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21 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Process Cost
Chapter 21
21 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Distinguish between the
flow of costs in processcosting and job costing.
Objective 1
21 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Direct materials, Direct labor, Overhead
Job 100 Job 101 Job 102
FinishedGoods
Cost ofGoods Sold
Job Costing
21 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
WIP ChoppingDepartment
WIP Mixing & BottlingDepartment
FinishedGoods
Cost ofGoods Sold
Process Costing
Direct materials, Direct labor, Overhead
21 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Record processcosting
transactions.
Objective 2
21 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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?
21 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Costs
Work in Process Inventory –Mixing & Bottling 4,000
Work in ProcessInventory – Chopping 4,000
To transfer costs from the Chopping Department
to the Mixing & Bottling Department
21 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Work-in-Process Inventory –Mixing & Bottling 3,000
Materials Inventory 3,000To requisition materials
Recording Costs
Assume that additional materials costing $3,000 were added in the Mixing & Bottling Department.
21 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Costs
Manufacturing wages amounted to $6,000 and manufacturing overhead was $12,000 in the Mixing & Bottling Department.
What are the journal entries?
21 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Costs
Work in Process Inventory –Mixing & Bottling 6,000
Manufacturing Wages 6,000Work in Process Inventory –Mixing & Bottling 12,000
Manufacturing Overhead 12,000To record the additional labor and overheadcost of the Mixing & Bottling Department
21 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Finished Goods Inventory 19,000Work in Process Inventory –Mixing and Bottling 19,000
To transfer the cost of goods completed
Recording Costs
$19,000 worth of finished items were transferred to Finished Goods Inventory.
21 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Costs
Assume $1,000 beginning Work in Process Inventory in the Mixing & Bottling Department.
What is the ending Work in Process Inventory?
21 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Costs
Work in ProcessBeg. Balance 1,000Transferred In 4,000 Transferred OutMaterials 3,000 19,000Labor 6,000Overhead 12,000End. Balance 7,000
21 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Tracking the Flow of Costs
In process costing, the accounting task is to track the flow of costs through the production process.
1 Account for the goods completed and transferred out.
2 Account for the cost of incomplete units that remain as a department’s ending work in process inventory.
21 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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 Finishing Department.
21 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Direct materials $ 70,000Conversion costs:Direct labor $12,250Mfg. overhead 29,750 42,000Costs to account for $112,000
Tracking the Flow of Costs Example
Assume that during September, the Shaping Department incurs these costs in processing 25,000 masks:
21 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Tracking the Flow of Costs Example
Assume the shaping process is complete for all 25,000 masks.
What is the cost transferred to the Finishing Department?
$112,000 What is the unit cost? $112,000 ÷ 25,000 = $4.48/mask
21 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 3
Compute equivalent units.
21 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Equivalent Units Example
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?
5,000 × .20 = 1,000 masks
21 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
21 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Physical UnitsBeginning 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
Summarize the Flow of Physical Units
21 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compute Output in Terms of Equivalent Units
Flow ofPhysical Direct Conv.Units Mtls. Costs
Units to account for: 25,000Started and completed 20,000 20,000 20,000Ending WIP 5,000 5,000 1,000Equivalent units 25,000 21,000
100% 20%
21 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Summarize Total Coststo Account for
Department 1 – ShapingFor the Month Ended September 30, 20xx
Physical Units DollarsBeginning Inventory -0- -0-Production Started 25,000Direct Materials $ 70,000Conversion Costs 42,000Total 25,000 $112,000
21 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Department 1 – ShapingFor the Month Ended September 30, 20xx
Direct Conversion Materials Costs
Costs added this month $70,000 $42,000÷ Equivalent Units 25,000 21,000= Cost per EU $2.80 $2.00
Compute the Cost perEquivalent Unit
21 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assign costs to units completed
and to units in endingwork-in-process inventory.
