ac102_ch4.pdf

7/21/2019 ac102_ch4.pdf

http://slidepdf.com/reader/full/ac102ch4pdf 1/16

Revised Summer 2010

of 16

CHAPTER 4SYSTEMS DESIGN: PROCESS COSTING

Key Terms and Concepts to Know

Differences between Job-Order Costing and Processing Costing:

Processing costing accumulates manufacturing costs (raw material, direct laborand manufacturing overhead) by processing department.Job-order costing accumulates manufacturing costs by job.Process costing uses a work-in-process account for each department whereas job-order costing uses one work-in-process account for all jobs.

In process costing, the flow of costs through the work-in-process accounts followsthe flow of units being produced through the manufacturing departments. Whenthe units are completed in one department and transferred to the nextdepartment, the costs incurred to date for those units are transferred to the nextdepartment’s work -in-process inventory account.

Production Report:

The Production Report replaces the Job Cost Sheet as the key document inprocess costing. A production report is prepared for each work-in-process account to assign the

total costs incurred to the units completed and transferred to the next department(or finished goods inventory if they are ready for sale) and to the units remainingin work-in-process in three major steps:

o first by analyzing the flow of units through the work-in-process accounto second by accumulating the costs added to work-in-process during the

period and the costs already present in the beginning balance in work-in-process

o third by assigned the total costs in work-in-process to the units transferredout and the units still in process.

Equivalent Units of Production – Weighted Average Method: At the end of most accounting periods, the balance in work-in-process inventory isnot zero. This means incomplete units are still in process and must be assignedcosts in proportion to how complete they are with respect to each of directmaterials, direct labor and manufacturing overhead.To simplify the calculations, partially completed units are converted into equivalentwhole units for each type of cost. For example, if there are six units in process atthe end of the period and one-third of the direct materials needed for a complete

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

unit has been added to each unit, then the six incomplete units are the equivalentof two complete units of direct materials.Units completed and transferred out are always 100% complete for all types ofcosts.

Key Topics to Know

Production Report

The production report is completed in four steps:

PhysicalUnits

STEP 1: Work in Process UnitsBeginning balance+ Started into production

= Units to be Accounted For

STEP 2: Equivalent UnitsMaterials Labor Overhead

Completed and Transferred Out+ Ending balance

= Units Accounted For

TotalSTEP 3A: Work in Process DollarsBeginning balance+ Costs added during the period

= Costs to be Accounted For

STEP 3B: Cost per Equivalent Unit

STEP 4: Costs Assigned

Completed and Transferred Out+ Ending balance

= Costs Accounted For

Step 1 : Analyze the flow of physical units through the work-in-process inventoryaccount. Units to be Accounted For (inflows) must equal Units Accounted For(outflows).

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Step 2 : Calculate equivalent units only for Units Completed and Transferred Outand Ending Balance in work-in-process. Multiply physical units by percentcomplete for each cost column (materials, labor and overhead). Total equivalentunits for each cost column. Step 3A : Total costs in beginning inventory and added during the period for eachcost column (materials, labor and overhead) and in total.

Step 3B : For each cost column (materials, labor and overhead), divide total costsfrom Step 3A by total equivalent units from Step 2. Step 4 : For Completed and Transferred Out, multiply equivalent units from Step 2by cost per equivalent unit from Step 3B for each cost column (materials, laborand overhead). For Ending Balance, multiply equivalent units from Step 2 by costper equivalent unit from Step 3B for each cost column (materials, labor andoverhead). Total costs assigned in each cost column and the total column. Totalcosts to be assigned in Step 3A must equal total costs assigned in Step 4. Note that labor and overhead may be combined as conversion cost only if thepercent complete is the same.

