Chapter 4: Process Costing

At Megan's Classic Cream Soda, some materials are added in the Formulating Department and some materials are added in the Bottling Department. What are the journal entries to record this?

Debit WIP - Formulating xxxx Credit Raw Materials xxxx Debit WIP - Bottling xxx Credit Raw Materials xxx

Record the journal entry for the transfer of the cost of partially completed units from the Formulating Department to the Bottling Department.

Debit WIP Bottling xxxx Credit WIP Formulating xxxx

equivalent units - FIFO method

* a separate calculation is made for each cost category in each processing department equivalent units of production = 1) equivalent units to complete beginning WIP inventory (=units in beginning WIP inventory x (100% -% completion of beginning WIP inventory) + 2) units started and completed during the period + 3) equivalent units in ending WIP inventory or it can be calculated in this method: equivalent units of production = units transferred out + equivalent units in ending WIP inventory - equivalent units in beginning WIP inventory

weighted-average method for computing equivalent units of production

* a separate calculation is made for each cost category in each processing department equivalent units of production = units transferred to the next department or to finished goods + equivalent units in ending work in process inventory

Record the cost of units being transferred to Cost of Goods Sold when a customer's order is filled and units are sold.

Debit COGS xxx Credit Finished Goods xxx

Record the transfer of costs of completed units from the Bottling to the Finished Goods inventory account.

Debit Finished Goods Credit WIP - Bottling

Record the overhead cost applied in the Formulating Department.

Debit WIP - Formulating Credit Mfg Overhead

Record labor costs in the Formulating Department at Megan's Classic Cream Soda.

Debit WIP - Formulating Credit Salaries and Wages Payable

key point concerning the weighted average method

we must ignore that beginning work in process inventory units may be partially complete

conversion cost

direct labor + mfg overhead cost

processing department definition and example

an organizational unit in which work is performed on a product and materials, labor, and overhead costs are added to the product an example is a potato chip factory which can have 3 processing departments: one for preparing potatoes, one for cooking, and one for inspecting and packaging

cost per equivalent unit - FIFO method

cost added during the period / equivalent units of production

cost per equivalent unit - weighted average method

(cost of beginning WIP inventory + cost added during the period) / equivalent units of production

3 differences between job-order and process costing

1) process costing is used when a company produces a continuous flow of units that are indistinguishable from one another (like paper towels) vs. job order costing is used when a company produces many different jobs that have unique production requirements 2) under process costing, it makes no sense to identify materials, labor, and overhead by particular customer order because each order is just one of many virtually identical units from the production line, so process costing accumulates costs by department 3) process costing systems compute unit costs by department rather than by job sheet

operation costing

used in situations where products have some common characteristics and some individual characteristics

process costing

a costing method used when essentially homogeneous products are produced on a continuous basis.

costs to be accounted for formula

cost of beginning WIP inventory + costs added to production during the period

costs accounted for formula

cost of ending WIP inventory + cost of units transferred out

formula for equivalent units

equivalent units = # of partially completed units x percentage completion

difference between weighted-average and FIFO method for finding the equivalent units of production

the weighted average method blends work and costs from the prior period with work and costs in the current period whereas FIFO separates the two periods

units in beginning WIP inventory + units started into production = ?

units in ending WIP inventory + units completed and transferred out