Copyright © 2008 Prentice Hall All rights reserved 4-1 Process Costing Chapter 4

Copyright © 2008 Prentice Hall All rights reserved

4-1

Process Costing

Chapter 4


4-2

Objective 1

Distinguish between the flow of costs in process costing and job costing


4-3

Cost of GoodsSold

Manufacturing Wages

Materials Inventory

FinishedGoods

Manufacturing

Overhead

Job Order Costing

Work in ProcessJob 90

Job 91Job 92


4-4

Cost of GoodsSold

Manufacturing Wages

Materials Inventory

FinishedGoods

Process Costing

Work in Process,Mixing Dept

Work in Process,Molding Dept

Work in Process,Packaging Dept

Manufacturing

Overhead


4-5

Building Blocks of Process Costing

• Conversion costs Costs incurred to convert raw materials into a

finished product Direct labor plus manufacturing overhead

• Equivalent unit of production Amount of work done during a period in terms

of fully complete units of output

• Inventory flow assumptions Weighted average First-in, first-out


4-6

Objective 2

Compute equivalent units


4-7

E4-28: Equivalent Units Calculation Example

Step 1: Summarize the flow of physical units

Units to account for Units accounted for

Blending Department

Beginning WIP

Units placed in production

+ Units completed

Units in Ending WIP

0 8,000 6,000 2,000+ +

+


4-8

Start

Dyes added

100%complete

30%complete

2,000 units startedbut not finished

6,000 units completed and transferred out

Step 2: Compute output in terms of equivalent units


4-9

E4-28: Equivalent Units for Direct Materials and for Conversion Costs

• Equivalent units for direct materials:

8,000 units x 100% complete 8,000

• Equivalent units for conversion costs:

6,000 units x 100% complete 6,000

2,000 units x 30% complete 600

6,600


4-10

Objective 3

Use process costing to assign manufacturing costs to units completed and to units in ending work in process

inventory in a first department


4-11

E4-28: Assign manufacturing costs to units completed

Step 3: Summarize total costs for which to account:

Beginning work in process inventory $ 0 Costs added during May: Direct materials (dyes) 4,800 Direct labor 800 Manufacturing overhead 1,840 Total costs to account for $7,440


4-12

E4-28

Blending Department

Direct Materials

Conversion Costs

Beginning work in process $ 0 $ 0

Costs added during period

Divide by equivalent units

Cost per equivalent unit

Step 3: Compute the cost per equivalent unit

$4,800

$0.40

$2,640

÷ 6,600

Refer back to the calculation of equivalent

units for Direct Materials.


4-13

E4-28

Direct Materials

Conversion Costs

Total

Completed and transferred out (6,000)Ending WIP (2,000)

Direct materials

Conversion costs

Total cost of ending WIP

Total costs accounted for

Step 4: Assign costs to units completed and to units in ending work in process inventory

6,000 x ($0.60 + 0.40) $6,000

600 x 0.40

$7,440

1,440

240

$1,200

Refer back to the equivalent

cost per equivalent unit calculation to compute the total cost of

direct materials.


4-14

E4-28: General Journal Entry for WIP

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Work in process inventoryblending department 7,440

Materials inventory 4,800

Manufacturing wages 800

Manufacturing overhead 1,840


4-15

E4-28: General Journal Entry - WIP


Work in process inventorypackaging department 6,000

Work in process inventory blending department 6,000


4-16

E4-28: T-account view of General Journal Entry for Transferred Out

Work in process inventory - blending7,440 6,000

Bal. 1,440


4-17

E4-28: Average Cost Used to assign cost to Transferred Out

Average cost per gallon transferred out of blending is:

$6,000 ÷ 6,000 gallons = $1.00 per gallon


4-18

Objective 4

Use process costing to assign manufacturing costs to units completed and to units in ending work in process

inventory in a second or later department


4-19

E4-35


Units to account for Units accounted for

Photolithography Department

Beginning WIP

Units placed in production

+ Units completed

Units in Ending WIP

8,000 27,000 26,000 9,000+ +

+


4-20

E4-35


Beg. Bal. 8,000

Transferred in 27,000

End Bal. 9,000

Work in process, Photolithography Dept (units)

26,000


4-21

E4-35Materialsadded

Start 100%complete

80%complete

Step 2: Compute output in terms of equivalent units

18,000 units started and completed

8,000 units in process & completed

70%complete

9,000 units started but not finished


4-22

Step 1 Step 2 Equivalent Units

Flow of Physical Units

Flow of Physical Units

Transferred In Direct Materials Conversion Costs

Units to account for:

Beginning WIP 8,000

Transferred In 27,000

Total Physical Units to Account for

35,000

Units Accounted For:

Completed and Transferred Out

26,000 26,000* 26,000 26,000

Ending WIP-70% Complete

9,000 9000* 9000 6,300

Total Physical Units Accounted for

35,000

Equivalent Units 35,000* 35,000 32,300


4-23

E4-35

Equivalent units transferred in:

Completed and transferred out 26,000

Ending work in process 9,000

Total units to account for 35,000


4-24

E4-35

Equivalent units:

Direct materials

Completed and transferred out 26,000

Ending work in process 9,000

Total 35,000


4-25

E4-35

Equivalent units for conversion costs:Completed and transferred out 26,000Ending WIP -9,000 x 70% 6,300 Total 32,300


4-26


E4-35

Costs to be Accounted For:

Trans in Dir. Mat.

Conv. Costs

Total

Beginning WIP $ 20,050 $20,250 $19,816 $60,116

Costs added 97,200 74,250 90,650 262,100

Total costs $117,250 $94,500 $110,466

÷ equivalent unit 35,000 35,000 32,300

Cost/equiv unit $3.35 $2.70 $3.42

Total costs to account for $322,216


4-27


E4-35

Trans in Dir. Mat. Conv Costs Total

Completed & transferred out

26,000 x ($3.35+$2.70+$3.42) $246,220

Ending WIPTransferred in 9,000x$3.35 $30,150 Direct materials 9,000 $2.70 24,300

Conversion 6,300x$3.42 21,546

Total WIP $75,996Total costs accounted for $322,216


4-28

E4-35


a. Raw materials inventory 9,000

Accounts payable 9,000

b. Work in process inventoryAssembly 4,000

Work in process inventoryFinishing 2,000

Raw materials inventory 6,000


4-29

E4-14

GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

c. Manufacturing wages 10,800

Wages payable 10,800

d. Manufacturing overhead 10,900Property tax payable 1,900

Utilities payable 4,500

Prepaid insurance 1,100

Accumulated depreciation 3,400


4-30

E4-14GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

e. Work in process inventory-Assembly 7,600

Manufacturing wages 4,700


f. Work in process inventory –Finishing 10,600

Manufacturing wages 4,400



4-31

E4-14


g. Work in process inventoryFinishing 10,250

Work in process inventoryAssembly 10,250

h. Finished goods inventory 15,600

Work in process inventoryFinishing 15,600


4-32

End of Chapter 4

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Copyright © 2008 Prentice Hall All rights reserved 4-1 Process Costing Chapter 4