Accounting Principles 8th Edition

1
Nature of Process Cost Systems
Similarities and Differences Between Job Order
Cost and Process Cost Systems

• Job Order Cost
• Costs assigned to each job.
• Products have unique characteristics.

• Process Cost
• Costs tracked through a series of connected mfg
  processes or departments (mixing, baking,
  packaging etc).
• Products are uniform or identical (homogenous)
  and produced in a large volume.

2
Nature of Process Cost Systems
Process and Job Cost Comparison
Illustration 17-2
3
Nature of Process Cost Systems
One Work In Process Account
Every production department has its own
Work-In-Process account. If you have 5
departments you have 5 Work-In-Process accounts
4
Nature of Process Cost Systems
Process Cost Flow
TCorp makes skateboard wheels. Manufacturing
consists of two processes machining and
assembly. Machining Dept shapes drills
materials. Assembly Dept assembles packages
the parts.
Illustration 17-5
5
Assigning Manufacturing Costs

• Handling materials, labor, and overhead same as
  in Ch 16.
• Debit Raw Materials Inv for purchases of raw
  materials CREDIT W-I-P to assign direct
  materials costs.
• Debit Factory Labor for factory labor incurred.
  CREDIT W-I-P to assign direct
  labor costs.
• Debit Factory (Mfg) Overhead for actual cost
  incurred CREDIT W-I-P to apply (estimated) Mfg
  Overhead costs.
• Use of more than one W-I-P (Work-In-Process) is
  different in process cost (ch 17) versus job
  order cost (Ch 16)

6
Nature of Process Cost Systems
Material Costs

• A process cost system requires fewer material
  requisition slips than a job order cost system.
• Materials are used for processes and not specific
  jobs.
• Requisitions are for larger quantities of
  materials.
• Journal entry to record materials used

7
Assigning Manufacturing Costs

• Handling materials, labor, and overhead same as
  in Ch 16.
• Debit Raw Materials Inv for purchases of raw
  materials CREDIT W-I-P to assign direct
  materials costs.
• Debit Factory Labor for factory labor incurred.
  CREDIT W-I-P to assign direct
  labor costs.
• Debit Factory (Mfg) Overhead for actual cost
  incurred CREDIT W-I-P to apply (estimated) Mfg
  Overhead costs.
• Use of more than one W-I-P (Work-In-Process) is
  different in process cost (ch 17) versus job
  order cost (Ch 16)

8
Nature of Process Cost Systems
Factory Labor Costs

• Time tickets may be used in both systems.
• All labor costs incurred within a production
  department are a cost of processing.
• The journal entry to record factory labor costs

9
Assigning Manufacturing Costs

• Handling materials, labor, and overhead same as
  in Ch 16.
• Debit Raw Materials Inv for purchases of raw
  materials CREDIT W-I-P to assign direct
  materials costs.
• Debit Factory Labor for factory labor incurred.
  CREDIT W-I-P to assign direct
  labor costs.
• Debit Factory (Mfg) Overhead for actual cost
  incurred CREDIT W-I-P to apply (estimated) Mfg
  Overhead costs.
• Use of more than one W-I-P (Work-In-Process) is
  different in process cost (ch 17) versus job
  order cost (Ch 16)

10
Nature of Process Cost Systems
Manufacturing Overhead Costs

• Objective of assigning overhead is to allocate
  overhead to production departments on objective
  and equitable basis.
• Use the activity that drives or causes the
  costs.
• Machine time used - primary driver.
• Journal entry to allocate overhead

11
Nature of Process Cost Systems
12
Equivalent Units of Production (EUP)
A term used in cost accounting to arrive at the
cost per unit. associated with the units that
are not completed at the end of an accounting
period (work-in-process). indicates how much
work was done on the work units that are still
in-process units at the end of a designated
period. basically, all of the work-in-process
inventory at the end of a period is expressed as
fully-completed units which gives us the
equivalent units of production.
13
Equivalent Units of Production (EUP)

• Equivalent units is a concept expressing a
  number of partially completed units as a smaller
  number of fully completed units.

2 half full pitchers 1 full pitcher.
14
Equivalent Units
Illustration Suppose a professor is asked to
compute the cost of instruction per full-time
equivalent student at your college. The colleges
finance dept. provides the following information.
Illustration 17-6
Costs Total cost of instruction
9,000,000 Student population Full-time
students 900 Part-time students 1,000
15
Equivalent Units
Illustration Part-time students take 60 of the
classes of a full-time student during the year.
To compute the number of full-time equivalent
students per year, you would make the following
computation.
Illustration 17-7
Cost of instruction per full-time equivalent
student
Total cost of instruction 9,000,000 Number of
full-time equivalent students / 1,500
6,000
16
Equivalent Units
Weighted Average Method

• Considers the degree of completion (weighting) of
  units completed and transferred out and units in
  ending work in process.
• Most widely used method.
• Beginning work in process not part of computation
  of equivalent units.

Illustration 17-8
17
Equivalent Units
Weighted Average Method

• Illustration Output of the Packaging Dept
  consists of
• 10,000 units completed and transferred out,
• 5,000 units in ending W-I-P which are 70
  completed.
• Calculate the equivalent units of production.

Completed units ...... __________ Work
in process equivalent units . __________

18
Equivalent Units
Weighted Average Method

• Illustration Output of the Packaging Dept
  consists of
• 10,000 units completed and transferred out,
• 5,000 units in ending W-I-P which are 70
  completed.
• Calculate the equivalent units of production.