Journal Entries

The journal entries for process costing are the same as those for job-order costingwith one exception.The entry to transfer cost from one work-in-process account to another is:

Work-in-process inventory – second department debit

Work-in-process – first department credit

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Example #1:

Micro Labs Company produces house paint in two processing departments: the MixingDepartment which mixes the paint colors and the Finishing Department which puts thepaint in containers and labels them. The following information related to the company’soperation for October follows:

a) Raw materials were issued for use in production: Mixing department, $551,000,

and the Finishing department, $629,000.b) Direct labor costs incurred: Mixing department $230,000, and Finishing

department $270,000.c) Manufacturing overhead cost applied: Mixing department $665,000, and Finishing

department, $405,000.d) The cost of the mixed paint transferred from the Mixing department to the

Finishing department was $1,850,000.e) Paint that had been prepared for shipping was transferred from the Finishing

department to Finished Goods. Cost of the transferred paint was $3,200,000.

Required: Prepare journal entries to record items a) through e) above.

Solution #1:a) Work in Process – Mixing 551,000

Work in Process – Finishing 629,000Raw Materials 1,180,000

b) Work in Process – Mixing 230,000Work in Process – Finishing 270,000

Wages and Salaries Payable 500,000

c) Work in Process – Mixing 665,000Work in Process – Finishing 405,000

Manufacturing Overhead 1,070,000

d) Work in Process – Finishing 1,850,000Work in Process – Mixing 1,850,000

e) Finished Goods 3,200,000

Work in Process – Finishing 3,200,000

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Example #2:

Micro Labs uses a processing costing system. The following data are available for themixing department for October. The department started 175,000 gallons intoproduction during the month.

Percent Complete

Gallons Materials

Conversion

CostsWork-in-process, October 1 30,000 65% 30%Work-in-process, October 31 15,000 80% 40%

Required: Determine the equivalent units of production for the month.

Solution #2:

Equivalent Units

Gallons MaterialsConversion

Cost

Work-in-process, October 1 30,000Started into production 175,000

Units to be Accounted For 205,000

Completed and Transferred 190,000 190,000 190,000Work-in-process, October 31 15,000 12,000 6,000

Units Accounted For 205,000 202,000 196,000

Example #3:

Micro Labs’ September 30th

general ledger showed a balance of $634,500 in work-in-process inventory. $206,500 of the balance was direct materials.

Required: Using the data and solutions from Examples #1 and #2, compute the costper equivalent unit for materials and conversion costs.

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Solution #3:

Total MaterialsConversion

CostBeginning balance $634,500 $206,500 $428,000Costs added during the period

1,446,000 551,000230,000665,000

Costs to be Accounted For $2,080,500 $757,500 $1,323,000

Cost per Equivalent Unit

$757,500202,000= $3.75

$1,323,000196,000= $6.75

Example #4:Micro Labs must assign the manufacturing costs in work-in-process inventory at the endof October to the gallons finished and ready for sale and the gallons still in process atOctober 31.

Required: Using the data and solutions from Examples #1, #2 and #3, compute thebalance in work-in-process inventory for the Mixing department and the costof gallons transferred to the Finishing department during October.

Solution #4:

Total MaterialsConversion

Cost

Completed and Transferred $1,995,000

190,000 x$3.75 =

$712,500

190,000 x$6.75 =

$1,282,500

Work-in-process, October 31 $85,500

12,000 x$3.75 =$45,000

6,000 x$6.75 =$40,500

Costs Accounted For $2,080,500 $757,000 $1,323,000

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Practice Problems

Practice Problem #1Steel Manufacturing Company uses a process cost system. The Molding Department

adds materials at the beginning of the process and conversion costs are incurreduniformly throughout the process. Work in process on May 1 was 75% complete andwork in process on May 31 was 40% complete.

Required: Complete the Production Cost Report for the Molding Department for May.

