Download - McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 20-1 Process Cost Accounting Chapter 20
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-2
Learning objectivesLearning objectives
1. Process Operation
2. Process Cost Accounting
3. Equivalent Units of Production
4. Process Costing Illustration
– GenX Company
5. Hybrid Costing System
6. Process Costing Typical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-3
Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.
Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.
1. Process Manufacturing Operations1. Process Manufacturing Operations
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-4
Job Order Systems
Custom orders
Heterogeneous products
Low production volume
High product flexibility
Low to medium standardization
Job Order Systems
Custom orders
Heterogeneous products
Low production volume
High product flexibility
Low to medium standardization
Process Systems
Repetitive operations
Homogeneous products
High production volume
Low product flexibility
High standardization
Process Systems
Repetitive operations
Homogeneous products
High production volume
Low product flexibility
High standardization
1. Process Operation - Comparing Job Order & Process Production
1. Process Operation - Comparing Job Order & Process Production
Exh. 20-2
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-5
DirectMaterials
FinishedGoods
Cost per unit for
each job
DirectLabor
FactoryOverhead
Jobs
The Goods in Process account consists of individual jobs in a job order system.
2. Process Cost Accounting - Comparing Job Order & Process Production2. Process Cost Accounting - Comparing Job Order & Process Production
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-6
DirectMaterials
FinishedGoods
DirectLabor
FactoryOverhead
Processes
The Goods in Process account consists of
specific processes in a process cost system.
Cost per unit
processed
2. Process Cost Accounting - Comparing Job Order & Process Production2. Process Cost Accounting - Comparing Job Order & Process Production
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-7
Same objective: to determine the cost of products
Same inventory accounts: raw materials, work in process, and finished goods
Same overhead assignment method:predetermined rate times actual activity
2. Process Cost Accounting - Job and Process Costing Similarities2. Process Cost Accounting - Job and Process Costing Similarities
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-8
Costs are accumulated for a period of time by process or department.
Costs are accumulated for a period of time by process or department.
Unit cost is computed by dividing the accumulated costs by the number of
equivalent units produced in the period.
Unit cost is computed by dividing the accumulated costs by the number of
equivalent units produced in the period.
3. Equivalent Units of Production3. Equivalent Units of Production
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-9
Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.
Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.
Two one-half full pitchers are equivalent to one full pitcher.
+ =
Equivalent Units of ProductionEquivalent Units of Production
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-10
For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of
production did PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of
production did PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
QuestionQuestion
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-11
For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of
production did PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of
production did PencilCo have for the period?
a. 10,000
b. 11,500
c. 1,500
d. 15,000
10,000 units + (5,000 units × .30) = 11,500 equivalent units
Question
QuestionQuestion
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-12
Cost perequivalent
unit
= Product costs for the periodEquivalent units for the period
Cost Per Equivalent UnitCost Per Equivalent Unit
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-13
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
QuestionQuestion
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-14
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Question
QuestionQuestion
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-15
Equivalent units may be different for material and labor
and overhead at different stages of a process.
Equivalent units may be different for material and labor
and overhead at different stages of a process.
At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only
25% complete.
At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only
25% complete.
Stage 1
40% ofMaterial
25% ofLabor andOverhead
Equivalent UnitsEquivalent Units
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-16
Stage 2
25% ofLabor andOverhead
60% ofMaterial
Stage 1
40% ofMaterial
25% ofLabor andOverhead
+
+
=
=
100%
50%
Equivalent UnitsEquivalent Units
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-17
Stage 3
50% ofLabor andOverhead
The process is now complete. The process is now complete.
Stage 2
25% ofLabor andOverhead
60% ofMaterial
Stage 1
40% ofMaterial
25% ofLabor andOverhead
Equivalent UnitsEquivalent Units
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-18
GenX makes a product called Profen in two departments,
Grinding (G) and Mixing (M).
4. Process Manufacturing Operations - GenX Example4. Process Manufacturing Operations - GenX Example
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-19
Goods in ProcessGrinding
Labor
Materials
Ind
irec
tIn
dir
ect
FactoryOverhead
Direct
Direct
Deliveredto
Customers
Goods in ProcessMixing
FinishedGoodsApplied
Overhead
Process Manufacturing Operations GenXProcess Manufacturing Operations GenX Exh.
20-5
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-20
Let’s look at actual units
processed and actual costs incurred for
GenX.
