Chapter 5: Process Costing

Material Requisition Form

As in Job-Order Costing, materials are drawn from the storeroom using a ____. They can be added in any processing department, although it isn't unusual for them to be added only in the first processing department, with subsequent departments adding only labor overhead costs.

Key Concept 2

Each department needs to calculate a separate unit cost for each type of manufacturing cost that it incurs. For example if a given department adds materials, labor cost, and overhead cost to the production process it would need to compute a unit cost for each of these three categories. For simplification, companies often will consolidate these three cost categories into two groups by combining labor and overhead costs into a category called conversion costs.

Debit, Credit

Finally, when a customer order gets filled and the units are sold, the cost of units is transferred to COGS via a ____ to COGS and a ____ to Finished Goods.

Essential Characteristics of Processing Departments

First the activity in the processing department is performed uniformly on all of the units passing through it. Second, the output of the processing department is homogeneous; in other words, identical.

Department

Manufacturing overhead cost is applied according to the amount of the allocation base that is incurred in the ____.

Similarities between Job-Order and Process Costing

1. both have the same basic purpose-to assign material, labor, and manufacturing overhead costs to products and to provide a mechanism for computing unit product costs. 2. use the same basic manufacturing accounts, including MFOH, Raw Materials, WIP and Finished Goods. 3. the flow of costs through the manufacturing accounts is basically the same in both systems

Processing departments

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

Four Steps to the Weighted Average Method

1. Compute the equivalent units of production. 2. Compute the cost per equivalent unit. 3. Assign Costs to Units. 4. Prepare a Cost Reconciliation Report.

How to Compute the Cost Per Equivalent Unit

First, find the % completion for Ending WIP for each cost category then multiply by total Ending WIP Inventory. Next find the cost for the Beginning WIP Inventory for each cost category and add it to their corresponding Added Costs During the Period. This sum is divided by the product of each (cost categories % completion x ending wip inventory). The outcome is the cost of one unit per cost category (materials, labor and overhead / conversion)

Few, Processing Departments

In a process costing system, instead of having to assign costs to hundreds of different jobs, costs are assigned to only a ____ ____.

PDOH Rates

In process costing as in job-order costing, ____ are usually used.

Any Processing Department

In process costing, labor costs can/are traced to ____, not individual jobs

unit cost

The key to deriving the cost of a Department's Ending WIP Inventory and the cost of its Completed Units that were Transferred to the next stage is calculating its ____ within each department.

Balance of Flow

The sum of Units in Beginning WIP Inventory plus Units Started into Production must equal the sum of Units in Ending WIP Inventory plus Units Completed and Transferred Out. The equation is as follows: Units in Beginning WIP Inventory + Units Started into Production = Ending WIP Inventory + Units Completed and Transferred Out

Key Concept 1

There are two Methods to Calculating Departmental Unit Cost, the weighted-average method and the FIFO method.

True

True or False? Job-Order and Process Costing share some similarities.

True

True or False? The weighted-average method ignores % completion for Beginning WIP.

Debit, Credit

Upon being finished, the cost of units is transferred from the department it reached completion in via a ____ to finished goods and a ____ to the former department.

COGS, Debit, Credit, Finished Goods

When a customer's order is filled and units are sold, the cost of units is transferred to ____ with a ____ and a ____ from ____.

Equivalent Units

____ is the product of the number of partially completed units and the percentage completion of those units with respect to the processing department.

Operation Costing

used in situations where products have some common characteristics and some individual characteristics. It is a hybrid of Job-Order and Process Costing. Products are typically processed in batches, with each batch charged for its own specific materials (somewhat mirroring Job-Order). However, labor and overhead costs are accumulated by operation or by departments and assigned to units like Process costing.

Key Concept 3

Quantifying each department's number of units produced during a period is complicated by the fact that most departments usually have some partially completed units on hand at the end of the period. Because it would be an overstatement to count these partially completed units as equivalent to fully completed units when counting the department's output, these partially completed units are translated into an equivalent number of fully completed units. In process costing, this translation is done using the following formula: (Equivalent Units) = (# of partially completed units) x (percentage completion)

Companies that use process costing

Reynolds consumer products(aluminum ingots), Scott Paper(paper towels), General Mills (flours), and Kellog's (cereals)

Processing Departments

An example of ____ is at Nalley's (a potato chip factory). It has three processing departments-one for preparing potatoes, one for cooking and one for inspecting and packaging.

Process Costing, Job-Order, Process Costing

Cost flows between accounts are basically the same in a ____ system as they are in a ____system. The only difference at this point is that in ____ each department has a separate WIP Account.

Two, Cost of Ending WIP inventory, Cost of its Completed Units Transferred to the next stage

In process costing, each department needs to calculate ____ numbers for financial reporting purposes-the ____ and the ____ of the production process.

Equivalent Units of Production

In the Weighted-Average Method, the Equivalent Units of Production for a department is the # of completed units transferred to the next department (or finished goods) plus the equivalent units in the department's ending WIP Inventory. It follows the equation: Equivalent Units of Production = Units transferred to the next department (or Finished Goods) + Equivalent units in the ending WIP Inventory

Differences between Job-Order and Process Costing

Job-Order Costing: 1. many different jobs are worked during each period, with each job having unique production requirements. 2. costs are accumulated by individual job 3. unit costs are computed by job on the job cost sheet. 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.

Debits, Credits

Once processing has been completed in a department, the units are transferred to the next for further processing. A journal entry ____ the cost of units to the upcoming department and ___ the cost of units from the department it's departing.

Homogeneous

Process costing is used most commonly in industries that convert raw materials into ____ products such as bricks, soda, or paper on a continuous basis.

Operation Costing

Production of shoes are an example of ____ with similarities in that all styles involve cutting and sewing that can be done on a repetitive basis, using the same equipment and procedures. Their individual characteristics may be expensive or inexpensive materials. If shoes are being