1. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing Chapter5 1

2. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 1 Distinguish between the flow of costs in process costing and job costing 2

3. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing Benefits Benefits – Cost trends – Budget to actual – Pricing – Financial statements 3

4. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Job and Process Costing Differences? Job Cost Systems – Individual job cost records – DM, DL, and MOH assigned to individual jobs – Cost of finished jobs flow into FG Inventory – Cost of sold jobs flow out of FG Inventory into COGS 4

5. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Job Costing 5 Cost of Goods Sold Direct labor Direct materials Finished Goods Manufacturing overhead Work in Process Job 100 Job 101 Job 102

6. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Job Costing and Process Costing Differences? Process Cost Systems – Series of manufacturing processes – Cost per process is accumulated and moved from one process to another process – Costs transferred to FG Inventory only from the WIP Inventory of the LAST manufacturing process – When units are sold, cost is transferred out of FG Inventory into COGS 6

7. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing 7 Cost of Goods Sold Manufacturing Wages Finished Goods Work in Process, Centers Dept Work in Process, Shells Dept Work in Process, Packaging Dept Manufacturing Overhead Materials Inventory

8. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Building Blocks of Process Costing Conversion costs – DL + MOH Equivalent units Inventory flow assumptions – Weighted average – FIFO (not covered in this textbook) 8

9. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 2 Compute equivalent units 9

10. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Building Blocks of Process Costing Equivalent units – Amount of work done during a period in terms of fully complete units of output 10

11. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. The Building Blocks of Process Costing Inventory flow assumptions – Weighted average – FIFO (not covered in the textbook) Cost-benefit standpoint 11

12. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 3 Use process costing in the first production department 12

13. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. How Does Process Costing Work Using weighted average assumption Five steps to process costing: 1.Summarize the flow of physical units. 2.Compute output in terms of equivalent units. 3.Summarize total costs to account for. 4.Compute the cost per equivalent unit. 5.Assign total costs to units completed and to units in ending WIP inventory. 13

14. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 1: Summarize the Flow of Physical Units – Exhibit 5-5 on p. 264 Total physical units to account for? – How many individual (physical) units were worked on (completed or not) Total physical units accounted for? – What happened to those products ? (Finished or still in process) 14

15. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S5-4 15

16. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-4 Determine the Physical Flow of Units (Process Costing Step 1) 16 Flow of Production Step 1 Flow of Physical Units Units to account for: Beginning work in process 21,000 Started in production during June 1 120,000 Total physical units to account for Not given Units accounted for: Completed and transferred out during October Not given Ending work in process, June 31 28,000 Total physical units accounted for Not given

17. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-4 Determine the Physical Flow of Units (Process Costing Step 1) 17 Flow of Production Step 1 Flow of Physical Units Units to account for: Beginning work in process 21,000 Started in production during June 1 120,000 Total physical units to account for $141,000 Units accounted for: Completed and transferred out during October Not given Ending work in process, June 31 28,000 Total physical units accounted for Not given

18. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-4 Determine the Physical Flow of Units (Process Costing Step 1) 18 Flow of Production Step 1 Flow of Physical Units Units to account for: Beginning work in process 21,000 Started in production during June 1 120,000 Total physical units to account for $141,000 Units accounted for: Completed and transferred out during October Not given Ending work in process, June 31 28,000 Total physical units accounted for $141,000

19. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-4 Determine the Physical Flow of Units (Process Costing Step 1) 19 Flow of Production Step 1 Flow of Physical Units Units to account for: Beginning work in process 21,000 Started in production during June 1 120,000 Total physical units to account for 141,000 Units accounted for: Completed and transferred out during October 113,000 Ending work in process, June 31 28,000 Total physical units accounted for 141,000

20. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 2: Compute Output in Terms of Equivalent Units – Exhibit 5-5 20

21. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-6 21

22. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-6 22 Step 2 Equivalent Units Direct Materials Conversion Cost Units to account for: Beginning work in process Started in production Total physical units to account for Units accounted for: Completed and transferred out 1,100,000 Ending work in process 85,000 Total physical units accounted for 1,185,000 Total equivalent units

23. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-6 (cont.) 23 Step 2 Equivalent Units Direct Materials Conversion Cost Units to account for: Beginning work in process Started in production Total physical units to account for Units accounted for: Completed and transferred out 1,100,000 Ending work in process 85,000 52,700 Total physical units accounted for 1,185,000 Total equivalent units 1,185,0001,152,700

24. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 3: Summarize Total Costs to Account For – Exhibit 5-7 24

25. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S5-7 25

26. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-7 26 Direct Materials Conversion Costs Total Beginning work in process, May 1 Costs added during May: Total costs to account for

27. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-7 27 Direct Materials Conversion Costs Total Beginning work in process, May 1 $ 42,000$ 21,000$ 63,000 Costs added during May: $101,000$172,000$273,000 Total costs to account for $143,000$193,000$336,000

28. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 4: Compute the Cost per Equivalent Unit – Exhibit 5-8 28

29. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory – Exhibit 5-9 29

30. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Now turn to S5-10 30

31. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-10 1.Determine the total cost that should be assigned to the following: a.Units completed and transferred out 370,000 x (5.00 + 2.25) = $2,682,500 31

32. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-10 (cont.) 32 1.Determine the total cost that should be assigned to the following: a.Units completed and transferred out 370,000 x (5.00 + 2.25) = $2,682,500 b.Units ending work in process inventory (74,000 x 5.00) + (48,000 X 2.25) = $478,000

33. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-10 (cont.) 33 1.Determine the total cost that should be assigned to the following: a.Units completed and transferred out 370,000 x (5.00 + 2.25) = $2,682,500 b.Units ending work in process inventory (74,000 x 5.00) + (48,000 X 2.25) = $478,000 What was the total costs accounted for? $2,682,500 + $478,000 = $3,160,500

34. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-10 (cont.) 34 1.Determine the total cost that should be assigned to the following: a.Units completed and transferred out 370,000 x (5.00 + 2.25) = $2,682,500 b.Units ending work in process inventory (74,000 x 5.00) + (48,000 X 2.25) = $478,000 What was the total costs accounted for? $2,682,500 + $478,000 = $3,160,500 2.What was Oscar’s average cost of making one unit of its product? $5.00 + $2.25 = $7.25

35. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Sustainability and Process Costing Employs lean and green practices Efficient and environmentally friendly? Many parties benefit 35

36. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-8 36

37. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. S5-8 37 Direct Materials Conversion Costs Total costs to account for Divided by total equivalent units Cost per equivalent unit $ 287,155$ 468,547 52,21045,490 $ 5.50$ 10.30

38. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 4 Prepare journal entries for a process costing system 38

39. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Journal entries used in a process costing system Similar to job order system except: – The manufacturing costs (direct materials, direct labor, and manufacturing overhead) are assigned to processing departments, rather than jobs. – At the end of the month a journal entry must be made to transfer cost to the next processing department. Example: Direct materials were requisitioned for use by department 1. DebitCredit Oct. 31 Work-in-process – Department 1140,000 Direct Materials140,000 Materials requisitioned to department 1

40. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Journal entries used Labor time records show that $21,250 of direct labor was used in department 1 during October, resulting in this journal entry Manufacturing overhead is allocated to the department using the company’s predetermined overhead rate. department’s overhead rate is $50 per machine hour and the department used 935 machine hours DebitCredit Oct. 31Work-in-process – Department 146,750 Manufacturing Overhead46,750 DebitCredit Oct. 31Work-in-process – Department 121,250 Wages Payable21,250

41. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. T - Account Work in Process Inventory—Department 1 Balance – Oct 1 $ 0 Direct Materials 140,000 Direct Labor. 21,250 Manufacturing Overhead 46,750 $176,000 DebitCredit Oct. 31Work-in-process – Department 2176,000 Work-in-process – Department 1176,000 $32,000

42. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Turn to E5-28A 42

43. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E5-28A, Req. 1 DebitCredit May 31Work-in-process – Blending5,980 Raw Materials Inventory5,980 To record direct materials used by Blending DebitCredit May 31 Work-in-process – Blending850 Wages Payable850 To record direct labor used in Blending DebitCredit May 31 Work-in-process – Blending1,733 Manufacturing Overhead1,733 To record Mfg overhead allocated to Blending

44. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. DebitCredit May 31 Work-in-process – Packaging6,600* Work-in-process – Blending6,600* To record transfer of cost out of Blending into Packaging E5-28A, Req. 1 (cont.) *Average cost per unit from Req. 4 of E5-27A is $1.00 per gallon; 6,600 gallons are being transferred

45. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. E5-28A, Req. 2 Work in Process Inventory— Blending Balance – May 1 $ 0 Direct Materials 5,980 Direct Labor 850 Mfg Overhead 1,733 $6,600 $1,963

46. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Objective 5 Use process costing in a second or later production department 46

47. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Process Costing in a Second or Later Processing Department Same five-step process Include cost of units transferred in when calculating equivalent units (EU) and cost per EU Transferred-in costs 47 $208,000$176,000 $32,000

48. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 1: Summarize Flow of Physical Units – Exhibit 5-12 48

49. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 1Step 2: Equivalent Units Flow of Physical Units Transferred In Direct Materials Conversion Cost Step 2: Compute Output in Terms of Equivalent Units – Exhibit 5-12 49 See Exhibit 5-12 on page 276 for additional details

50. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit – Exhibit 5-13 50 Transferred In Direct Materials Conversion Costs Total Beginning work in process, October 1 $ 22,000$ 0$ 1,100$ 23,100 Costs added during October 176,00019,00012,935207,935 Total costs to account for Divide by total equivalent units Cost per equivalent unit *

51. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Steps 3 and 4: Summarize Total Costs to Account For and Compute the Cost per Equivalent Unit – Exhibit 5-13 51 Transferred In Direct Materials Conversion Costs Total Beginning work in process, October 1 $ 22,000$ 0.00$ 1,100$ 23,100 Costs added during October 176,00019,00012,935207,935 Total costs to account for $ 198,000$ 19,000$ 14,035$ 231,035 Divide by total equivalent units 45,00038,00040,100 Cost per equivalent unit $ 4.40$ 0.50$ 0.35

52. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process Inventory – Exhibit 5-14 Transferred In Direct Materials Conversion Cost Total Units completed and transferred out to Finished Goods Inventory (38,000) [ 38,000 x ( 4.40 + 0.50 + 0.35) =$199,500 Ending work in process, October 31(7,000) Transferred-in costs [ 7,000 x 4.40]30,800 Direct materials [ 0 x 0.50 ]0 Conversion costs [ 2,100 x 0.35] 735 Total ending work in process, October 31 $ 31,535 Total costs accounted for $ 231,035 52

53. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. End of Chapter 5 53