STEEL MANUFACTURING COMPANYMolding Department

Production Cost ReportFor the Month Ended May 31, 2008

PhysicalUnits

STEP 1: Work in Process UnitsBeginning balance 16,000+ Started into production 50,000

= Units to be Accounted For 66,000

STEP 2: Equivalent UnitsMaterials Conversion

CostsCompleted and Transferred Out 46,000+ Ending balance

= Units Accounted For

TotalSTEP 3A: Work in Process DollarsBeginning balance $41,000 $42,000+ Costs added during the period 250,000

= Costs to be Accounted For 198,000

STEP 3B: Cost per Equivalent Unit

STEP 4: Costs AssignedCompleted and Transferred Out+ Ending balance

= Costs Accounted For

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Practice Problem #2:

The Pasta Factory manufactures spaghetti sauce through two production departments:Cooking and Packaging. For the month of February, the work-in-process accounts showthe following postings:

Cooking PackagingBeginning work-in-process $0 $6,000

Materials 40,000 21,000Labor 21,000 9,000Overhead 25,000 14,000Costs transferred in 50,000

Required:a) Journalize the February transactions for work in process inventory.b) Determine the February 28th balances in the work-in-process accounts.

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Sample True / False Questions

1. Process cost accounting focuses on the process involved in mass-producingproducts that are very similar in nature.

True False

2. Process cost systems are used to apply costs to a specific job, such as themanufacturing of a specialized machine.True False

3. In a process cost system, materials, labor and overhead are only added in the firstproduction department.True False

4. Equivalent units of production are used to determine the cost per unit ofcompleted products.True False

5. Equivalent units of production is the sum of units completed and transferredout plus equivalent units of beginning work in process.True False

6. The physical units in a department are another name for the equivalent units ofproduction.True False

7. A production report is an internal document for management that showsproduction quantity and cost data for a particular job.True False

8. Equivalent units of production measure the work done during a period, expressedin fully completed units.True False

9. The total manufacturing cost per unit is used in costing the units completed and

transferred during the period.True False

10. One similarity of process cost accounting with job order cost accounting is thatboth determine total manufacturing costs after each job.True False

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Sample Multiple Choice Questions

1. Jacobs Company's Assembly Department has materials cost at $4 per unit andconversion cost at $8 per unit. There are 9,000 units in ending work in process,

all of which are 70% complete as to conversion costs. What are the total costsassigned to inventory?a) $50,400b) $86,400c) $75,600d) $108,000

2. If beginning work in process is 2,000 units, ending work in process is 1,000 units,and the units accounted for equals 5,000 units, what are the units started intoproduction?

a)

7,000b) 6,000c) 3,000d) 4,000

3. Stone Company had the following department information about physical unitsand percentage of completion:

Physical UnitsWork in process, May 1 (60%) 36,000Completed and transferred out 90,000Work in process, May 31 (40%) 30,000

If materials are added at the beginning of the production process, what is thetotal number of equivalent units for materials during May?a) 126,000b) 120,000c) 116,400d) 102,000

4. Which of the following would not appear as a debit in the Work in Process

account of a second department in a two stage production process?a) Materials usedb) Overhead appliedc) Labor assignedd) Cost of products transferred out

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

5. One characteristic of products that are mass-produced in a continuous productionprocess is thata) The products are identical or very similar in nature.b) They are grouped in batches.c) They are produced at the time an order is received.d) Their costs are accumulated on job cost sheets

6. Which of the following would not appear as a debit in the Work in Processaccount of a second department in a two stage production process?a) Materials usedb) Overhead appliedc) Labor assignedd) cost of products transferred out

Use the following information for questions 7 –9.In the month of June, department X had 10,000 units in beginning work in process

that were 70% complete. During June, 40,000 units were transferred into productionfrom another department. At the end of June, there were 5,000 units in ending workin process that were 40% complete. Materials are added at the beginning of theprocess, while conversion costs are incurred uniformly throughout the process

7. How many units were transferred out of the process in June?a) 40,000 unitsb) 35,000 unitsc) 45,000 unitsd) 50,000 units

8. The equivalent units of production for materials for June werea) 45,000 equivalent units.b) 50,000 equivalent units.c) 52,000 equivalent units.d) 40,000 equivalent units

9. The equivalent units of production for conversion costs for June werea) 40,000 equivalent units.

b)

47,000 equivalent units.c) 45,000 equivalent units.d) 50,000 equivalent units.

