1. 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 McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 20 P ROCESS C OST A CCOUNTING

2. 20 - 2  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product.  Used for production of small, identical, low-cost items.  Mass produced in automated continuous production process.  Costs cannot be directly traced to each unit of product. P ROCESS O PERATIONS C 1

3. 20 - 3 C OMPARING J OB O RDER AND P ROCESS O PERATIONS Job Order Systems  Custom orders  Heterogeneous products  Low production volume  High product flexibility  Low to medium standardization Process Systems  Repetitive operations  Homogeneous products  High production volume  Low product flexibility  High standardization A 1

4. 20 - 4 Direct Materials Finished Goods Cost for each job Direct Labor Factory Overhead Jobs The goods in process account consists of individual jobs in a job order system. C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

5. 20 - 5 Direct Materials Finished Goods Direct Labor Factory Overhead Processes The goods in process account consists of specific processes in a process cost system. Cost per unit processed C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

6. 20 - 6 Same objective: to determine the cost of products Same inventory accounts: raw materials, work in process, and finished goods Same overhead assignment method: predetermined rate times actual activity C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

7. 20 - 7 Journal entries for both job order and process costing are identical The difference between job order and process costing lies in how the cost of goods transferred to finished goods is determined. C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

8. 20 - 8 Job order costing The cost of goods transferred to finished goods is equal to the sum of all of the completed jobs for that period. Process costing The cost of goods transferred to finished goods equals the number of completed units times the cost per equivalent unit. C OMPARING J OB O RDER AND P ROCESS O PERATIONS A 1

9. 20 - 9 G EN X C OMPANY ─ A N I LLUSTRATION GenX makes a product called Profen in a process cost system. A 1

10. 20 - 10 Labor Materials Indirect Factory Overhead Direct Cost of Goods Sold Goods in Process Finished Goods Applied Overhead P ROCESS O PERATIONS AND C OSTS – G EN X A 1

11. 20 - 11 E QUIVALENT U NITS OF P RODUCTION Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number of equivalent units produced in the period. C 2

12. 20 - 12 E QUIVALENT U NITS OF P RODUCTION Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Two one-half full pitchers are equivalent to one full pitcher. + = So, 4,000 units that are 60 percent complete would total 2,400 equivalent units. C 2

13. 20 - 13 For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period? 10,000 units + (5,000 units ×.30) = 11,500 equivalent units C 2 E QUIVALENT U NITS OF P RODUCTION

14. 20 - 14 Cost per equivalent unit = Product costs for the period Equivalent units for the period C OST P ER E QUIVALENT U NIT C 2 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit If PencilCo incurred $27,600 in production costs during the period, what is the cost per equivalent unit for the period?

15. 20 - 15 Equivalent units may be different for material, labor, and overhead, given that costs may be added at different stages of a process. At completion of Stage 1 of the process, material is 40% complete, but labor and overhead are only 25% complete. Stage 1 40% of Material 25% of Labor and Overhead E QUIVALENT U NITS C 2

16. 20 - 16 Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead + + = = 100% 50% E QUIVALENT U NITS C 2

17. 20 - 17 Stage 3 50% of Labor and Overhead The process is now complete. Stage 2 25% of Labor and Overhead 60% of Material Stage 1 40% of Material 25% of Labor and Overhead E QUIVALENT U NITS C 2

18. 20 - 18 P ROCESS C OSTING I LLUSTRATION GenX uses a weighted average cost flow system with the following four steps:  Determine physical flow of units.  Compute equivalent units of production.  Compute cost per equivalent unit.  Assign and reconcile costs. GenX uses a weighted average cost flow system with the following four steps:  Determine physical flow of units.  Compute equivalent units of production.  Compute cost per equivalent unit.  Assign and reconcile costs. C 2

19. 20 - 19 P ROCESS O PERATIONS – G EN X C 2

20. 20 - 20 P ROCESS O PERATIONS – G EN X C 2

21. 20 - 21  D ETERMINE P HYSICAL F LOW OF U NITS These two amounts are reconciled. C 2

22. 20 - 22  C OMPUTE E QUIVALENT U NITS OF P RODUCTION - M ATERIALS C 2

23. 20 - 23  C OMPUTE E QUIVALENT U NITS OF P RODUCTION – D IRECT L ABOR AND F ACTORY O VERHEAD C 2

24. 20 - 24  C OMPUTE E QUIVALENT U NITS OF P RODUCTION C 2

25. 20 - 25  C OMPUTE THE C OST P ER E QUIVALENT U NIT C 2

26. 20 - 26 In the cost reconciliation, we will account for all costs incurred by assigning unit costs to the: A. 100,000 units transferred out. B. 20,000 units remaining in ending inventory. In the cost reconciliation, we will account for all costs incurred by assigning unit costs to the: A. 100,000 units transferred out. B. 20,000 units remaining in ending inventory.  A SSIGN AND R ECONCILE C OSTS C 2

27. 20 - 27 C 2

28. 20 - 28 Process Cost Summary P ROCESS C OST S UMMARY Helps managers control their departments. Provides cost information for financial statements. Shows the flow of units and costs through work in process. Helps factory managers evaluate department manager performance. C 3

29. 20 - 29 We will illustrate the process cost summary for GenX in three sections:  Costs charged to production.  Equivalent units of production and cost per equivalent unit.  Cost assignment and reconciliation We will illustrate the process cost summary for GenX in three sections:  Costs charged to production.  Equivalent units of production and cost per equivalent unit.  Cost assignment and reconciliation P ROCESS C OST S UMMARY C 3

30. 20 - 30 P ROCESS C OST S UMMARY C 3

31. 20 - 31 P ROCESS C OST S UMMARY C 3

32. 20 - 32 P ROCESS C OST S UMMARY C 3

33. 20 - 33 T RENDS IN P ROCESS O PERATIONS Process design Just-in-time production AutomationServices Customer orientation C 3

34. 20 - 34 G LOBAL V IEW As part of a series of global environmental goals, Anheuser-Busch InBev set targets to reduce its water usage. To meet these goals, the company followed recent trends in process operations, including extensive redesign of production processes and the use of advanced technology to increase efficiency at wastewater treatment plants. As a result water usage decreased by almost 37 percent.

35. 20 - 35 Hybrid costing systems contain features of both job order and process operations. Job Order Costing Process Costing Hybrid Costing Material costs are accounted for using a job order system. Conversion costs are accounted for using a process system. H YBRID C OSTING S YSTEMS A 2

36. 20 - 36 P ROCESS C OSTING J OURNAL E NTRIES Let’s look at the accounting journal entries for the process cost system at GenX.

37. 20 - 37 P ROCESS C OSTING J OURNAL E NTRIES P 1

38. 20 - 38 P ROCESS C OSTING J OURNAL E NTRIES P 2

39. 20 - 39 P ROCESS C OSTING J OURNAL E NTRIES P 3

40. 20 - 40 P ROCESS C OSTING J OURNAL E NTRIES P 4

41. 20 - 41 A PPENDIX 20A: FIFO M ETHOD OF P ROCESS C OSTING C 4 The same GenX data for April will also be used to illustrate the FIFO method.

42. 20 - 42  D ETERMINE P HYSICAL F LOW OF U NITS C 4

43. 20 - 43  C OMPUTE E QUIVALENT U NITS OF P RODUCTION – M ATERIALS C 4

44. 20 - 44  C OMPUTE C OST P ER E QUIVALENT U NIT – FIFO C 4

45. 20 - 45  A SSIGN AND R ECONCILE C OSTS C 4

46. 20 - 46  A SSIGN AND R ECONCILE C OSTS C 4

47. 20 - 47 E ND OF C HAPTER 20