Chapter 4: Process Costing

Why are partially completed units transferred into equivalent units?

-because most departments usually have some partially completed units on hand at the end of the period -would be an overstatement to count these partially completed units as equivalent to fully completed

What is the journal entry when a customer's order is filled and units are sold?

-debit cost of goods sold -credit finished goods

What is the journal entry to record the transfer of completed units in department B to finished goods inventory?

-debit finished goods -credit work in process (department B)

What is the journal entry to record materials added to the second processing department?

-debit work in process (department 2 name) -credit raw materials

What is the journal entry to record labor added to the first processing department?

-debit work in process (department A name) -credit salaries and wages payable

What is the journal entry to record overhead cost applied in department A?

-debit work in process (department A) -credit manufacturing overhead

What is the journal entry to record the transfer of units in department A to department B?

-debit work in process (department B) -credit work in process (department A)

What is a journal entry to record materials added to the first processing department?

-debit work in process- (department name) -credit raw materials

What are the two common methods for determining unit product cost?

-job-order costing -process costing

Equivalent Units of Production

-name we use for the denominator in unit cost calculation -each processing department calculates the equivalent units of production for each of its manufacturing costs categories

An example of three processing departmental units at potato chip factory?

-preparing potatoes -cooking potatoes -inspecting and packaging

In process costing department, what are the two numbers each department has to calculate?

-the cost of its ending work in process inventory -cost of its completed units that were transferred to the next stage of the production process (the key to deriving these two numbers is to calculate unit costs within each department)

Process Costing

-used more commonly in industries that convert raw materials into homogeneous (i.e. uniform) products, such as brick, soda, or paper on a continuous basis -sometimes used in companies with assembly operations -may be used in utilities that produce gas, water, and electricity

What are the two methods to calculate unit cost?

-weighted average -FIFO

List the similarities between job-order costing and process costing?

1. both systems have the same basic purpose--to assign material, labor, and manufacturing overhead to products and to provide a mechanism for computing unit product costs 2. both systems use the same basic 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

What 4 steps are in the weighted average method?

1. compute the equivalent units of production 2. compute the cost per equivalent unit 3. assign cost to units 4. prepare a cost reconciliation report

FIFO of Process Costing

calculates unit costs based solely on the costs and outputs from the current period

Weighted Average of Process Costing

calculates unit costs by combining costs and outputs from the current and prior periods

Conversion Costs

companies often consolidate the three cost categories (materials, labor, and overhead costs) into two groups by combining labor and overhead costs into conversion cost

In processing costing, what happens to work in process from department A?

it is transferred to work in process department B, and then to finished goods and then cost of goods sold (will go through work in process departments first before going to finished goods)

In process costing, is there only one work in process?

no, there is a separate work in process account for each processing department

Does weighted average method incur the completed percentages in beginning work in process inventory?

no, they are ignored

Equivalent Units

number of complete units that could have been obtained from the materials and effort that went into the partially completed units

Processing Department

organizational unit where work is performed on a product and where materials, labor or overhead costs are added to the product

Is cost accumulation simpler in a job-order costing or process costing?

process costing

In processing costing, how are labor costs traced?

they are traced to departments--not individual jobs

Weighted Average Method Equivalent Units of Production Unit Equation on Department

units in beginning work in process inventory + units started in production or transferred in = units in ending work in process inventory + units completed and transferred out

Operating Costing

used in situations where products have common characteristics and some individual characteristics (example: shoes)

Are predetermined overhead rates used in the processing costing?

yes

Does each department need to calculate a separate unit cost for each type of manufacturing cost that it incurs?

yes

Can materials, labor, and overhead costs be added in any processing department?

yes, it does not only have to be the first one

Does weighted average method incur the completed percentages in ending work in process inventory?

yes, uses equivalent units of production on only ending work in process inventory

List the three differences between job-order costing and process costing

1. job-order costing is used when a company produces many different jobs that have unique production requirements, process costing is used when a company produces a continuous flow of units that are indistinguishable from one another 2. job-order costing uses job cost sheets to accumulate costs for individual jobs, process costing accumulates cost by department (rather than individual) and assigns these costs uniformly to all identical units that pass through a department during the period 3. job-order costing uses job cost sheets to compute unit costs for each job, process costing compute units cost by department

Regardless of the number of processing departments, what are the two features they each have?

1. the activity in processing department is performed uniformly on all of the units passing through it 2. the output of the processing department is homogeneous (all the units produced are identical)

Weighted Average Method Cost Per Equivalent Unit Equation

= (cost of beginning work in process inventory + cost added during the period) / equivalent units of production

Conversion Cost Equation

= direct materials + manufacturing overhead cost

Weighted Average Cost of Ending Work in Process Inventory Equation

= equivalent units x cost per equivalent unit

Equivalent Units Equation

= number of partially completed units x percentage completion

Weighted Average Method Equivalent Units of Production Equation

= the number of completed units transferred to the next department (or to finished goods) + equivalent units in ending work in process inventory (means multiplying units by percentage completion)

Weighted Average Cost of Units Transferred Out Equation

= units transferred to the next department x cost per equivalent unit