Chapter 3 PROCESS COSTING

Process costing:

used by companies whose products or services are mass produced through a continuous process.

products are usually homogenous, using approximately the same amount of materials, labor, and overhead. Costs are accumulated for all units produced in the period, and then a cost per unit is determined.

Examples of companies using process costing: oil refining, steel manufacturing, ice cream production

Job Order vs. Process Costing

Similarities:1. use same three product costs – direct materials, direct labor, overhead2. use same basic cost flows – Raw materials to Work in process to Finished goods

Differences:

Job Order Process# of work in process accounts

One control account, subsidiary ledger detailing each job

One WIP account for each process

Documentation Job cost sheet for each job Production cost report for each process

Determination of total manufacturing costs

Accumulated by job Accumulated each period

Computation of cost per unit

Total cost of job ÷ # units produced for that job

Total costs of period ÷Equivalent units produced during the period

Just as with job order costing, a company using process costing assigns production costs (DM, DL, and OH) to the Work in process account. Companies using process costing may have more than one Work in process account; a Work in process account is needed for each production process.

As work is completed, the costs associated with or "attached to" the completed work is transferred out of Work in process and into the Finished goods account.

When the Finished goods are sold, the cost of the product is classified as Cost of goods sold (an expense).

Our goal is to determine:1. how much of the product costs should "attach" to the units completed and

transferred out of Work in process.

2. how much of the product costs should "attach" to the units still in process.

Since products are homogenous (essentially the same), we can divide total production costs by the number of units produced to get an average cost per unit.

The problem: how can we calculate an average cost per unit of product when not all units are equal (some units are finished, some are only partly finished)?

The solution: equivalent units of production: the number of complete whole units that could be obtained from the materials and effort used to partially complete some units

example: 100 units that are 60% complete are considered to be the equivalent of 60 completed units (100 x .60)

equivalent units are usually computed separately for direct materials and conversion costs

Class example #1

Teldex Company manufactures a product that goes through three departments, A, B. and C. Information relating to activity in department A during October is given below:

Percent Completed Units Materials Conversion

Work in process, Oct 1 20,000 80 60Started into production 120,000Work in process, Oct 31 15,000 70 30

Compute the equivalent units of direct material and conversion for October, assuming that the company uses the weighted average method of accounting for units and costs.

Example problem #2: Process costing

The Ranchland Baked Beans Company cans and sells both regular and jalapeno- flavored baked beans. The company has two departments: the cooking department of Ranchland is responsible for mixing all ingredients and cooking the beans, and the canning department cans and packages the cooked beans.

The cooking department of the company had 5,000 units in process at the beginning of June, and started processing another 28,000 units during the month. At the end of the month, 2,000 units were still in process. All materials are added at the beginning of the process. The beginning inventory was 40% complete as to conversion costs, and the ending work in process inventory was 50% complete for conversion costs.

Costs for the cooking department were as follows:Materials Conversion

Beginning inventory $ 8,060 $ 1,300Costs added during June 41,440 14,700

Required:a. Determine the physical flow of units for the month of June.

b. Determine the equivalent units of production for materials and conversion cost for June.

c. Compute cost per unit produced for materials and conversion.

d. Assign costs to the finished and unfinished units.

e. Prepare a cost reconciliation for the cooking department.

COST OF PRODUCTION REPORT

Steps in preparing a production report1. Account for the physical flow of units2. Calculate equivalent units of production.3. Determine total production (manufacturing) costs and calculate the cost per unit4. Prepare a cost reconciliation to allocate unit costs to units completed and units still in

process

problemProcess Costing

Yums, Inc produces an antacid product that passes through two production departments. Data for May for the first department follow:

Pounds Materials Labor OverheadWork in process, May 1 80,000 $ 69,300 $ 28,000 $ 44,800Pounds started in process 760,000Pounds transferred out 790,000Work in process May 31 50,000Costs added during May 906,500 369,600 592,000

The beginning work in process was 80% complete as to materials and 75% complete as to conversion. The ending work in process was 60% complete as to materials and 20% complete as to conversion.

Required:1. Assume that the company uses a weighted-average method of accounting for units and costs. Prepare a quantity schedule and a computation of equivalent units for May's production activity.

2. Determine the unit costs for May, the amount of production completed and transferred out of the first production department, and the amount of the ending work in process.

CHAPTER REVIEW1. What similarities exist between job order and process costing?2. How many Work in process accounts are maintained by a company using process

costing?3. What is meant by the term equivalent units of production when the weighted average

method is used?4. What is a quantity schedule and what purpose does it serve?

Additional in class problems1. EQUIVALENT UNITS OF PRODUCTIONA company that makes shampoo has the following information concerning Work in process:

Beginning inventory 3,500 partially completed unitsTransferred out 9,000 unitsEnding inventory ? units, 10% complete for materials,

15% complete for conversionStarted this month 12,000 units

Compute:a. Equivalent units for materials using weighted averageb. Equivalent units for conversion costs using weighted average

2. PROCESS COSTINGSoltex Company manufactures a product that passes through two production processes. A quantity schedule for a recent month for the first process follows:

Units to be accounted forWork in process, May 1 (materials 75% complete, conversion 40% complete) 60,000Started into production 280,000Work in process, May 31 (materials 50% complete, conversion 25% complete) 40,000

Costs in the beginning work in process inventory were: materials, $56,600 and conversion costs, $14,900. Costs added during the month were: materials, $385,000, and conversion, $214,500.

Soltex uses the weighted average method of accounting for units and costs.

Required:1. Compute the equivalent units for materials and conversion for the month.2. Determine a cost per equivalent units for materials and conversion.3. Assign costs to the units completed and transferred out and to the ending work in

process.