Accounting for GenXAccounting for GenX
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-21
GenX Grinding Department Production Data for April
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 33 1/3%
Units started in April 90,000
Units transferred from grinding to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 25%
GenX Grinding Department Production Data for April
Beginning Inventory:
Units of product 30,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 33 1/3%
Units started in April 90,000
Units transferred from grinding to mixing 100,000
Ending Inventory:
Units of product 20,000
Percentage of completion - direct materials 100%
Percentage of completion - direct labor 25%
Accounting for GenXAccounting for GenX Exh. 20-12
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-22
Exh. 21-5BAccounting for GenXAccounting for GenX Exh.
20-12
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-23
GenX uses a FIFO cost flow systemwith the following four steps:
Physical flow of units. Computing equivalent units of production. Computing cost per equivalent unit. Cost reconciliation.
GenX uses a FIFO cost flow systemwith the following four steps:
Physical flow of units. Computing equivalent units of production. Computing cost per equivalent unit. Cost reconciliation.
Accounting for GenXAccounting for GenX
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-24
GenX Grinding Department Physical Flow for April
Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000
Units accounted for as:Units transferred from grinding to mixing 100,000 Ending inventory 20,000 Total number of units 120,000
GenX Grinding Department Physical Flow for April
Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000
Units accounted for as:Units transferred from grinding to mixing 100,000 Ending inventory 20,000 Total number of units 120,000
Physical Flow of Units Physical Flow of Units Exh. 20-13
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-25
GenX Grinding DepartmentDirect Materials Equivalent Units of Production for April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending goods in process 20,000 100% 20,000
Total units 120,000 90,000
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-14
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-26
GenX Grinding DepartmentDirect Materials Equivalent Units of Production for April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending goods in process 20,000 100% 20,000
Total units 120,000 90,000
} 100,000
100,000 units transferredfrom grinding to mixing.
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-14
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-27
GenX Grinding DepartmentDirect Materials Equivalent Units of Production for April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 0% 0
Goods started and completed 70,000 100% 70,000
Ending goods in process 20,000 100% 20,000
Total units 120,000 90,000
Since materials are added at the beginning of the process in Grinding, no
additional materials are necessary to complete the beginning inventory.
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-14
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-28
GenX Grinding Department Direct Labor and FactoryOverhead Equivalent Units of Production for April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 66 2/3% 20,000
Goods started and completed 70,000 100% 70,000
Ending goods in process 20,000 25% 5,000
Total units 120,000 95,000
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-15
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-29
GenX Grinding Department Direct Labor and FactoryOverhead Equivalent Units of Production for April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 66 2/3% 20,000
Goods started and completed 70,000 100% 70,000
Ending goods in process 20,000 25% 5,000
Total units 120,000 95,000
} 100,000Transferred
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-15
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-30
GenX Grinding Department Direct Labor and FactoryOverhead Equivalent Units of Production for April
Units of Percent Added EquivalentProduct This Period Units
Beginning goods in process 30,000 66 2/3% 20,000
Goods started and completed 70,000 100% 70,000
Ending goods in process 20,000 25% 5,000
Total units 120,000 95,000
Since labor and overhead were 331/3 percent complete in the beginning inventory, 662/3 percent of the work
must be completed in April.
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-15
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-31
GenX Grinding DepartmentEquivalent Units of Production for April
Direct Direct FactoryActivities during April 2002 Materials Labor OverheadBeginning goods in process 0 20,000 20,000
Goods started and completedin current period 70,000 70,000 70,000
Ending goods in process 20,000 5,000 5,000
Equivalent units of productionfor period 90,000 95,000 95,000
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-16
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-32
GenX Grinding DepartmentCost Per Equivalent Unit for April
Direct Direct FactoryActivities during April 2002 Materials Labor OverheadCosts assigned to grinding
in the current period 9,900$ 5,700$ 4,275$
Equivalent units of productionin the current period ÷ 90,000 ÷ 95,000 ÷ 95,000
Cost per equivalent unit forthe current period = 0.11$ = 0.06$ = 0.045$
Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.
20-17
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-33
In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the:
A. 100,000 units transferred from grinding to mixing.
B. 20,000 units remaining in ending inventory.
In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the:
A. 100,000 units transferred from grinding to mixing.
B. 20,000 units remaining in ending inventory.
Cost Reconciliation Cost Reconciliation
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-38
ProcessCost
Summary
Process Cost SummaryProcess Cost Summary
Helps managerscontrol theirdepartments.
Provides costinformation for
financial statements.
Shows the flowof units and coststhrough work in
process.
Helps factorymanagers evaluate
department managerperformance.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-39
We will illustrate the process cost summary for the Grinding Department
of GenX in three sections: Costs charged to department. Equivalent unit processing costs. Assignment of costs to output of
department.
We will illustrate the process cost summary for the Grinding Department
of GenX in three sections: Costs charged to department. Equivalent unit processing costs. Assignment of costs to output of
department.