Completed units 10,000 Work in process
EU (5,000 x 70) . 3,500

13,500
19
EUP while still work-in-process
Month End
80 ofMaterial
20 ofMaterial
At this point in time 100 Complete for
Materials
W-I-P Baking
W-I-P Mixing
Month End
At this point in time 60 Complete for Labor
Overhead
25 ofLabor andOverhead
35 ofLabor andOverhead
Month End
The bread (product) is still a work In Process.
The Manufacturing Process is NOT complete.
20
Equivalent Units
Refinements on the Weighted-Average Method
Illustration Kellogg produces Eggo Waffles
using three departments Mixing, Baking, and
Packaging. The Mixing Department combines dry
ingredients, including flour, salt, and baking
powder, with liquid ingredients, including eggs
and vegetable oil, to make waffle
batter. Illustration 17-9 provides information
related to the Mixing Department at the end of
June.
21
Equivalent Units
Refinements on the Weighted-Average Method
Illustration Info for the Mixing Dept at the
end of June.
Conversion costs labor costs overhead
costs.
22
Equivalent Units

• Beginning work in process is not part of the
  equivalent-units-of-production formula WHY NOT ?

23
Conversion Costs
Conversion costs are those costs required to
convert raw materials into finished goods that
are ready for sale. Conversion costs Direct
labor Manufacturing overhead Examples of
costs that may be considered conversion costs
are Direct labor benefits
Equipment depreciation Equipment
maintenance Factory rent Factory
supplies Factory insurance
Factory utilities
Factory supervisors Most conversion costs are
likely to be manufacturing overhead.
24
The fabricating department has the following
production and cost data for the current month.
Beginning Units Ending Work in Process
Transferred Out Work in Process 0 15,000
10,000
Materials are entered at the beginning of the
process. The ending work in process units are 30
complete as to conversion costs. Compute the
equivalent units of production for (a) materials
and (b) conversion costs.
25
The fabricating department has the following
production and cost data for the current month.
Beginning Units Ending Work in Process
Transferred Out Work in Process 0 15,000
10,000
Compute the equivalent units of production for
(a) materials and (b) conversion costs.
Units transferred out . 15,000 Ending work
in process units .. 10,000
25,000
26
The fabricating department has the following
production and cost data for the current month.
Beginning Units Ending Work in Process
Transferred Out Work in Process 0 15,000
10,000
Compute the equivalent units of production for
(a) materials and (b) conversion costs.
Units transferred out 15,000 Equiv
Units-ending WIP .. 3,000 (10,000 x 30)
18,000
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Production Cost Report
28
Production Cost Report

• A production cost report is the
• Key document used to understand activities.
• Prepared for each department and shows Production
  Quantity and Cost data.
• Four steps in preparation
• Step 1 Compute physical unit flow
• Step 2 Compute equivalent units of production
• Step 3 Compute unit production costs
• Step 4 Prepare a cost reconciliation schedule

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Production Cost Report
Illustration 17-12 Flow of costs in making Eggo
Waffles
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Production Cost Report
Illustration 17-13 Unit and cost dataMixing
Department
33
Production Cost Report
Compute the Physical Unit Flow (Step 1)

• Physical units - actual units to be accounted for
  during a period, regardless of work performed.
• Total units to be accounted for - units started
  (or transferred) into production during the
  period units in production at beginning of
  period.
• Total units accounted for - units transferred out
  during period units in process at end of period.

34
Production Cost Report
Compute the Physical Unit Flow (Step 1)
Illustration 17-14
35
Production Cost Report
Compute Equivalent Units of Production (Step 2)

• Mixing Department
• Department adds materials at beginning of process
  and
• Incurs conversion costs uniformly during the
  process.

Illustration 17-15
36
Production Cost Report
Compute Unit Production Costs (Step 3)

• Costs expressed in terms of equivalent units of
  production.
• When equivalent units of production are different
  for materials and for conversion costs, three
  unit costs are computed
• Materials
• Conversion
• Total Manufacturing

37
Production Cost Report
Compute Unit Production Costs (Step 3)
Compute total materials cost related to Eggo
Waffles
Illustration 17-16
Work in process, June 1 Direct materials costs
50,000 Cost added to production during
June Direct material cost 400,000
Total material costs 450,000
Illustration 17-17
LO 6
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Production Cost Report
Compute Unit Production Costs (Step 3)
Compute total conversion costs related to Eggo
Waffles
Illustration 17-18
Work in process, June 1 Conversion costs
35,000 Costs added to production during
June Conversion costs 170,000 Total
conversion costs 205,000
Illustration 17-19
39
Production Cost Report
Compute Unit Production Costs (Step 3)
Illustration 17-19
Compute total manufacturing costs per unit
Illustration 17-20
40
Production Cost Report
Prepare a Cost Reconciliation Schedule (Step 4)
Kellogg charged total costs of 655,000 to the
Mixing Department in June, calculated as follows.
Illustration 17-21
Costs to be accounted for Work in process, June
1 85,000 Started into production 570,000 Tot
al costs 655,000
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Production Cost Report
Illustration 17-22
42
Illustration 17-23
Production Cost Report
Prepare the Production Cost Report
LO 7
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Production Cost Report
Costing Systems Final Comments

• Companies often use a combination of a process
  cost and a job order cost system.
• Called operations costing, this hybrid system is
  similar to process costing in its assumption that
  standardized methods are used to manufacture the
  product.
• At the same time, the product may have some
  customized, individual features that require the
  use of a job order cost system.