies that produce identical units through a series of processes
Coca-Cola
Surfboards
Medical equipment
Used by large producers of similar goods
Accumulates cost of each process needed to complete the product
Assigns costs to products
Some companies manufacture batches of unique products or provide specialized services. A job order costing system accumulates costs for each batch, or job. Accounting firms, music studios, health-care providers, building contractors, and furniture manufacturers are examples of companies that use job order costing systems. For example, Dell makes personal computers based on customer orders (see the “Customize” button on Dell’s Web site). As we move to a more service-based economy and with the advent of ERP systems, job order costing has become more prevalent.
Other companies, such as Procter & Gamble and Coca-Cola produce identical units through a series of production steps or processes. A process costing system accumulates the costs of each process needed to complete the product. So, for example, Coca-Cola’s process steps may include mixing, bottling, and packaging. A surfboard manufacturing company’s process steps may include sanding, painting, waxing, and packaging. A medical equipment manufacturer of a blood glucose meter’s process steps may include soldering, assembly, and testing. Process costing is used primarily by large producers of similar goods.
Both job order and process costing systems:
● accumulate the costs incurred to make the product.
● assign costs to the products.

7. Job Order vs. Process Costing
Cost tracing is used to assign directly traceable costs
Direct materials
Direct labor
Cost allocation
Assigns indirect costs to the product
Overhead costs
Less precise technique
Accountants use cost tracing to assign directly traceable costs, such as direct materials and direct labor, to the product. They use a less precise technique—cost allocation—to assign manufacturing overhead and other indirect costs to the product. Let’s see how a job order costing system works for a manufacturing company.

8. S17-1: Distinguishing between job costing and process costing
Job costing and process costing track costs differently.
Would the following companies use job order costing or process costing?
A manufacturer of refrigerators __________________
A manufacturer of specialty wakeboards __________________
A manufacturer of luxury yachts __________________
A professional services firm __________________
A landscape contractor __________________
A custom home builder __________________
A cell phone manufacturer __________________
A manufacturer of frozen pizzas __________________
A manufacturer of multivitamins __________________
A manufacturer of tennis shoes __________________
Process costing
Process costing
Job order costing
Job order costing
Job order costing
Short Exercise 17-1 distinguishes between job costing and process costing.
Job order costing
Process costing
Process costing
Process costing
Process costing

9. Record materials and labor in a job order costing system2
Record materials and labor in a job order costing system
The second learning objective is to record materials and labor in a job order costing system.

10. Flow of Costs Job 293 Work in process Finished goods
Materials $793
Labor
Overhead 472
Flow of Costs
Job 293
Direct materials
Work in process
Finished goods
Direct labor
A job order costing system tracks costs as raw materials move from the storeroom to the production floor to finished products. Exhibit 17-1 diagrams the flow of costs through the accounts in a job order costing system.
Each customer order is a separate job. A company uses a job cost record to accumulate the following costs for each job:
direct materials
direct labor
manufacturing overhead
The company starts the job cost record when work begins on the job. As costs are incurred, the company adds costs to the job cost record. For jobs started but not yet finished, the job cost records show costs that accumulate as costs are added to the Work in process (WIP) inventory. When a company finishes a job, the company totals the costs and transfers costs from Work in process inventory to Finished goods inventory. When the job’s units are sold, the costing system moves the costs from Finished goods inventory, an asset, to Cost of goods sold (COGS), an expense.
Cost of goods sold
Overhead

11. Purchasing Materials Purchasing for cash or on account
Debit materials inventory
Asset account
Subsidiary ledger
Direct materials
Indirect materials
When materials are purchased, an entry is made debiting the Materials inventory account and crediting Accounts payable (if purchased on credit). Materials inventory is a general ledger account. Most companies use a subsidiary ledger for materials. The subsidiary materials ledger includes a separate record for each type of material. The balance of the Materials inventory account in the general ledger should always equal the sum of the balances in the subsidiary materials ledger.
Materials inventory
70,000

12. Manufacturing overhead
Using Materials
Direct materials debited to Work in process
Indirect materials debited to Manufacturing overhead
Inventory is credited for materials removed
Manufacturing overhead
Materials inventory
Work in process
The DVDs, software, and casings can be traced to a specific job(s), so these are all direct materials. Direct material costs go from the Materials inventory account directly into the Work in process inventory account. By contrast, the $17,000 cost of printer cartridges to print the labels on the paper inserts is difficult to trace to a specific job, so the printer cartridges are indirect materials. The cost of indirect materials goes from the Materials inventory account into the Manufacturing overhead account.