Process Cost SummaryProcess Cost Summary
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-40
Process Cost SummaryProcess Cost Summary Exh. 20-19
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-46
Total coststransferred to Mixing
$6,350 + $15,050 = $21,400
Exh. 20-19
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-47
Total coststransferred to Mixing
$6,350 + $15,050 = $21,400
$21,400 ÷ 100,000 units transferred = $0.214
Exh. 20-19
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-48
These unit costs differ because the$0.214 contains costs incurred
in March that differed in amount from costs incurred in April.
Exh. 20-19
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-49
Accounting for GenXAccounting for GenX Exh. 20-21
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-50
Material, labor andoverhead are added
at the same rate in Mixing.
Accounting for GenXAccounting for GenX Exh. 20-21
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-51
GenX Mixing DepartmentEquivalent Units of ProductionGenX Mixing DepartmentEquivalent Units of Production Exh.
20-22
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-52
75 percent added to completethe units in beginning inventory.
GenX Mixing DepartmentEquivalent Units of ProductionGenX Mixing DepartmentEquivalent Units of Production Exh.
20-22
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-53
Process Cost SummaryProcess Cost Summary Exh. 20-23
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-54GenX Company Mixing Department
Process Cost Summary for Mixing DepartmentFor the Month Ended April 30
EQUIVALENT UNIT PROCESSING COSTSEquivalent
Units of Units ofProduct Production
Units processedBeginning goods in process 16,000 12,000 Units started and completed 85,000 85,000 Ending goods in process 15,000 5,000 Total 116,000 102,000
Total direct materials for April 2,040$ Direct materials cost per equivalent unit
($2,040/102,000 units) 0.020$
Total direct labor cost for April 5,100$ Direct labor cost per equivalent unit
($5,100/102,000 units) 0.050$
Total factory overhead cost for April 1,020$ Factory overhead cost per equivalent unit
($1,020/102,000 units) 0.010$
Exh. 20-23
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-56
Total coststransferred to Finished Goods
$4,480 + $24,990 = $29,470
Exh. 20-23
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-57
Total coststransferred to Finished Goods
$4,480 + $24,990 = $29,470
Unit cost = $29,470 ÷ 101,000 units transferred = $0.2918 (rounded)
Exh. 20-23
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-58
Hybrid costing systems contain featuresof both job order and process operations.
Hybrid costing systems contain featuresof both job order and process operations.
Job OrderCosting
ProcessCosting
Hybrid Costing
Material costs areaccounted for usinga job order system.
Material costs areaccounted for usinga job order system.
Conversion costs areaccounted for usinga process system.
Conversion costs areaccounted for usinga process system.
5. Hybrid Costing Systems5. Hybrid Costing Systems
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-59
Let’s look at the accounting journal entries for a process cost system. We’ll omit the
numbers so that we can focus on accounts.
6. Process CostingTypical Accounting Entries6. Process CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-60
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Raw Materials Inventory XXXXX
Accounts Payable XXXXX
Acquired materials on credit for
use in the factory.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-61
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Goods in Process Inv. - Grinding XXXXX
Goods in Process Inv. - Mixing XXXXX
Raw Materials Inventory XXXXX
To assign costs of direct material
used in the grinding and mixing
departments.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-62
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Factory Overhead XXXXX
Raw Materials Inventory XXXXX
To record indirect materials used
in April.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-63
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Factory Payroll XXXXX
Cash XXXXX
To record factory wages for April.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-64
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Goods in Process Inv. - Grinding XXXXX
Goods in Process Inv. - Mixing XXXXX
Factory Payroll XXXXX
To assign costs of direct labor
used in the grinding and mixing
departments.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-65
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Factory Overhead XXXXX
Factory Payroll XXXXX
To record indirect labor as
overhead.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-66
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Factory Overhead XXXXX
Prepaid Insurance XXXXX
Accrued Utilities Payable XXXXX
Cash XXXXX
Accumulated Depreciation XXXXX
To record factory overhead items
incurred during April.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-67
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Goods in Process Inv. - Grinding XXXXX
Goods in Process Inv. - Mixing XXXXX
Factory Overhead XXXXX
Allocated factory overhead costs to
the grinding department and to the
mixing department on the basis of
direct labor cost.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-68
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Goods in Process Inv. - Mixing XXXXX
Goods in Process Inv. - Grinding XXXXX
To record the transfer of partially
completed goods from the grinding
department to the mixing
department.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-69
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Finished Goods Inventory XXXXX
Goods in Process Inv. - Mixing XXXXX
To record the transfer of completed
goods out of production.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
20-70
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Cost of Goods Sold XXXXX
Finished Goods Inventory XXXXX
To record cost of goods sold
during April.
Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries