Ch. 5 - Process Costing - ACCT 3202
Assume Department A has 500 units in its ending work in process inventory that are 60% complete with respect to processing in the department. Calculate equivalent units:
These 500 partially complete units are equivalent to 300 fully complete units (500 * 0.6 = 300) Department A's ending work in process inventory would contain 300 equivalent units for the period.
FIFO method
calculates unit costs based solely on the costs and outputs from the current period
Conversion Costs
Direct labor costs are often small in comparison to the other product costs in process cost systems Therefore, direct labor and manufacturing overhead are often combined into one classification of product costs called Conversion Costs
Flow of costs for job-order costing
Jobs include: 1. Direct materials 2. Direct labor 3. Manufacturing overhead Trace and apply man. costs to jobs: 1. Finished goods 2. Cost of goods sold
Both process and job-order costing transfer Work in Process when completed to:
1. Finished goods 2. Cost of goods sold
Step 2: Compute the Cost Per Equivalent Unit - formula (weighted average method - separate calculation is made for each cost category in each processing department)
(Cost of beginning work in process inventory + Cost added during period) --------------------------------------------------- Equivalent units of production
Process costing
1. A single product is produced either on a continuous basis or for long periods of time. All units of product are identical. 2. Costs are accumulated by department. 3. Unit costs are computed by department.
Both process and job-order costing include:
1. Direct materials 2. Direct labor 3. Manufacturing overhead
Step 2: Compute the Cost Per Equivalent Unit - beginning work in process Beginning Work in Process Inventory: 300 Units Costs added to production in June
Beginning Work in Process Inventory: 300 Units M (40% complete) =$6,119 C (20% complete) = $3,920 Production started during June: 6,000 units Production completed during June: 5,400 units Costs added to production in June: M cost =$118,621 C cost = $81,130
Step 2: Compute the Cost Per Equivalent Unit
COSTS TO BE ACCOUNTED FOR: Work in Process June 1 = 10,039 (TC), 6,119 (M), 3920 (C) +Costs Added in Assembly = 199,751 (TC), 118,621 (M), 81,130 (C) =Total Costs = 124,740 (M), 85,050 (C) /Equivalent Costs = 5,940 (M), 5,670 (C) =COST PER EQUIVALENT UNIT: $21.00 (M), $15.00 (C) =COST PER EQUIVALENT UNIT: $36.00
Step 4: Prepare a Cost Reconciliation Report (Assembly Department)
COSTS TO BE ACCOUNTED FOR: costs of beg. WIP inventory: 10,039 +costs added to production during period: 199,751 =total costs to be accounted for: 209,790 COSTS ACCOUNTED FOR AS FOLLOWS: costs of end. WIP inventory: 15,390 +costs of units transferred out during period: 194,400 =total costs accounted for: 209,790
Step 1: Compute the Equivalent Units of Production Finally, identify the equivalent units of production in ending work in process inventory with respect to CONVERSION for the month (270 units) and adding this to the 5,400 units
Units completed & transferred out of Department A in June = Materials: 5,400 Conversion: 5,400 Work in Process June 30 (960 * .3) = Materials: 540 Conversion: 270 Equivalent units of production in the department during June = Materials: 5,940 Conversion: 5,670
Step 1: Compute the Equivalent Units of Production Next, identify the equivalent units of production in ending work in process inventory with respect to MATERIALS for the month (540 units) and adding this to the 5,400 units from before
Units completed & transferred out of Department A in June = Materials: 5,400 Conversion: 5,400 Work in Process June 30 (960 * .6) = Materials: 540 Equivalent units of production in the department during June = Materials: 5,940
Processing Departments
1. Any unit in an organization where materials, labor, or overhead are added to the product. 2. The activities performed in a processing department are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogeneous. 3. Products in a process costing department typically flow in a sequence from one department to another.
Similarities between job-order and process costing
1. Both systems assign material, labor, and overhead costs to products and they provide a mechanism for computing unit product costs. 2. Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods. 3. The flow of costs through the manufacturing accounts is basically the same in both systems.
Job-order costing
1. Many different jobs are worked on during each period, with each job having different production requirements 2. Costs are accumulated by individual job 3. Unit costs are computed by job on the job cost sheet
Characteristics of the weighted average method:
1. This method makes no distinction between work performed in the prior and current periods. It blends together units and costs from the prior and current periods 2. The equivalent units of production for a department are the number of units transferred to the next department (or finished goods) plus the equivalent units in the department's ending work in process inventory.
2 methods for computing process costing
1. Weighted Average 2. FIFO
For the current period, Jones 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 Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000
10,000 + (5,000 * 0.3) = 11,500 units b. 11,500
Transfers from Finished Goods to Cost of Goods Sold: Journal Entry Finally, when a customer's order is filled and units are sold, the cost of the units is transferred to Cost of Goods Sold:
Cost of Goods Sold (D) Finished Goods (C)
Step 2: Assign Costs to Units (Assembly Department)
ENDING WIP INVENTORY: equivalent units: 540 (M) 270 (C) cost per equivalent unit: $21 (M) $15 (C) cost of ending WIP inventory: $11,340 (M) $4,050 (C) $15,390 (T) UNITS COMPLETED AND TRANSFERRED OUT units transferred: 5400 (M) 5400 (C) cost per equivalent unit: $21 (M) $15 (C) cost of units transferred out: $113,400 (M) $81,000 (C) $194,400 (T)
Step 2: Compute the Cost Per Equivalent Unit - ending work in process Ending Work in Process Inventory: 900 Units
Ending Work in Process Inventory: 900 Units M (60% complete) C (30% complete)
Calculating equivalent units
Equivalent Units = No. partially completed units * Percent completion
Transfers from work in process - B to Finished Goods: Journal Entry After processing has been finished in department B, the costs of the completed units are transferred to the Finished Goods inventory account.
Finished Goods (D) Work in Process - Department B (C)
Step 1: Compute the Equivalent Units of Production Smith Company recorded the following activity in the Assembly Department for the month of June: U = units M = materials C = conversion
PERCENT COMPLETED: Work in Process June 1 - 300 (U), 40% (M), 20% (C) Units started into production in June - 6,000 (U) Units completed and transferred out of Department A in June - 5,400 (U) Work in Process June 30 - 900 (U), 60% (M), 30% (C)
Flow of costs for process costing
Processing department includes: 1. Direct materials 2. Direct labor 3. Manufacturing overhead Processing department: 1. Work in process (separate account for each department) 2. Transferred-in costs (process account to another department) 3. Finished goods 4. Cost of goods sold
Equivalent Units
The product of the number of partially completed units and the percentage completion of those units Need to be calculated because a department usually has some partially completed units in its beginning and ending inventories. These partially completed units complicate the determination for a department's output for a given period, and the unit cost that should be assigned to that output.
Equivalent Units
The product of the number of partially completed units and the percentage completion of those units with respect to the processing in the department The number of complete units that could have been obtained from the materials and effort that went into the partially complete units
Step 1: Compute the Equivalent Units of Production Begin by calculating the equivalent units completed & transferred out of Department A in June (5,400 units)
Units completed & transferred out of Department A in June: Materials: 5,400 Conversion: 5,400
Equivalent units of production always equals:
Units completed and transferred + Equivalent units remaining in work in process
The Flow of Manufacturing Overhead Costs: Journal Entry Predetermined Overhead Rates are usually used. Manufacturing overhead costs is applied according to the amount of the allocation base that is incurred in the department. The following journal entry records the overhead cost applied to Department A and Department B:
Work in Process - Department A (D) Work in Process - Department B (D) Manufacturing Overhead (C)
Flow of Raw Material Costs: Journal Entry Materials are drawn from the storeroom using a materials requisition form. Materials can be added in any processing department. Here is the journal entry to issue raw materials to Processing Department A and Processing Department B:
Work in Process - Department A (D) Work in Process - Department B (D) Raw Materials (C)
The Flow of Labor Costs: Journal Entry In process costing, labor costs are traced to departments, not individual jobs. The following journal entry records the labor costs records to Department A and Department B:
Work in Process - Department A (D) Work in Process - Department B (D) Salaries and Wages Payable (C)
Transfers from work in process - A to B: journal entry The transferred-in costs from Department A are added to the manufacturing costs incurred in Department B. Once processing is completed in a department, the units are transferred to the next department for further processing.
Work in Process - Department B (D) Work in Process - Department A (C)
operating costing
a hybrid of job-order and process costing because it possesses attributes of both approaches commonly used when batches of many different products pass through the same processing department
Process costing is used for products that are a. Different and produced continuously b. Similar and produced continuously c. Individual units produced to customer specifications d. Purchased from vendors
b. Similar and produced continuously
Weighted Average Method
calculates unit costs by combining costs and outputs from the current and prior periods