13. Materials Requisition
Used to request the transfer of materials to Work in process
Assigns the cost of the direct material to a job (Job 16)
Shows the company cost of the material requested
For both direct materials and indirect materials, the production team completes a document called a materials requisition to request the transfer of materials to the production floor. A materials requisition sends the signal to the warehouse to bring materials into production. These requisitions are often in electronic form rather than on paper. Notice that all the dollar amounts in these exhibits show Smart Touch’s costs—not the prices at which Smart Touch sells its products.

14. Job Cost Record
A job cost record is shown here. It assigns the cost of the direct materials, direct labor, and manufacturing overhead to a job.

15. Manufacturing overhead
Labor
Use electronic labor/time records to streamline the labor tracking costs
Debit Work in process inventory (for direct labor)
Debit Manufacturing overhead (for indirect labor)
Credit Wages payable
Manufacturing overhead
Work in process
Wages payable
Most companies use electronic labor/time records to streamline the labor tracking costs. Each employee completes an entry, called a labor time record, for each job he or she works on. The labor time record shows the employee, the amount of time he (in this case) spent on Job 16 (5 hours), and the labor cost charged to the job ($60 = 5 hours $12 per hour).
Smart Touch’s accounting for labor cost requires the company to:
● assign labor cost to individual jobs, as we saw for Ryan Oliver’s work on Job 16.
● transfer labor cost incurred (Wages payable) into Work in process inventory (for direct labor) and into Manufacturing overhead (for indirect labor).
We record manufacturing wages by debiting an account called Manufacturing wages. Wages payable is credited. This entry includes the costs of both direct labor and indirect labor.

16. Job Cost Record with Labor Added
Exhibit 17-5 shows how Smart Touch adds the direct labor cost to the job cost record. The Labor Time Record Numbers show that on July 24, three employees worked on Job 16. Labor time record 251 is Ryan Oliver’s ($60). Labor time records 236 and 258 indicate that two other employees also worked on Job 16. The job cost record shows that Smart Touch assigned Job 16 a total of $200 of direct labor costs for the three employees’ work.

17. S17-3: Accounting for materials
Rite Packs manufactures backpacks. Its plant records include the following materials-related transactions:
Purchases of canvas (on account) $71,000
Purchases of sewing machine lubricating oil (on account) ,100
Materials requisitions:
Canvas ,000
Sewing machine lubricating oil
Journalize the entries to record these transactions.
Post these transactions to the Materials inventory account.
If the company had $34,000 of Materials inventory at the beginning of the period, what is the ending balance of Materials inventory?
Short Exercise 17-3 reviews accounting for materials.

18. S17-3: Accounting for materials
Journalize the entries to record these transactions.
Purchases
Requisitions
The exercise continues on this slide.

19. S17-3: Accounting for materials
2. Post these transactions to the Materials inventory account.
3. If the company had $34,000 of Materials inventory at the beginning of the period, what is the ending balance of Materials inventory?
The exercise concludes on this slide.
The ending balance of materials inventory account is $41,850.

20. S17-6 : Accounting for materials and labor
Seattle Enterprises produces LCD touch screen products. The company reports the following information at December 31, 2012:
Seattle began operations on January 30, 2012.
1. What is the cost of direct materials used? The cost of indirect materials used?
2. What is the cost of direct labor?
The cost of indirect labor?
Short Exercise 17-6 reviews accounting for materials and labor.
$ 28,000
$ 3,400
$ 62,000
$ 12,000

21. Record overhead in a job order costing system3
Record overhead in a job order costing system
The third learning objective shows how to record overhead in a job order costing system.

22. Accounting for Manufacturing Overhead
All manufacturing overhead costs are accumulated as debits to a single general ledger account—Manufacturing overhead. In addition to indirect materials and indirect labor, companies incur several types of overhead costs. The first entry records any depreciation on the manufacturing plant and its assets. The second entry is for any cash outlay for overhead costs, such as utilities or repairs. The third entry is for plant insurance. The fourth entry records property taxes on the factory land, building, and plant assets.
The actual manufacturing overhead costs (such as indirect materials and indirect labor, plus depreciation, utilities, insurance, and property taxes on the plant) are debited to Manufacturing overhead, as they occur throughout the year.

23. Assigning Manufacturing Overhead to Jobs
Actual overhead costs are accumulated in the Manufacturing overhead account
Overhead costs are essential to production
Must be assigned to determine full cost
Two step process
Step 1 – Calculate overhead allocation rate
Step 2 – Rate is multiplied by the actual quantity of allocation base used on the job
Formula:
But how does Smart Touch allocate (assign) overhead costs to individual jobs? As you can see, overhead includes a variety of costs that the company cannot trace to individual jobs. Manufacturing overhead costs are as essential as direct materials and direct labor, so a company must find some way to allocate (assign) overhead costs to specific jobs. Otherwise, each job would not bear its fair share of the total cost. A company may then set unrealistic prices for some of its products and wind up losing money on some of its hard-earned sales.

24. Predetermined Manufacturing Overhead Rate
Most accurate allocation when total overhead cost is known
A predetermined rate is calculated before the period begins using estimates
Use this rate to allocate estimated overhead cost to jobs
Rate is based upon two factors:
Total estimated manufacturing overhead costs for the period
Total estimated quantity of the manufacturing overhead allocation base
The most accurate allocation can be made only when total overhead cost is known—and that is not until the end of the period. But managers cannot wait that long for product cost information. So the predetermined manufacturing overhead rate is calculated before the period begins. Companies use this predetermined rate to allocate estimated overhead cost to individual jobs.
The predetermined manufacturing overhead rate is based on two factors:
● Total estimated manufacturing overhead costs for the period (in Smart Touch’s
case, one year)
● Total estimated quantity of the manufacturing overhead allocation base

25. Predetermined Manufacturing Overhead Rate
Identify an allocation base
Direct labor hours (labor-intensive production)
Direct labor cost (labor-intensive production)
Machine hours (machine-intensive production)
The key to allocating (assigning) indirect manufacturing costs to jobs is to identify a workable manufacturing overhead allocation base. The allocation base is a common denominator that links overhead costs to the products. Ideally, the allocation base is the primary cost driver of manufacturing overhead—that is, the more “allocation base,” the more overhead costs and vice-versa. As the phrase implies, a cost driver is the primary factor that causes (drives) a cost. Traditionally, manufacturing companies have used the following as cost drivers (allocation bases):
● Direct labor hours (for labor-intensive production environments)
● Direct labor cost (for labor-intensive production environments)
● Machine hours (for machine-intensive production environments)

26. Allocate Overhead Costs to Jobs
How to allocate overhead cost to jobs
Compute the predetermined manufacturing overhead rate
The application rate is multiplied by the actual quantity of allocation base used on the job
If the rate is based on direct labor hours
Rate is multiplied by the direct labor hours used on each job
To allocate overhead to jobs, the application rate is multiplied by the actual quantity of allocation base used on the job. So, if the overhead application rate is based on direct labor hours, the rate is multiplied by the direct labor hours used on each job.
Predetermined manufacturing Actual quantity of the overhead rate (from Step 1) allocation base used by each job x

27. Manufacturing Overhead on Job Cost Record
The completed job cost record for the Macy’s order (Exhibit 17-6) shows that Job 16 cost Smart Touch a total of $420, comprised of $140 for direct materials, $200 for direct labor, and $80 of allocated manufacturing overhead. Job 16 produced 10 DVDs, so Smart Touch’s cost per DVD is $42 ($420 ÷ 10).

28. Assignment of Overhead to Jobs
Overhead is allocated to jobs in process
The journal entry includes:
At the end of the period, when a balance exists
If allocated amount is less than actual overhead— underallocated
If allocated amount is more than actual overhead— overallocated
The flow of manufacturing overhead through the T-accounts is shown here. Actual overhead costs are debited to the Manufacturing overhead account. Overhead allocated to specific jobs is debited to Work in process and credited to Manufacturing overhead. Notice that Work in process has debits for the three product costs.
After allocating manufacturing overhead to jobs for 2014, a $5,400 debit balance remains in the Manufacturing overhead account. This means that a company’s actual overhead costs of $73,000 were greater than the overhead allocated to jobs in Work in process inventory of $67,600. We say that a company’s Manufacturing overhead is underallocated because the company allocated only $67,600 to jobs but actually incurred $73,000 of manufacturing overhead.

29. S17-7: Accounting for overhead
Teak Outdoor Furniture manufactures wood patio furniture. The company reports the following costs for June 2012:
Wood $ 250,000
Nails, glue, and stain ,000
Depreciation on saws ,500
Indirect manufacturing labor ,000
Depreciation on delivery truck ,300
Assembly-line workers’ wages ,000
1. What is the balance in the Manufacturing overhead account before overhead is applied to jobs?
Short Exercise 17-7 reviews how to account for overhead.

30. S17-8: Allocating overhead
Job 303 includes direct materials costs of $500 and direct labor costs of $430.
Requirement
1. If the manufacturing overhead allocation rate is 80% of direct labor cost, what is the total cost assigned to Job 303?
Short Exercise 17-8 addresses allocating overhead.

31. S17-9: Comparing actual to allocated overhead
Seattle Enterprises produces LCD touch screen products. The company reports the following information at December 31, 2012:
1. What is the actual manufacturing overhead of Seattle Enterprises?
2. What is the allocated manufacturing overhead?
3. Is manufacturing overhead underallocated or overallocated? By how much?
Short Exercise 17-9 compares actual to allocated overhead.
$ 51,900
$53,900
Overallocated
$ 2,000

32. 4
Record completion and sales of finished goods and the adjustment for under- or overallocated overhead
The fourth learning objective is to record completion and sales of finished goods and the adjustment for under- or overallocated overhead.

33. Completion and Sale of Finished Goods
To complete the process, we must:
Account for the completion and sale of finished goods
Adjust manufacturing overhead at the end of the period
Now you know how to accumulate and assign the cost of direct materials, direct labor, and overhead to jobs. To complete the process, we must do the following:
● Account for the completion and sale of finished goods
● Adjust manufacturing overhead at the end of the period

34. Accounting for the Completion and Sale of Finished Goods
Remember the flow of costs—a job goes from:
work in process
to finished goods
to cost of goods sold
Journal entry:
Work in process to Finished goods
Finished goods to Cost of goods sold
To record the completion of a job, the cost of the job is transferred from Work in process to Finished goods. Finished goods is debited and Work in process is credited. When a job is sold, two entries are needed. The first is to record the sale at the retail price. The second transfers the cost from the Finished goods inventory to Cost of goods sold.

35. Accounting for Finished Goods Cost Flows
T-account example of cost flows
These T-accounts show the flow of costs through the accounts. When a job is completed, the amount is transferred from Work in process to Finished goods. When a job is sold, its cost is transferred to the Cost of goods sold account.
We end the period with other jobs started but not finished ($27,000 ending balance of Work in process inventory), and jobs completed but not sold ($50,000 ending balance of Finished goods inventory).

36. Adjusting Manufacturing Overhead
Overhead is allocated to jobs in process
At the end of the period, when a balance exists
If allocated amount is less than actual overhead— underallocated
If allocated amount is more than actual overhead— overallocated
An adjustment is made to close out the account
Adjustment should increase (decrease) Cost of goods sold
The total debits to the Manufacturing overhead account rarely equal the total credits. Why? Because Smart Touch allocates overhead to jobs using a predetermined manufacturing overhead rate that is based on estimates. The predetermined manufacturing overhead rate represents the expected relationship between overhead costs and the allocation base. In our example, the $5,400 debit balance of Manufacturing overhead is called “underallocated” overhead because the manufacturing overhead allocated to Work in process inventory was less than the actual overhead cost. (If it had been overallocated instead, the Manufacturing overhead account would have had a credit balance.)

37. Adjusting Manufacturing Overhead
To close Manufacturing overhead
If underallocated:
Debit Cost of goods sold
Credit Manufacturing overhead
Increases Cost of goods sold for unallocated amount
If overallocated:
Debit Manufacturing overhead
Credit Cost of goods sold
Decreases Cost of goods sold for overallocated amount
Accountants adjust underallocated and overallocated overhead at the end of the period when closing the Manufacturing overhead account. Closing the account means zeroing it out and adjusting Cost of goods sold to its correct amount.

38. E17-18: Allocating manufacturing overhead
Selected cost data for Antique Print, Co. are as follows:
Estimated manufacturing overhead cost for the year $ 115,000
Estimated direct labor cost for the year ,875
Actual manufacturing overhead cost for the year ,000
Actual direct labor cost for the year ,000
Compute the predetermined manufacturing overhead rate per direct labor dollar.
2. Prepare the journal entry to allocate overhead cost for the year.
$ 115,000
71,875
The predetermined manufacturing overhead rate per direct labor dollar is 160%.
Exercise refers to the allocation of manufacturing overhead.

39. E17-18 : Allocating manufacturing overhead
Selected cost data for Antique Print, Co., are as follows:
Estimated manufacturing overhead cost for the year $ 115,000
Estimated direct labor cost for the year ,875
Actual manufacturing overhead cost for the year ,000
Actual direct labor cost for the year ,000
3. Use a T-account to determine the amount of underallocated or overallocated manufacturing overhead.
4. Prepare the journal entry to close the balance of the Manufacturing overhead account.
Underallocated by $ 2,200
The exercise continues on this slide.

40. Calculate unit costs for a service company5
Calculate unit costs for a service company
The fifth learning objective is to calculate unit costs for a service company.

41. Service Companies Have no inventory
Need to know the cost of jobs to set prices
Example:
Cost of Job $ 6,000
Add standard markup of 50% ($6, ) ,000
Sale price of Job $9,000
How do service firms trace direct labor to individual jobs?
STEP 1: Compute the predetermined indirect cost allocation rate
STEP 2: Allocate indirect costs to jobs by multiplying the predetermined indirect cost allocation rate (Step 1) by the actual quantity of the allocation base used by each job
Service firms have no inventory. These firms incur only noninventoriable costs. But their managers still need to know the costs of different jobs in order to set prices for their services.
The law firm of Walsh Associates considers each client a separate job. Walsh’s most significant cost is direct labor—attorney time spent on clients’ cases. How do service firms trace direct labor to individual jobs?

42. Assigning Labor Costs to Service Jobs
Often service companies largest cost is labor
Once costs are computed, prices can be set
Indirect cost of the firm is $30 per hour
Total costs assigned to a client are as follows:
Direct labor: 14 hours $50/hour $ 700
Indirect costs: 14 hours $30/hour
Total costs $ 1,120
Often, service companies’ most significant cost is direct labor. How do service firms trace direct labor to individual jobs? In some companies, employees fill out a weekly time record. Software totals the amount of time spent on each job. For automated services like Web-site design, employees enter the client number when they start on the client’s job. Software records the time elapsed until the employee signs off that job. The amount of direct labor charged to the client is computed by determining the employee’s hourly rate. This is done by dividing the employee’s annual salary by the 2,000 work hours per year (40 hours per week x 50 weeks per year)—assuming a 2-week per-year vacation.

43. S17-12: Job order costing in a service company
Roth Accounting pays Jaclyn Sawyer $104,400 per year. Sawyer works 1,800 hours per year.
What is the hourly cost to Roth Accounting of employing Sawyer?
2. What direct labor cost would be traced to client 507 if Sawyer works 12 hours to prepare client 507’s financial statements?
$104,400
1,800
= $58
Short Exercise17-12 addresses job order costing in a service company.
$58 x 12 = $ 696

44. 6
Allocate costs using a process costing system—weighted-average method (see Appendix 17A)
Appendix A provides an overview of the process costing system, using the weighted-average method.

45. Process Costing
Used where large quantities of similar products are produced
Two methods:
Weighted-average
FIFO
Costs accumulated in each manufacturing process
Company then assigns these costs to products passing through that process
Sum of the costs applied to units produced to determine costs per unit
We saw in the chapter that some companies use job order costing to determine the cost of their custom goods and services. In contrast, Shell Oil, Crayola, and Sony use a series of steps (called processes) to make large quantities of similar products. These are called process costing systems. There are two methods for handling process costing—weighted average and FIFO. We focus on the weighted average method in this appendix.

46. Job Order Costing
Remember, with job order costing, cost information is collected by job. When a job is complete and all costs are added on the job cost record, managers can determine the cost of the job and of producing each unit. 46

47. Process Costing
In process costing, all units go through the same production process and therefore, have the same unit cost. Each process requires the use of a separate Work in process inventory account. Costs are collected by process (or department). Materials, labor, and overhead can be incurred in any department. The costs accumulate until all costs have been added to the product, and it is sent to finished goods.
1. Each process (mixing, molding, and packaging) is a separate department and each department has its own Work in process inventory account.
2. Direct materials, direct labor, and manufacturing overhead are assigned to Work in process inventory for each process that uses them.
3. When the Mixing Department’s process is complete, the wax moves out of the Mixing Department and into the Molding Department. The Mixing Department’s cost is also transferred out of Work in process inventory—Mixing into Work in process inventory—Molding.
4. When the Molding Department’s process is complete, the finished crayons move from the Molding Department into the Packaging Department. The cost of the crayons flows out of Work in process inventory—Molding into Work in process inventory—Packaging.
5. When production is complete, the boxes of crayons go into finished goods storage. The combined costs from all departments then flow into Finished goods inventory, but only from the Work in process inventory account of the last manufacturing process (for Crayola, Packaging is the last department). 47

48. Process Costing: Building Blocks
Two cost categories:
Direct materials
Conversion costs
Direct labor and manufacturing overhead combined
Costs incurred to convert materials into finished products
Equivalent units
Allow measurement of partially finished goods
Express production in terms of fully completed units
Materials may have different percentage completed than conversion costs
We use two building blocks for process costing—conversion costs and equivalent units of production.
Many companies are highly automated, so direct labor is a small part of total manufacturing costs. Such companies often use only two categories—direct materials and conversion costs (direct labor plus manufacturing overhead). Combining direct labor and manufacturing overhead into a single category simplifies the accounting. We call this category conversion costs because it is the cost (direct labor plus manufacturing overhead) to convert raw materials into finished products.
The concept of equivalent units allows us to measure the amount of work done on a partially finished group of units during a period and to express it in terms of fully complete units of output. That is:
Number of partially complete units times percentage of process completed equals
We use this formula when costs are incurred evenly throughout production. This is usually true for conversion costs.

49. Process Costing: Building Blocks
Equivalent units
Direct materials often added at a specific point or different points in the process
Compute separate equivalent units
Direct materials
Conversion cost
Direct materials, however, are often added at a specific point in the process. For example, wax is added at the beginning of production in the Mixing Department, and packaging materials are added at the end in the Packaging Department. How many equivalent units of wax, conversion costs, and packaging materials are in the ending work in process inventory of 10,000 crayons?
The 10,000 crayons in ending work in process inventory have:
● 100% of their wax because wax was added at the very beginning. So, they have 10,000 equivalent units of wax. (10, % have the wax material.)
● none of their boxes because that is the very last thing that happens in the Packaging Department. So, they have 0 equivalent units of packaging materials. (The crayons have not been packaged yet.)
● 8,000 equivalent units of conversion costs that we completed earlier.

50. Steps of Process Costing
Summarize the flow of physical units
Compute output in equivalent units
Compute the cost per equivalent unit
Assign costs to completed and ending inventory units
There are four steps in process costing:
Summarize the flow of physical units.
Compute the output in equivalent units.
Compute the cost per equivalent unit.
Assign costs to units completed and units in ending inventory.

51. Process Costing Example
To provide an example of process costing, the data shown here will be used. The company had no beginning inventory. Materials are added at the beginning of the process and conversion costs are added evenly throughout the process. During the period, 50,000 units were started and costs were incurred as shown here. Of the 50,000 units started, 40,000 were transferred to the next department. 10,000 remained in process.

52. Step 1: Summarize the flow of physical units Step 2: Compute output in terms of equivalent units
Step 1- Units to account for:
Number of units in process plus the number of units started
Step 2- Units accounted for:
Number of units completed and transferred out plus number of partially completed units
The first two steps involve determining the number of units worked on during the period and where they are in the production cycles.
”Units to account for” include the number of units still in process at the beginning of the period plus the number of units started. In this example, there were no units in beginning work in process and 50,000 units started.
”Units accounted for” shows what happened to the units in process during the period.
Of the 50,000 units started, 40,000 were completed and transferred out to the next department. The remaining 10,000 are only partially completed. In this example, materials are added at the beginning of the process, so the ending work in process is 100% complete as to materials (there are no more materials to add to these units). However, for conversion costs, the goods are 25% complete. Therefore, for ending inventory we multiply the 10,000 units by 25%.
The equivalent units for Department 1 are 50,000 for materials and 42,500 for conversion costs.

