Process Costing

Process Costing



Chapter 21

Objectives

 Distinguish between the flow of costs in

process costing and job costing

 Compute equivalent units

 Use process costing to assign costs to

units completed and to units in ending

work in process inventory

 Use the weighted average method to

assign costs to units completed and to

units in ending work in process inventory

in a second department

Job Costing

Direct materials, Direct labor, Overhead





Job 100 Job 101 Job 102





Finished Cost of

Goods Goods Sold

Process Costing

Direct materials, Direct labor, Overhead





WIP Chopping WIP Mixing & Bottling

Department Department





Finished Cost of

Goods Goods Sold

Recording Costs Example



 Assume that Pace Foods transfers $4,000

of partially completed items from the

Chopping Department to the Mixing &

Bottling Department.

 What is the journal entry?

Recording Costs

 Assume that additional materials costing

$3,000 were added in the Mixing &

Bottling Department. What would the

journal entry be?

Recording Costs



 Manufacturing wages amounted to $6,000

and manufacturing overhead was $12,000

in the Mixing & Bottling Department.

 What are the journal entries?

Recording Costs



 $19,000 worth of finished items were

transferred to Finished Goods Inventory.

 What is the journal entry?

Recording Costs



 Assume $1,000 beginning Work in Process

Inventory in the Mixing & Bottling

Department.

 What is the ending Work in Process

Inventory?

Recording Costs



Work in Process – M & B

Tracking the Flow of Costs

 In process costing, the accounting task is

to track the flow of costs through the

production process.

 Account for the goods completed and

transferred out.

 Account for the cost of incomplete units

that remain as a department’s ending

work in process inventory.

Building Blocks of Process Costing

 Conversion Costs = Direct Labor +

Manufacturing Overhead

 Equivalent Units – expresses the amount

of work in terms of finished output

 Partially complete units = 5,000

 Percentage complete = 80%

 Number of Equivalent Units = ?

Tracking the Flow of Costs

Example

 Key Largo Co. manufactures diving masks.

 The Shaping Department shapes the

masks.

 Direct materials are added at the

beginning of the process.

 Conversion costs are incurred evenly

throughout the shaping process.

 The partially completed masks then move

to the Insertion Department.

Tracking the Flow of Costs

Example

 Assume that during September, the

Shaping Department incurs these costs in

processing 25,000 masks:

Direct materials $ 70,000

Conversion costs:

Direct labor $12,250

Mfg. overhead 29,750 42,000

Costs to account for $112,000

Tracking the Flow of Costs

Example

 Assume the shaping process is complete

for all 25,000 masks.

 What is the cost transferred to the

Insertion Department?



 What is the unit cost?

Equivalent Units Example



 Now, assume that on September 30, the

Key Largo Co.’s Shaping Department still

had 5,000 masks that were only 20% of

the way through the shaping process.

 What are the conversion equivalent units

in ending work in process inventory?

Steps in Process Cost Accounting



1 Summarize the flow of physical units.

2 Compute output in terms of equivalent

units.

3 Summarize total costs to account for.

4 Compute the cost per equivalent unit.

5 Assign costs to units completed and to

units in ending work in process.

1: Summarize the Flow of

Physical Units

Physical Units

Beginning inventory -0-

+ Started in production 25,000

= Total to account for 25,000



Completed and transferred 20,000

+ Work in process 5,000

= Total accounted for 25,000

2: Compute Output in Terms of

Equivalent Units

Flow of

Physical Direct Conv.

Units Mtls. Costs

Units to account for: 25,000

Started and completed 20,000 20,000 20,000

Ending WIP 5,000 5,000 1,000

Equivalent units 25,000 21,000



100% 20%

3: Summarize Total Costs

to Account For

Department 1 – Shaping

For the Month Ended September 30, 20xx

Physical Units Dollars

Beginning Inventory -0- -0-

Production Started 25,000

Direct Materials $ 70,000

Conversion Costs 42,000

Total 25,000 $112,000

4: Compute the Cost per

Equivalent Unit

Department 1 – Shaping

For the Month Ended September 30, 20xx



Direct Conversion

Materials Costs

Costs added this month

÷ Equivalent Units

= Cost per EU

5: Assign Costs to Units

Department 1 – Shaping

For the Month Ended September 30, 20xx

Units completed and transferred out:



Units in ending inventory:

Materials:

Conversion: ________

Total costs

Assign Costs to Units



Work in Process Inventory – Shaping

Balance, Aug. 31 -0- Transferred to

Direct Materials 70,000

Insertion 96,000

Direct Labor* 12,250

Overhead* 29,750

Balance Sept. 30 16,000



*Conversion costs: $12,250 + $29,750 = $42,000

Process Costing in a Second

Department

 Products usually go through more than

one process during production.

 Now, we must consider the other

department(s)

Process Costing for a Second

Department Example

 A batch of swim masks were transferred

out of the Shaping Department and into

the Insertion Department at the end of

July.

 These masks did not make it completely

through the Insertion Department during

August.

 They become the beginning inventory in

September.

Process Costing for a Second

Department Example

 Assume that the Insertion Department of

Key Largo Co. had 4,000 units in

beginning inventory on September 1, and

3,000 in inventory on September 30.

Process Costing for a Second

Department Example

 The ending inventory was 90% complete

for materials and 40% for conversion.

 20,000 units were transferred in from the

Shaping Department.

 Account for these units by using the

Weighted Average Process Costing Method

1: Summarize the Flow

of Physical Units

Physical Units

Beginning inventory 4,000

+ Transferred in from Shaping 20,000

= Total to account for 24,000



Total units completed 21,000

+ Units in ending inventory 3,000

= Total units accounted for 24,000

2: Compute Output in Terms

of Equivalent Units

 What are the equivalent units for

transferred in?



Completed and transferred 21,000

Ending inventory 3,000

Equivalent units 24,000

2: Compute Output in Terms

of Equivalent Units

Flow of

Physical Direct Conv.

Units Mtls. Costs

Units to account for: 24,000

Completed 21,000 21,000 21,000

Ending WIP 3,000 2,700 1,200

Equivalent units 23,700 22,200

90% 40%

3: Summarize Total Costs

Information

given now



Beginning work in process inventory cost consists of:

Transferred in: $18,960

Materials: 8,877

Conversion: 2,003

Total $29,840

3: Summarize Total Costs





Costs added during September:

Transferred in from Shaping Dept: $ 96,000

Materials added in Insertion Dept: 55,350

Conversion added in Insertion Dept: 42,400*

Total $193,750

(*$32,400 overhead, $10,000 labor)

4: Compute the Cost

Per Equivalent Unit



Transferred in: ($18,960 + $96,000) ÷ 24,000 = $4.79

Materials: ($ 8,877 + $55,350) ÷ 23,700 = $2.71

Conversion: ($ 2,003 + $42,400) ÷ 22,200 = $2.00*

Total $9.50

*rounded

5: Assign Total Cost to Units



Units completed: 21,000 × $9.50 = $199,500





Transferred in: 3,000 × $4.79 = $14,370

Materials: 2,700 × $2.71 = 7,317

Conversion: 1,200 × $2.00 = 2,400*

Total $24,090*

*rounded

Cost Reconciliation



Cost in beg. inventory $ 29,840

+ Costs added during September 193,750

= Total to account for $223,590



Costs transferred out $199,500

+ Cost in ending inventory 24,090

= Total accounted for $223,590

Journal Entries

Work in Process Inv – Insertion 96,000

Work in Process Inv – Shaping 96,000



Work in Process Inv – Insertion 97,750

Materials Inv 55,350

Manufacturing Wages 10,000

Manufacturing Overhead 32,400



Finished Goods Inv 199,500

Work in Process Inv – Insertion 199,500

Production Cost Reports



 Summarizes department’s operations

 Exhibit 21-16, page 868

 Allows managers to use information to

make decisions

 Cut costs

 Pricing decisions

Review



 Conversion Costs

 Equivalent Units

 Steps of Process Costing

 Process Costing in a Second Department

 Weighted Average

 FIFO (appendix)

FIFO METHOD - Appendix





Account for a second

processing

department by the FIFO

method.

Process Costing for a Second

Department – FIFO

 A batch of swim masks were transferred

out of the Shaping Department and into

the Insertion Department at the end of

July.

 These masks did not make it completely

through the Insertion Department during

August.

 They become the beginning inventory in

September.

Process Costing for a Second

Department – FIFO

 Assume that the Insertion Department of

Key Largo Co. had 4,000 units in

beginning inventory on September 1, and

3,000 in inventory on September 30.

Process Costing for a Second

Department – FIFO

 The beginning inventory was 80%

complete for materials and 25% for

conversion.

 The ending inventory was 90% complete

for materials and 40% for conversion.

 20,000 units were transferred in from the

Shaping Department.

Summarize the Flow

of Physical Units

Physical Units

Beginning inventory 4,000

+ Transferred in from Shaping 20,000

= Total to account for 24,000

From beginning inventory 4,000

Started and completed 17,000

Total units completed 21,000

Units in ending inventory 3,000

Total units accounted for 24,000

Compute Output in Terms

of Equivalent Units

 What are the equivalent units for

transferred in?



Started and completed 17,000

Ending inventory 3,000

Equivalent units 20,000

Compute Output in Terms

of Equivalent Units

Flow of

Physical Direct Conv.

Units Mtls. Costs

Units to account for: 24,000

Beginning inventory 4,000 800 3,000

Started and completed 17,000 17,000 17,000

Ending WIP 3,000 2,700 1,200

Equivalent units 20,500 21,200

90% 40%

Summarize Total Costs

Information

given now



Costs added during September are:

Transferred in $ 96,000

Materials 55,350

Conversion 42,400

Total $193,750

Summarize Total Costs

Information

given now



Costs in the beginning work in process: $ 29,840

Costs added during September: 193,750

Total $223,590

Compute the Cost

Per Equivalent Unit



Transferred in: $96,000 ÷ 20,000 = $4.80

Materials: $55,350 ÷ 20,500 = $2.70

Conversion: $42,400 ÷ 21,200 = $2.00

Total $9.50

Assign Costs to

Units Completed

Cost in beginning inventory: $ 29,840

Cost to complete the units in

beginning inventory:

Direct materials (800 × $2.70) $ 2,160

Conversion (3,000 × $2.00) 6,000

Cost of the units started and

completed (17,000 × $9.50) 161,500

Total $199,500

Assign Costs to Units

in Ending Inventory



Transferred in: 3,000 × $4.80 = $14,400

Materials: 2,700 × $2.70 = 7,290

Conversion: 1,200 × $2.00 = 2,400

Total $24,090

Cost Reconciliation



Cost in beg. inventory $ 29,840

+ Costs added during September 193,750

= Total to account for $223,590



Costs transferred out $199,500

+ Cost in ending inventory 24,090

= Total accounted for $223,590

End of Chapter 21