28-1. Process Cost Accounting Section 1: Process Cost Accounting System Chapter 28 Section...

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Process Cost Accounting

Process Cost Accounting

Section 1: Process Cost

Accounting System

Chapter

28

Section Objectives1. Compute equivalent units of production with no beginning

work in process inventory.2. Prepare a cost of production report with no beginning

work in process inventory.3. Compute the unit cost of manufacturing under the process

cost accounting system.4. Record costs incurred and the flow of costs as products

move through the manufacturing process and are sold.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

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This system is used in operations when a single product is manufactured and production is continuous.

Companies like oil refineries, cement producers, and paint manufacturers use this system.

Costs are accumulated for each process or department and then transferred to the next department.

Process Cost Accounting SystemProcess Cost Accounting System

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Job order cost sheets are not maintained.

Separate work in process accounts are maintained for each department.

Costs are identified with specific departments as incurred.

Under a process cost system:

How is a process cost system different from a job order cost system?

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All products begin in the Assembly Department.

Assembly Department

Finished Goods Inventory

FinishingDepartment

Knox Manufacturing Company (manufacturer of trays)

Trays to be sold in an unpainted state are transferred to the finished goods storeroom.

Trays to be painted are transferred to the Finishing Department.

Flow of Goods in a Factory Operation

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Departmental Cost Data

All costs are recorded by department

Assembly Finishing Department Department

Materials $18,000.00 $8,000.00Labor 25,000.00 16,000.00Manufacturing overhead 12,300.00 7,900.00

Total costs $55,300.00 $31,900.00

QuantitiesStarted in production 6,000 -0- Transferred in from prior department -0- 5,000Transferred out to next department 5,000 -0- Transferred out to finished goods 500 4,200Work in process—ending 500 800

Stages of Completion—Ending Work in ProcessMaterials 100% 90% Labor 80% 50 Manufacturing overhead 80% 50

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Compute equivalent units of production with no beginning work in process inventory.

Objective 1

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Equivalent production is the estimated number of units that could have been started and completed with the same effort and costs incurred in the department during the month.

ANSWER:

QUESTION:

What is equivalent production in a process cost system?

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MaterialsUnits transferred out To next department: 100% x 5,000 units 5,000 To finished goods: 100% x 500 units    500 Total transferred out 5,500 Work in process: 100% x 500 units    500

Equivalent units of production for materials 6,000Labor and Manufacturing Overhead

Units transferred out To next department: 100% x 5,000 units 5,000 To finished goods: 100% x 500 units    500 Total transferred out 5,500 Work in process: 80% x 500 units 400

Equivalent units of production for labor and overhead 5,900

Assembly Department

Separate equivalent unit computations are made for materials and for labor and overhead.

In computing equivalent production, accountants frequently consider labor and overhead to be at the same stage of production.

Calculating Equivalent Units

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Prepare a cost of production report with no beginning work in process inventory.

Objective 2

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Summarizes all costs charged to each department.

Shows costs assigned to: Goods transferred out of the department Goods still in process

Has separate sections for: Quantities Costs

Reconciles the total to be accounted for with the total accounted for.

Cost of Production Report

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Compute the unit cost of manufacturing under the process cost accounting system.

Objective 3

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Cost Schedule

Quantity Schedule

Cost of Production Report by Department

Shows units to be accounted for and what happened to those units.

Shows total and unit cost of each element and cumulative cost total.

Shows cost of units transferred out.

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Cost Schedule Total Cost E.P. Units Unit cost

Costs to be accounted for:

Costs in current Department

Materials $18,000 6,000 $3.00

Labor $25,000 5,900 $4.24

Manufacturing O.H. $12,280 5,900 $2.08

Cumulative Total Cost $55,280 $9.32

Materials cost per unit = $18,000 / 6,000 units =

$3.00/per unit

Cost Schedule: Unit Cost

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Record costs incurred and the flow of costs as products move through the manufacturing process and are sold.

Objective 4

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Charging Direct Materials Costs to Work in Process

20--Apr 28 Work in Process—Assembly Department 18,000.00

Work in Process—Finishing Department 8,000.00 Raw Materials Inventory 26,000.00

Allocation of materials to production;

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Charging Direct Labor to Work in Process

20--Apr 28 Work in Process—Assembly Department 25,000.00

Work in Process—Finishing Department 16,000.00 Social Security Tax Payable 2,542.00 Medicare Tax Payable 594.50 Employee Income Tax Payable 6,150.00 Salaries and Wages Payable 31,713.50

Salaries and wages for April.

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Manufacturing Overhead Costs in the Process Cost Accounting System

1. When incurred, overhead costs are debited to the Manufacturing Overhead account.

2. At month-end, overhead costs are allocated to the producing departments:

Debit Work-in-Process—Assembly Department

Debit Work-in-Process—Finishing Department

Credit Manufacturing Overhead

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Recording Transfers of Products out of Departments

Assembly Department

Finishing Department

Finished Goods Inventory

Assembly Department

Finishing Department

$46,600 $67,828

$4,660

20--Apr 28 Work in Process—Finishing Department 46,600.00

Finished Goods Inventory 4,660.00 Work in Process —Assembly Department 51,260.00

Cost of goods transferred out of laminating department in April

28 Finished Goods Inventory 67,828.00 Work in Process—Finishing Department 67,828.00 Cost of goods completed in April

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The final step is to record the sale of finished goods.

Recording Sale of Finished Goods

1. Record sales.

2. Record cost of goods sold.

20-- Apr 28 Accounts Receivable 105,000.00

Record sales on credit for April

Cost of Goods Sold 65,000.00Finished Goods 65,000.00

Sales 105,000.00

Cost of goods sold in April

28

**In a perpetual inventory system, two journal entries are required to record a sale.

Process Cost Accounting

Process Cost Accounting

Section 2: Work in Process

Inventory

Chapter

28

Section Objectives

5. Compute equivalent production and prepare a cost of production report with a beginning work in process inventory.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

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Compute equivalent production and prepare a cost of production report with a beginning work in process inventory.

Objective 5

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The company discussed in the previous section did not have any beginning work in process.

However, beginning work in process inventories are a normal part of business operations.

Beginning Work in Process Inventory

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The average method of process costing combines the cost of beginning inventory for each cost element with the costs of the current period.

ANSWER:

QUESTION:

What is the average method of process costing?

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Assembly Finishing Department Department

Costs in prior department $7,456.00Costs in current department

Materials $ 1,500.00 1,173.60 Labor 1,696.00 1,392.00 Manufacturing overhead 844.00* 648.40*

Costs transferred in from prior department 51,975.00 Current department costs

Materials 18,500.00 8,100.00 Labor 25,500.00 17,000.00 Manufacturing overhead 13,000.00 8,800.00

Total costs $61,040.00 $96,545.00 QuantitiesWork in process—beginning 500 800 Started in production 6,000 -0- Transferred in from prior department -0- 5,100 Transferred out to next department 5,500 -0- Transferred out to finished goods 400 5,500 Work in proces—ending 600 400 Stage of Completion—Ending Work in Process

Materials 100% 80% Labor 90% 50 Manufacturing overhead 90% 50

*Rounding adjustment included in overhead

Departmental Data with Beginning Inventory

Beginning inventory costs

Beginning inventory quantities

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Unit Costs Using the Average Method of Process Costing

Unit Cost = (Beginning work in process inventory + Current period costs) ÷ Equivalent units

The beginning work in process inventory is shown on the cost of production report under the appropriate department.

Unit costs are calculated by adding the beginning inventory to the current period costs for each cost element, then dividing by equivalent units.

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The ending work in process of one period becomes the beginning work in process of the following period.

Journal entries are made as shown earlier in Section 1 to record the transfer of costs.

Recording Cost Flows

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Transfer of goods from one department to another and to finished goods inventory:

Record the costs of goods from work in process to finished goods inventory:

20--May 31 Work in Process—Finishing Department 51,975.00

Finished Goods Inventory 3,780.00 Work in Process—Assembly Department 55,755.00

Cost of goods transferred out of Assembly departmentin May.

20--May 31 Finished Goods Inventory 91,025.00

Work in Process—Finishing Department 91,025.00

Cost of goods completedin May and transferred out.

Recording Transfer of Costs

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College Accounting, 12th Edition

Price • Haddock • Farina