53. Step 3: Compute Cost per Equivalent Unit
Cost of direct materials is divided by the equivalent units
For conversion costs, direct labor and overhead costs are added together and divided by the equivalent units for conversion costs
Step three is to compute the equivalent cost per unit. The cost of direct materials is divided by the equivalent units. The result is $2.80 of materials cost per equivalent unit. For conversion costs, the direct labor and overhead costs are added together and divided by the 42,500 equivalent units for conversion costs.

54. Step 4: Assign Costs
For the 40,000 units transferred out, multiply them by both the materials and labor cost per unit
Ending inventory needs to be split between materials and conversion
Materials cost uses the 10,000 equivalent units multiplied by the material unit costs
For conversion, use 2,500 equivalent units multiplied by $1.60
The last step is to assign the period’s cost to the units. For the 40,000 units transferred out, we multiply them by both the materials and labor cost per unit. $176,000 will be transferred to the next department. The ending inventory needs to be split between materials and conversion. The materials cost uses the 10,000 equivalent units multiplied by the material unit costs. For conversion, we use 2,500 equivalent units multiplied by $ Ending inventory totals $32,000.

55. Journal Entries
Journal entries to record July costs placed into production
The entry to transfer the cost of the 40,000 completed puzzles
The journal entry to record the transferred out cost to the next department involves a shift from the Work in process of one department to the next. The amount is taken from the previous schedule.

56. Work in Process: Dept. 1 Account
This costing system continues for each remaining department
Total cost from previous department is transferred to the next department
Process continues
Notice how the ending balance in the Work in process-Dept. 1 T-account is the same $32,000 that is shown on the process costing schedule as “Total cost of ending inventory.”

57. Total Process
Process costing accumulates costs as the product moves through production. Costs are assigned to the units (such as gallons of gasoline or number of crayons) as they pass through that process.
The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.

58. Chapter 17 Summary
A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product.
Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited.
A job order costing system accumulates costs for each individual batch, or job. Process costing accumulates costs for each individual process needed to complete the product.
Direct materials and direct labor associated with a specific job are tracked to a job costing record based on a job number. When direct materials costs are incurred for a job, Work in process inventory is debited and Materials inventory is credited.

59. Chapter 17 Summary
When direct labor costs are incurred on a job, Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later.
Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driver—that is, the item that drives manufacturing overhead costs up or down.
When direct labor costs are incurred on a job, Work in process inventory is debited and Wages payable is credited. Indirect materials and indirect labor utilized are debited to the Manufacturing overhead account to be allocated to jobs later.
Manufacturing overhead is allocated to jobs based on a predetermined manufacturing overhead rate. The rate should be based on the main cost driver—that is, the item that drives manufacturing overhead costs up or down.

60. Chapter 17 Summary
Once the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits).
The total actual manufacturing overhead costs (debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits).
Once the predetermined manufacturing overhead rate is determined, manufacturing overhead is allocated (assigned) to jobs based on this rate. At the end of the period, the balance in manufacturing overhead will be the difference between actual costs (debits) and costs allocated to jobs (credits).
The total actual manufacturing overhead costs (debits) rarely equal the total manufacturing overhead costs allocated to jobs (credits).

61. Chapter 17 Summary
At the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold.
Service firms must also allocate overhead to jobs to determine each job’s real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs.
At the end of the period, we must adjust the under-allocated or overallocated Manufacturing overhead account balance. Closing the Manufacturing overhead account means zeroing it out. The balance is closed out to Cost of goods sold.
Service firms must also allocate overhead to jobs to determine each job’s real cost. Just like with manufacturing firms, a predetermined indirect cost allocation rate must be determined. The rate is then used to allocate overhead costs to service jobs.

62. Summary of the Appendix
As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they:
accumulate costs as the product moves through production.
assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process.
As we saw earlier in this chapter, accountants prepare cost reports to help production managers evaluate the efficiency of their manufacturing operations. Both job order and process costing are similar in that they:
accumulate costs as the product moves through production.
assign costs to the units (such as gallons of gasoline or number of crayons) passing through that process.

63. Summary of the Appendix
The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.
The difference between job order costing and process costing lies in the way costs are accumulated. Job order costing uses a job cost sheet and process costing uses a production cost report.

64. Do you have any questions?

65. Copyright
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