Objective 4
21 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assign Costs to Units
Department 1 – ShapingFor the Month Ended September 30, 20xx
Units completed and transferred out:20,000 × (2.80 + 2.00) $ 96,000Units in ending inventory:Materials: 5,000 × 2.80 14,000Conversion: 1,000 × 2.00 2,000Total costs $112,000
21 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Work in Process Inventory – ShapingBalance, Aug. 31 -0- Transferred toDirect Materials 70,000 Finishing 96,000Direct Labor* 12,250Overhead* 29,750Balance Sept. 30 16,000
*Conversion costs: $12,250 + $29,750 = $42,000
Assign Costs to Units
21 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Account for a second processingdepartment by the FIFO
method.
Objective 5
21 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Process Costing for a Second Department – FIFO
A batch of swim masks were transferred out of the Shaping Department and into the Finishing Department at the end of July.
These masks did not make it completely through the Finishing Department during August.
They become the beginning inventory in September.
21 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Process Costing for a Second Department – FIFO
Assume that the Finishing Department of Key Largo Co. had 4,000 units in beginning inventory on September 1, and 3,000 in inventory on September 30.
21 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
21 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Physical UnitsBeginning inventory 4,000+ Transferred in from Shaping 20,000= Total to account for 24,000
From beginning inventory 4,000Started and completed 17,000Total units completed 21,000Units in ending inventory 3,000Total units accounted for 24,000
Summarize the Flowof Physical Units
21 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Started and completed 17,000Ending inventory 3,000 Equivalent units 20,000
Compute Output in Termsof Equivalent Units
What are the equivalent units for transferred in?
21 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compute Output in Termsof Equivalent Units
Flow ofPhysical Direct Conv.Units Mtls. Costs
Units to account for: 24,000Beginning inventory 4,000 800 3,000Started and completed 17,000 17,000 17,000Ending WIP 3,000 2,700 1,200Equivalent units 20,500 21,200
90% 40%
21 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Summarize Total Costs
Costs added during September are:Transferred in $ 96,000Materials 55,350Conversion 42,400Total $193,750
Informationgiven now
21 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Summarize Total Costs
Costs in the beginning work in process: $ 29,840Costs added during September: 193,750Total $223,590
Informationgiven now
21 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Transferred in: $96,000 ÷ 20,000 = $4.80Materials: $55,350 ÷ 20,500 = $2.70Conversion: $42,400 ÷ 21,200 = $2.00Total $9.50
Compute the CostPer Equivalent Unit
21 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cost in beginning inventory: $ 29,840Cost to complete the units inbeginning inventory:Direct materials (800 × $2.70) $ 2,160Conversion (3,000 × $2.00) 6,000Cost of the units started andcompleted (17,000 × $9.50) 161,500Total $199,500
Assign Costs toUnits Completed
21 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assign Costs to Unitsin Ending Inventory
Transferred in: 3,000 × $4.80 = $14,400Materials: 2,700 × $2.70 = 7,290Conversion: 1,200 × $2.00 = 2,400Total $24,090
21 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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
Cost Reconciliation
21 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Account for a second processing
department by theweighted-average method.
Objective 6
21 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Physical UnitsBeginning 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
Summarize the Flowof Physical Units
21 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Completed and Transferred 21,000Ending inventory 3,000Equivalent units 24,000
Compute Output in Termsof Equivalent Units
What are the equivalent units for transferred in?
21 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compute Output in Termsof Equivalent Units
Flow ofPhysical Direct Conv.Units Mtls. Costs
Units to account for: 24,000Completed 21,000 21,000 21,000Ending WIP 3,000 2,700 1,200Equivalent units 23,700 22,200
90% 40%
21 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Summarize Total Costs
Beginning work in process inventory cost consists of:Transferred in: $18,960Materials: 8,877Conversion: 2,003Total $29,840
Informationgiven now
21 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Transferred in: ($18,960 + $96,000) ÷ 24,000 = $4.79Materials: ($ 8,877 + $55,350) ÷ 23,700 = $2.71Conversion: ($ 2,003 + $42,400) ÷ 22,200 = $2.00Total $9.50
Compute the CostPer Equivalent Unit
21 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assign Total Cost to Units
Transferred in: 3,000 × $4.79 = $14,370Materials: 2,700 × $2.71 = 7,317Conversion: 1,200 × $2.00 = 2,400Total $24,090($3 difference due to rounding)
Units completed: 21,000 × $9.50 = $199,500