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

10. A process cost accounting system is most appropriate whena) A variety of different products are produced, each one requiring different

types of materials, labor, and overhead.b) The focus of attention is on a particular job or order.c) Similar products are mass-produced.d) Individual products are custom made to the specification of customers

11. Which of the following cost elements occurs in a process costing system?a) Direct materialsb) Direct laborc) Manufacturing overheadd) All of these

12. If equivalent units are 6,000 for conversion costs and units transferred out equals4,000, what stage of completion should the ending work in process be for the8,000 units remaining?

a)

75%b) 25%c) 10%d) 20%

13. In a process cost system:a) A Work in Process account is maintained for each product.b) A materials requisition identifies the job on which the materials will be used.c) A Work in Process account is maintained for each process.d) One Work in Process account is maintained for all manufacturing processes.

14. In process cost accounting, manufacturing costs are summarized on aa) Job order cost sheet.b) Process order cost sheet.c) Production cost report.d) Manufacturing cost sheet.

15. Binder Company has the following production information available for June:Total materials costs $ 80,000

Equivalent units of materials 10,000Total conversion costs $120,000Equivalent units of conversion costs 20,000

What is the total manufacturing cost per unit?a) $14.00b) $6.67c) $6.00d) $8.00

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Solutions to Practice Problems


STEEL MANUFACTURING COMPANYMolding Department

Production Cost ReportFor the Month Ended May 31, 2008

PhysicalUnits

STEP 1: Work in Process UnitsBeginning balance 16,000+ Started into production 50,000

= Units to be Accounted For 66,000

STEP 2: Equivalent UnitsMaterials Conversion

CostsCompleted and Transferred Out 46,000 46,000 46,000+ Ending balance 20,000 20,000 8,000

= Units Accounted For 66,000 66,000 54,000

Total

STEP 3A: Work in Process DollarsBeginning balance $83,000 $41,000 $42,000+ Costs added during the period 250,000 157,000 93,000

= Costs to be Accounted For $333,000 $198,000 $135,000

STEP 3B: Cost per Equivalent Unit $3.00 $2.50

STEP 4: Costs AssignedCompleted and Transferred Out $253,000 $138,000 $115,000+ Ending balance 80,000 60,000 20,000

= Costs Accounted For $333,000 $198,000 $135,000

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16


a) Work in Process —Cooking 40,000Work in Process —Packaging 21,000

Raw Materials Inventory 61,000

Work in Process —Cooking 21,000Work in Process —Packaging 9,000

Salaries and Wages Payable 30,000

Work in Process —Cooking 25,000Work in Process —Packaging 14,000

Manufacturing Overhead 39,000

Work in Process —Packaging 50,000

Work in Process —Cooking 50,000

b) Cooking Packaging

$0 $6,00040,000 21,00021,000 9,00025,000 14,000

50,000 50,000

$36,000 $100,000

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Solutions to True / False Problems

1. True

2. False because process costing focuses on accumulating quantities and costs by

production department, not production jobs.3. False because materials, labor and/or overhead may be added at any point

during the production process.

4. True

5. False because equivalent units is the sum of units completed and transferredout plus equivalent units of ending work in process.

6. False because physical units are the actual units being produced whereasequivalent units are an accounting convenience to eliminate partially completedunits when preparing the production report.

7.

False because the production report shows quantity and cost data for aparticular production department.

8. True

9. True

10. False because the production report shows total manufacturing costs for aparticular production department.

7/21/2019 ac102_ch4.pdf


Revised Summer 2010

of 16

Solutions to Multiple Choice Questions

1. B

2. C

3. B

4. D

5. A

6. D

7. C

8. B

9. B

10. C

11. D

12.

B

13. C

14. C

15. A

ac102_ch4.pdf

Documents