20-11 the Number of Units in Work in Process Inventory at the End of the Period

You are reading a preview.

Create your free account to continue reading.

1. Process Costing Chapter 20 20-1Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
2. Learning Objectives 1. Describe the flow of costs through a process costing system 2. Calculate equivalent units of production for direct materials and conversion costs 3. Prepare a production cost report using the weighted average method 20-2Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
3. Learning Objectives 4. Prepare journal entries for a process costing system 5. Use a production cost report to make decisions 6. Prepare a production cost report using the first-in, first-out method (Appendix 20A) 20-3Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
4. Learning Objective 1 Describe the flow ofDescribe the flow of costs through acosts through a process costingprocess costing systemsystem 20-4Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
5. Job Order Costing vs. Process Costing Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-5
6. Process Costing Methods • Weighted-average • First-in, first-out (FIFO—see Appendix 20A) Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-6
7. Process Costing— Calculating Cost per Unit Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-7
8. Process Costing— Calculating Cost per Unit Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-8 $600 ÷ 10,000 crayons = $0.06 per crayon$600 ÷ 10,000 crayons = $0.06 per crayon
9. Cost per Unit of Each Process Is Used to: • Control costs • Set selling prices • Calculate account balances – Work-in-Process Inventory – Finished Goods Inventory – Cost of Goods Sold Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-9
10. Comparison of Cost Flows: Job Order Costing and Process Costing Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-10 Direct Materials Direct Labor Manufacturing Overhead Work-in-Process Inventory Job 27 Job 28 Job 29 Finished Goods Inventory Job 27 Job 28 Cost of Goods Sold Job 27 Exhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process CostingExhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process Costing PANEL A: Job Order Costing (Smart Touch Learning) Balance Sheet Income Statement
11. Comparison of Cost Flows: Job Order Costing and Process Costing Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-11 Direct Materials Direct Labor Manufacturing Overhead Direct Materials Direct Labor Manufacturing Overhead Work-in-Process Inventory Job 27 Job 28 Job 29 Finished Goods Inventory Job 27 Job 28 Cost of Goods Sold Job 27 Finished Goods Inventory Work-in-Process Inventory Mixing Work-in-Process Inventory Molding Work-in-Process Inventory Packaging Cost of Goods Sold Exhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process CostingExhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process Costing PANEL A: Job Order Costing (Smart Touch Learning) Balance Sheet Income Statement PANEL B: Process Costing (Cheerful Colors) Balance Sheet Income Statement
12. Match each costing system characteristic to job order costing, process costing, or both. 1.Used by companies that manufactures identical items through a series of uniform production steps or processes. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-12
13. Match each costing system characteristic to job order costing, process costing, or both. 1.Used by companies that manufactures identical items through a series of uniform production steps or processes. Process costing Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-13
14. Match each costing system characteristic to job order costing, process costing, or both. 2.Transfers costs from Work-in-Process Inventory to Finished Goods Inventory to Cost of Goods Sold. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-14
15. Match each costing system characteristic to job order costing, process costing, or both. 2.Transfers costs from Work-in-Process Inventory to Finished Goods Inventory to Cost of Goods Sold. Both Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-15
16. Match each costing system characteristic to job order costing, process costing, or both. 3.Used by companies that manufacture unique products or provide specialized services. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-16
17. Match each costing system characteristic to job order costing, process costing, or both. 3.Used by companies that manufacture unique products or provide specialized services. Job order costing Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-17
18. Match each costing system characteristic to job order costing, process costing, or both. 4.Has multiple Work-in-Process Inventory accounts. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-18
19. Match each costing system characteristic to job order costing, process costing, or both. 4.Has multiple Work-in-Process Inventory accounts. Process costing Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-19
20. Match each costing system characteristic to job order costing, process costing, or both. 5.Tracks direct materials, direct labor, and manufacturing overhead costs. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-20
21. Match each costing system characteristic to job order costing, process costing, or both. 5.Tracks direct materials, direct labor, and manufacturing overhead costs. Both Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-21
22. Learning Objective 2 Calculate equivalentCalculate equivalent units of production forunits of production for direct materials anddirect materials and conversion costsconversion costs 20-22Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
23. All Costs Must Be Accounted For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-23 Total Costs Incurred during Period in Department 1 Costs Transferred to Department 2 at End of Period Costs Remaining in Department 1 at End of Period = Exhibit 20-3 Assignment of Department 1 Costs at the End of the PeriodExhibit 20-3 Assignment of Department 1 Costs at the End of the Period
24. Equivalent Units of Production (EUP) Cheerful Colors' production plant has 10,000 crayons in ending Work-in-Process Inventory— Packaging. The crayons are 40% complete for direct materials and 80% complete for conver- sion. What are the equivalent units of pro- duction for direct materials? For conversion costs? Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-24
25. Equivalent Units of Production (EUP) Cheerful Colors' production plant has 10,000 crayons in ending Work-in-Process Inventory— Packaging. The crayons are 40% complete for direct materials and 80% complete for conver- sion. What are the equivalent units of pro- duction for direct materials? For conversion costs? Direct materials 10,000 crayons × 40% = 4,000 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-25
26. Equivalent Units of Production (EUP) Cheerful Colors' production plant has 10,000 crayons in ending Work-in-Process Inventory— Packaging. The crayons are 40% complete for direct materials and 80% complete for conver- sion. What are the equivalent units of pro- duction for direct materials? For conversion costs? Direct materials 10,000 crayons × 40% = 4,000 EUP Conversion costs 10,000 crayons × 80% = 8,000 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-26 Direct Labor + Manufacturing OverheadDirect Labor + Manufacturing Overhead
27. 6. The Cutting Department has 6,500 units in process at the end of September that are 100% complete for direct materials and 85% complete for conversion costs. Calculate the equivalent units of production for direct materials and conversion costs. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-27
28. 6. The Cutting Department has 6,500 units in process at the end of September that are 100% complete for direct materials and 85% complete for conversion costs. Calculate the equivalent units of production for direct materials and conversion costs. Direct materials 6,500 units × 100% = 6,500 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-28
29. 6. The Cutting Department has 6,500 units in process at the end of September that are 100% complete for direct materials and 85% complete for conversion costs. Calculate the equivalent units of production for direct materials and conversion costs. Direct materials 6,500 units × 100% = 6,500 EUP Conversion costs 6,500 units × 85% = 5,525 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-29
30. Learning Objective 3 Prepare a productionPrepare a production cost report using thecost report using the weighted averageweighted average methodmethod 20-30Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
31. Flow of Costs in Producing Puzzles Assembly Process Direct Materials Cardboard, picture, glue Direct Labor Workers operating pressing machines Manufacturing Overhead Maintenance and depreciation on pressing machines Cutting Process Direct Materials Box Direct Labor Workers operating cutting machines Manufacturing Overhead Maintenance and depreciation on cutting machines Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-31 Exhibit 20-4 Flow of Costs in Producing PuzzlesExhibit 20-4 Flow of Costs in Producing Puzzles Partially completed puzzles Completed puzzles
32. Steps to Preparing a Production Cost Report 1. Summarize the flow of physical units 2. Compute output in terms of equivalent units of production 3. Compute the cost per equivalent unit of production 4. Assign costs to units completed and units in process Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-32
33. Production Cost Report Terms • To account for – Amount in process at the beginning of the period + – Amount started or added during the period • Accounted for – Still in process or – Completed and transferred out Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-33
34. Production Cost Report – July Data for Puzzle Me Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-34
35. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount started Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-35
36. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount started = 0 units + 50,000 units = 50,000 units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-36
37. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount started = 0 units + 50,000 units = 50,000 units Accounted for = Transferred out + In process Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-37
38. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount started = 0 units + 50,000 units = 50,000 units Accounted for = Transferred out + In process 50,000 units = 40,000 units + In process 50,000 units = 40,000 units + 10,000 units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-38
39. Production Cost Report—Assembly Department— Whole Units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-39 Step 1: Physical flow of units
40. Step 2: Compute Output in Terms of Equivalent Units of Production Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-40
41. Step 2: Compute Output in Terms of Equivalent Units of Production Direct Materials Completed units 40,000 units × 100% = 40,000 EUP In process units 10,000 units × 100% = 10,000 EUP Total EUP for direct materials 50,000 EUP Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-41
42. Step 2: Compute Output in Terms of Equivalent Units of Production Direct Materials Completed units 40,000 units × 100% = 40,000 EUP In process units 10,000 units × 100% = 10,000 EUP Total EUP for direct materials 50,000 EUP Conversion Costs Completed units 40,000 units × 100% = 40,000 EUP In process units 10,000 units × 25% = 2,500 EUP Total EUP for conversion costs 42,500 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-42
43. Production Cost Report—Assembly Department— EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-43 Step 2: EUP
44. Step 3: Compute the Cost— Cost per EUP for Direct Materials Cost per EUP for Direct Materials = Total direct materials costs Equivalent units of production for direct materials Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-44
45. Step 3: Compute the Cost— Cost per EUP for Direct Materials Cost per EUP for Direct Materials = Total direct materials costs Equivalent units of production for direct materials = $140,000 50,000 EUP = $2.80 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-45
46. Step 3: Compute the Cost— Cost per EUP for Conversion Costs Cost per EUP for Conversion Costs = Total conversion costs Equivalent units of production for conversion costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-46
47. Step 3: Compute the Cost— Cost per EUP for Conversion Costs Cost per EUP for Conversion Costs = Total conversion costs Equivalent units of production for conversion costs = $68,000 42,500 EUP = $1.60 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-47
48. Production Cost Report—Assembly Department— Costs to Account For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-48 Step 3: Costs to Account for
49. Step 4: Assign Costs to Units Completed and Units In Process Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-49
50. Step 4: Assign Costs to Units Completed and Units In Process Direct Materials Completed 40,000 EUP × $2.80 per EUP = $ 112,000 In process 10,000 EUP × $2.80 per EUP = 28,000 Total $ 140,000 Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-50
51. Step 4: Assign Costs to Units Completed and Units In Process Direct Materials Completed 40,000 EUP × $2.80 per EUP = $ 112,000 In process 10,000 EUP × $2.80 per EUP = 28,000 Total $ 140,000 Conversion Costs Completed 40,000 EUP × $1.60 per EUP = $ 64,000 In process 2,500 EUP × $1.60 per EUP = 4,000Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-51
52. Production Cost Report—Assembly Department— Costs Accounted For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-52 Step 4: Costs Accounted for
53. Production Cost Report— July Data for Puzzle Me Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-53
54. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-54
55. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in = 5,000 units + 40,000 units = 45,000 units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-55
56. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in = 5,000 units + 40,000 units = 45,000 units Accounted for = Transferred out + In process Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-56
57. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in = 5,000 units + 40,000 units = 45,000 units Accounted for = Transferred out + In process 45,000 units = 38,000 units + In process 45,000 units = 38,000 units + 7,000 units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-57
58. Production Cost Report—Cutting Department— Whole Units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-58
59. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-59
60. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Completed units 38,000 units × 100% = 38,000 EUP In process units7,000 units × 100% = 7,000 EUP Total EUP for transferred in 45,000 EUP Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-60
61. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Completed units 38,000 units × 100% = 38,000 EUP In process units7,000 units × 100% = 7,000 EUP Total EUP for transferred in 45,000 EUP Direct Materials Completed units 38,000 units × 100% = 38,000 EUP In process units 7,000 units × 0% = 0 EUP Total EUP for direct materials 38,000 EUP Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-61
62. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Completed units 38,000 units × 100% = 38,000 EUP In process units7,000 units × 100% = 7,000 EUP Total EUP for transferred in 45,000 EUP Direct Materials Completed units 38,000 units × 100% = 38,000 EUP In process units 7,000 units × 0% = 0 EUP Total EUP for direct materials 38,000 EUP Conversion Costs Completed units 38,000 units × 100% = 38,000 EUP In process units 7,000 units × 30% = 2,100 EUP Total EUP for conversion costs 40,100 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-62
63. Production Cost Report—Cutting Department— EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-63
64. Cutting Department: Costs to Account For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-64
65. Step 3: Compute the Cost— Cost per EUP for Transferred In Cost per EUP for Transferred In = Total transferred in costs Equivalent units of production for transferred in Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-65
66. Step 3: Compute the Cost— Cost per EUP for Transferred In Cost per EUP for Transferred In = Total transferred in costs Equivalent units of production for transferred in = $198,000 45,000 EUP = $4.40 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-66
67. Step 3: Compute the Cost— Cost per EUP for Direct Materials Cost per EUP for Direct Materials = Total direct materials costs Equivalent units of production for direct materials Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-67
68. Step 3: Compute the Cost— Cost per EUP for Direct Materials Cost per EUP for Direct Materials = Total direct materials costs Equivalent units of production for direct materials = $19,000 38,000 EUP = $0.50 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-68
69. Step 3: Compute the Cost— Cost per EUP for Conversion Costs Cost per EUP for Conversion Costs = Total conversion costs Equivalent units of production for conversion costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-69
70. Step 3: Compute the Cost— Cost per EUP for Conversion Costs Cost per EUP for Conversion Costs = Total conversion costs Equivalent units of production for conversion costs = $16,000 40,100 EUP = $0.40 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-70
71. Production Cost Report—Cutting Department— Costs to Account For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-71
72. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-72
73. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Completed 38,000 EUP × $4.40 per EUP = $ 167,200 In process 7,000 EUP × $4.40 per EUP = 30,800 Total $ 198,000 Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-73
74. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Completed 38,000 EUP × $4.40 per EUP = $ 167,200 In process 7,000 EUP × $4.40 per EUP = 30,800 Total $ 198,000 Direct Materials Completed 38,000 EUP × $0.50 per EUP = $ 19,000 In process 0 EUP × $0.50 per EUP = 0 Total $ 19,000 Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-74
75. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Completed 38,000 EUP × $4.40 per EUP = $ 167,200 In process 7,000 EUP × $4.40 per EUP = 30,800 Total $ 198,000 Direct Materials Completed 38,000 EUP × $0.50 per EUP = $ 19,000 In process 0 EUP × $0.50 per EUP = 0 Total $ 19,000 Conversion Costs Completed 38,000 EUP × $0.40 per EUP = $ 15,200 In process 2,100 EUP × $0.40 per EUP = 840 Total $ 16,040 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-75
76. Production Cost Report—Cutting Department— Costs Accounted For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-76
77. The Finishing Department started the month with 500 units in process, received 2,000 units from the Assembly Department, and transferred 2,100 units to the finished goods storage area. All materials are added at the beginning of the process. The units in process at the end of the month are 45% complete in respect to conversion costs. The Finishing Department incurred the following costs: Beginning WIP Added this month Total Transferred In $ 6,250 $ 25,000 $ 31,250 Direct Materials 500 2,000 2,500 Conversion Costs 1,250 5,590 6,840 Total $ 8,000 $ 32,590 $ 40,590 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-77
78. 7. How many units are still in process at the end of the month? Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-78
79. 7. How many units are still in process at the end of the month? To account for = 500 units + 2,000 units = 2,500 units Accounted for = 2,100 units + In Process 2,500 units = 2,100 units + In Process In Process = 400 units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-79
80. 8. Compute the equivalent units of production for the Finishing Department. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-80
81. 8. Compute the equivalent units of production for the Finishing Department. Transferred In Completed units 2,100 units × 100% = 2,100 EUP In process units 400 units × 100% = 400 EUP Total EUP for transferred in 2,500 EUP Direct Materials Completed units 2,100 units × 100% = 2,100 EUP In process units 400 units × 100% = 400 EUP Total EUP for direct materials 2,500 EUP Conversion Costs Completed units 2,100 units × 100% = 2,100 EUP In process units 400 units × 45% = 180 EUP Total EUP for conversion costs 2,280 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-81
82. 9. Determine the cost per equivalent unit for transferred in, direct materials, conversion costs, and total costs. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-82
83. 9. Determine the cost per equivalent unit for transferred in, direct materials, conversion costs, and total costs. Transferred In $31,250 = $ 12.50 per EUP 2,500 EUP Direct Materials $2,500 = $ 1.00 per EUP 2,500 EUP Conversion Costs $6,840 = $ 3.00 per EUP 2,280 EUP Total: = $ 16.50 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-83
84. 10. Determine the cost to be transferred to Finished Goods Inventory. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-84
85. 10. Determine the cost to be transferred to Finished Goods Inventory. $16.50 per EUP × 2,100 EUP = $34,650 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-85
86. Learning Objective 4 Prepare journal entriesPrepare journal entries for a process costingfor a process costing systemsystem 20-86Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
87. Raw Materials Purchased Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-87 Transaction 1—Raw Materials Purchased: During July, the company purchased materials on account for $175,000. A = L + E
88. Raw Materials Purchased Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-88 Transaction 1—Raw Materials Purchased: During July, the company purchased materials on account for $175,000. A ↑ = L ↑ + E RM ↑ A/P ↑
89. Raw Materials Used in Production Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-89 Transaction 2—Raw Materials Used in Production: During July, direct materials were assigned to the two production departments: $140,000 to the Assembly Department and $19,000 to the Cutting Department; $2,000 in indirect materials were accumulated in Manufacturing Overhead. A = L + E
90. Raw Materials Used in Production Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-90 Transaction 2—Raw Materials Used in Production: During July, direct materials were assigned to the two production departments: $140,000 to the Assembly Department and $19,000 to the Cutting Department; $2,000 in indirect materials were accumulated in Manufacturing Overhead. A ↓ = L + E ↓ RM ↓ WIP - Assembly ↑ WIP - Cutting ↑ MOH ↑
91. Labor Costs Incurred Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-91 Transaction 3—Labor Costs Incurred: During the month, Puzzle Me incurred $20,000 in direct labor costs in the Assembly Department; $3,840 in direct labor costs in the Cutting Department; and $1,500 in indirect labor costs which were accumulated in Manufacturing Overhead. A = L + E
92. Labor Costs Incurred Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-92 Transaction 3—Labor Costs Incurred: During the month, Puzzle Me incurred $20,000 in direct labor costs in the Assembly Department; $3,840 in direct labor costs in the Cutting Department; and $1,500 in indirect labor costs which were accumulated in Manufacturing Overhead. A ↑ = L ↑ + E ↓ WIP - Assembly ↑ WIP - Cutting ↑ Wages Payable ↑ MOH ↑
93. Additional Manufacturing Costs Incurred Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-93 Transaction 4—Additional Manufacturing Costs Incurred: In addition to the indirect materials and indirect labor costs, Puzzle Me incurred $35,000 in machinery depreciation and $20,000 in indirect costs that were paid in cash, which included rent and utilities. A = L + E
94. Additional Manufacturing Costs Incurred Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-94 Transaction 4—Additional Manufacturing Costs Incurred: In addition to the indirect materials and indirect labor costs, Puzzle Me incurred $35,000 in machinery depreciation and $20,000 in indirect costs that were paid in cash, which included rent and utilities. A ↓ = L + E ↓ Accumulated Depreciation ↑ Cash ↓ MOH ↑
95. Allocation of Manufacturing Overhead Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-95 Transaction 5—Allocation of Manufacturing Overhead: Puzzle Me used a predetermined overhead allocation rate to allocate indirect costs to the departments: $48,000 to the Assembly Department and $11,000 to the Cutting Department. A = L + E
96. Allocation of Manufacturing Overhead Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-96 Transaction 5—Allocation of Manufacturing Overhead: Puzzle Me used a predetermined overhead allocation rate to allocate indirect costs to the departments: $48,000 to the Assembly Department and $11,000 to the Cutting Department. A ↑ = L + E ↑ WIP - Assembly ↑ WIP - Cutting ↑ MOH ↓
97. Transfer from the Assembly Department to the Cutting Department Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-97 Transaction 6—Transfer from the Assembly Department to the Cutting Department: At the end of July, when the production cost report for the Assembly Department was prepared, Puzzle Me assigned $176,000 to the 40,000 units transferred from the Assembly Department to the Cutting Department. A = L + E
98. Transfer from the Assembly Department to the Cutting Department Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-98 Transaction 6—Transfer from the Assembly Department to the Cutting Department: At the end of July, when the production cost report for the Assembly Department was prepared, Puzzle Me assigned $176,000 to the 40,000 units transferred from the Assembly Department to the Cutting Department. A ↑ ↓ = L + E WIP - Assembly ↓ WIP - Cutting ↑
99. Transfer from Cutting Department to Finished Goods Inventory Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-99 Transaction 7—Transfer from Cutting Department to Finished Goods Inventory: At the end of July, when the production cost report for the Cutting Department was prepared, Puzzle Me assigned $201,400 to the 38,000 units transferred from the Cutting Department to Finished Goods Inventory. This is the cost of goods manufactured. A = L + E
100. Transfer from Cutting Department to Finished Goods Inventory Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-100 Transaction 7—Transfer from Cutting Department to Finished Goods Inventory: At the end of July, when the production cost report for the Cutting Department was prepared, Puzzle Me assigned $201,400 to the 38,000 units transferred from the Cutting Department to Finished Goods Inventory. This is the cost of goods manufactured. A ↑ ↓ = L + E FG ↑ WIP - Cutting ↓
101. Puzzles Sold Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-101 Transaction 8—Puzzles Sold: During July, Puzzle Me sold 35,000 puzzles. We have already determined from the production cost report for the Cutting Department that the cost of goods manufactured is $5.30 per puzzle. Therefore, the cost of 35,000 puzzles is $185,500 (35,000 puzzles × $5.30). The puzzles were sold on account for $8.00 each, which is a total of $280,000 (35,000 puzzles × $8.00). A = L + E
102. Puzzles Sold Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-102 Transaction 8—Puzzles Sold: During July, Puzzle Me sold 35,000 puzzles. We have already determined from the production cost report for the Cutting Department that the cost of goods manufactured is $5.30 per puzzle. Therefore, the cost of 35,000 puzzles is $185,500 (35,000 puzzles × $5.30). The puzzles were sold on account for $8.00 each, which is a total of $280,000 (35,000 puzzles × $8.00). A ↑ ↓ = L + E ↑ ↓ A/R ↑ FG ↓ Sales Revenue ↑ COGS ↑
103. Adjust Manufacturing Overhead Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-103 Transaction 9—Adjust Manufacturing Overhead: The actual manufacturing overhead costs incurred were $58,500, which includes the indirect materials in Transaction 2, the indirect labor in Transaction 3, and the accumulated depreciation and other indirect costs in Transaction 4. The amount of manufacturing overhead allocated to the two departments was $59,000, as shown in Transaction 5. A = L + EManufacturing Overhead Trans. 2 2,000 Trans. 5 59,000 Trans. 3 1,500 Trans. 4 35,000 Trans. 4 20,000 Bal 500
104. Adjust Manufacturing Overhead Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-104 Transaction 9—Adjust Manufacturing Overhead: The actual manufacturing overhead costs incurred were $58,500, which includes the indirect materials in Transaction 2, the indirect labor in Transaction 3, and the accumulated depreciation and other indirect costs in Transaction 4. The amount of manufacturing overhead allocated to the two departments was $59,000, as shown in Transaction 5. A = L + E ↑ ↓ MOH ↑ COGS ↓ Manufacturing Overhead Trans. 2 2,000 Trans. 5 59,000 Trans. 3 1,500 Trans. 4 35,000 Trans. 4 20,000 Bal 500
105. Key Accounts After Posting Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-105 Work-in-Process Inventory—Assembly Balance, June 30 0 Trans. 6 176,000 Trans. 2 140,000 Trans. 3 20,000 Trans. 5 48,000 Balance, July 31 32,000 Work-in-Process Inventory—Cutting Balance, June 30 23,200 Trans. 7 201,400 Trans. 2 19,000 Trans. 3 3,840 Trans. 5 11,000 Trans. 6 176,000 Balance, July 31 31,640 Finished Goods Inventory Balance, June 30 0 Trans. 8 185,500 Trans. 7 201,400 Balance, July 31 15,900 Cost of Goods Sold Trans. 8 185,500 Trans. 9 500 Balance, July 31 185,000
106. 11. Castillo Company has three departments: Mixing, Bottling, and Packaging. At the end of the month, the production cost reports for the departments show the costs of the products completed and transferred were $75,000 from Mixing to Bottling, $50,000 from Bottling to Packaging, and $65,000 from Packaging to Finished Goods Inven- tory. Prepare the journal entries for the transfer of the costs. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-106
107. Transfer from Mixing to Bottling Work-in-Process Inventory—Bottling 75,000 Work-in-Process Inventory—Mixing 75,000 Transfer from Bottling to Packaging Work-in-Process Inventory—Packaging 50,000 Work-in-Process Inventory—Bottling 50,000 Transfer from Packaging to Finished Goods Inventory Finished Goods Inventory 65,000 Work-in-Process Inventory—Packaging 65,000 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-107
108. Learning Objective 5 Use a production costUse a production cost report to makereport to make decisionsdecisions 20-108Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
109. How Managers Use Production Cost Reports to Make Decisions • Controlling costs • Evaluating performance • Pricing products • Identifying the most profitable products • Preparing the financial statements Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-109
110. 12. Describe some ways managers use production cost reports to make business decisions. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-110
111. 12. Describe some ways managers use production cost reports to make business decisions. Managers use production cost reports to: • Control costs • Evaluate performance • Price products • Identify profitability of different products • Prepare financial statements Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-111
112. Learning Objective 6 Prepare a productionPrepare a production cost report using thecost report using the first-in, first-outfirst-in, first-out methodmethod (Appendix 20A)(Appendix 20A) 20-112Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
113. Production Cost Report— July Data for Puzzle Me Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-113
114. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-114
115. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in = 5,000 units + 40,000 units = 45,000 units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-115
116. July Units Accounted For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-116 Beginning Inventory 5,000 units Started and Completed in July 33,000 units Completed in July—38,000 units Exhibit 20A-1 July Units Accounted For Exhibit 20A-1 July Units Accounted For
117. July Units Accounted For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-117 Beginning Inventory 5,000 units Started and Completed in July 33,000 units Ending Inventory 7,000 units Started in July—40,000 units Completed in July—38,000 units Units Accounted For—45,000 units Exhibit 20A-1 July Units Accounted For Exhibit 20A-1 July Units Accounted For
118. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in = 5,000 units + 40,000 units = 45,000 units Accounted for = Beginning balance + Started and completed + In process Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-118
119. Step 1: Summarize the Flow of Physical Units To account for = Beginning balance + Amount transferred in = 5,000 units + 40,000 units = 45,000 units Accounted for = Beginning balance + Started and completed + In process 45,000 units = 5,000 units + Started and completed + 7,000 units 45,000 units = 5,000 units + 33,000 units + 7,000 units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-119
120. Production Cost Report—Cutting Department— FIFO Method—Whole Units Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-120
121. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-121
122. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Beginning WIP units 5,000 units × 0% = 0 EUP Started and completed units 33,000 units × 100% = 33,000 EUP In process units 7,000 units × 100% = 7,000 EUP Total EUP for transferred in 40,000 EUP Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-122
123. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Beginning WIP units 5,000 units × 0% = 0 EUP Started and completed units 33,000 units × 100% = 33,000 EUP In process units 7,000 units × 100% = 7,000 EUP Total EUP for transferred in 40,000 EUP Direct Materials Beginning WIP units 5,000 units × 100% = 5,000 EUP Started and completed units 33,000 units × 100% = 33,000 EUP In process units 7,000 units × 0% = 0 EUP Total EUP for direct materials 38,000 EUP Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-123
124. Step 2: Compute Output in Terms of Equivalent Units of Production Transferred In Beginning WIP units 5,000 units × 0% = 0 EUP Started and completed units 33,000 units × 100% = 33,000 EUP In process units 7,000 units × 100% = 7,000 EUP Total EUP for transferred in 40,000 EUP Direct Materials Beginning WIP units 5,000 units × 100% = 5,000 EUP Started and completed units 33,000 units × 100% = 33,000 EUP In process units 7,000 units × 0% = 0 EUP Total EUP for direct materials 38,000 EUP Conversion Costs Beginning WIP units 5,000 units × 40% = 2,000 EUP Started and completed units 33,000 units × 100% = 33,000 EUP In process units 7,000 units × 30% = 2,100 EUP Total EUP for conversion costs 37,100 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-124
125. Timing of Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-125 Exhibit 20A-3 Timing of Conversion Costs Exhibit 20A-3 Timing of Conversion Costs Beginning Inventory 60% 40% Started and Completed 100% Ending Inventory 30% 70% June July August
126. Production Cost Report—Cutting Department— FIFO Method—EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-126
127. Cutting Department: Costs to Account For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-127
128. Step 3: Compute the Cost— