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Process Cost

Chapter 21

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Distinguish between the

flow of costs in processcosting and job costing.

Objective 1

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Direct materials, Direct labor, Overhead

Job 100 Job 101 Job 102

FinishedGoods

Cost ofGoods Sold

Job Costing

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WIP ChoppingDepartment

WIP Mixing & BottlingDepartment

FinishedGoods

Cost ofGoods Sold

Process Costing

Direct materials, Direct labor, Overhead

5

Record processcosting

transactions.

Objective 2

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Recording Costs Example

Assume that Pace Foods transfers Rs.4,000 of partially completed items from the Chopping Department to the Mixing & Bottling Department.

What is the journal entry?

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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

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Work-in-Process Inventory –Mixing & Bottling 3,000

Materials Inventory 3,000To requisition materials

Recording Costs

Assume that additional materials costing Rs.3,000 were added in the Mixing & Bottling Department.

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Recording Costs

Manufacturing wages amounted to Rs.6,000 and manufacturing overhead was Rs.12,000 in the Mixing & Bottling Department.

What are the journal entries?

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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

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Finished Goods Inventory 19,000Work in Process Inventory –Mixing and Bottling 19,000

To transfer the cost of goods completed

Recording Costs

Rs.19,000 worth of finished items were transferred to Finished Goods Inventory.

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Recording Costs

Assume Rs.1,000 beginning Work in Process Inventory in the Mixing & Bottling Department.

What is the ending Work in Process Inventory?

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Recording Costs

Work in ProcessBeg. Balance 1,000Transferred In 4,000 Transferred OutMaterials 3,000 19,000Labor 6,000Overhead 12,000End. Balance 7,000

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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.

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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.

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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:

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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?

Rs.112,000 What is the unit cost? Rs.112,000 ÷ 25,000 = Rs.4.48/mask

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Objective 3

Compute equivalent units.

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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

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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.

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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

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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%

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Summarize Total Coststo Account for

Department 1 – ShapingFor the Month Ended September 30, 20xx

Physical Units RupeesBeginning Inventory -0- -0-Production Started 25,000Direct Materials Rs. 70,000Conversion Costs 42,000Total 25,000 Rs. 112,000

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Department 1 – ShapingFor the Month Ended September 30, 20xx

Direct Conversion Materials Costs

Costs added this month Rs.70,000 Rs. 42,000÷ Equivalent Units 25,000 21,000= Cost per EU Rs. 2.80 Rs. 2.00

Compute the Cost perEquivalent Unit

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Assign costs to units completed

and to units in endingwork-in-process inventory.

Objective 4

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Assign Costs to Units

Department 1 – ShapingFor the Month Ended September 30, 20xx

Units completed and transferred out:20,000 × (2.80 + 2.00) Rs. 96,000Units in ending inventory:Materials: 5,000 × 2.80 14,000Conversion: 1,000 × 2.00 2,000Total costs Rs. 112,000

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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 = Rs.42,000

Assign Costs to Units

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Account for a second processingdepartment by the FIFO

method.

Objective 5

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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.

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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.

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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.

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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

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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?

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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%

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Summarize Total Costs

Costs added during September are:Transferred in Rs. 96,000Materials 55,350Conversion 42,400Total Rs. 193,750

Informationgiven now

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Summarize Total Costs

Costs in the beginning work in process: Rs. 29,840Costs added during September: 193,750Total Rs.223,590

Informationgiven now

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Transferred in: Rs.96,000 ÷ 20,000 = Rs.4.80Materials: Rs.55,350 ÷ 20,500 = Rs.2.70Conversion: Rs.42,400 ÷ 21,200 = Rs.2.00Total Rs.9.50

Compute the CostPer Equivalent Unit

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Cost in beginning inventory: Rs. 29,840Cost to complete the units inbeginning inventory:Direct materials (800 × Rs.2.70) Rs. 2,160Conversion (3,000 × Rs.2.00) 6,000Cost of the units started andcompleted (17,000 × Rs.9.50) 161,500Total Rs.199,500

Assign Costs toUnits Completed

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Assign Costs to Unitsin Ending Inventory

Transferred in: 3,000 × Rs.4.80 = Rs.14,400Materials: 2,700 × Rs.2.70 = 7,290Conversion: 1,200 × Rs.2.00 = 2,400Total Rs.24,090

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Cost in beg. inventory Rs. 29,840+ Costs added during September 193,750= Total to account for Rs.223,590

Costs transferred out Rs.199,500+ Cost in ending inventory 24,090= Total accounted for Rs.223,590

Cost Reconciliation

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Account for a second processing

department by theweighted-average method.

Objective 6

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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

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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?

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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%

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Summarize Total Costs

Beginning work in process inventory cost consists of:Transferred in: Rs.18,960Materials: 8,877Conversion: 2,003Total Rs.29,840

Informationgiven now

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Transferred in: (18,960 + 96,000) ÷ 24,000 = Rs.4.79Materials: (8,877 + 55,350) ÷ 23,700 = Rs.2.71Conversion: (2,003 + 42,400) ÷ 22,200 = Rs.2.00Total Rs.9.50

Compute the CostPer Equivalent Unit

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Assign Total Cost to Units

Transferred in: 3,000 × Rs.4.79 = Rs.14,370Materials: 2,700 × Rs.2.71 = 7,317Conversion: 1,200 × Rs.2.00 = 2,400Total Rs.24,090(Rs.3 difference due to rounding)

Units completed: 21,000 × Rs.9.50 = Rs.199,500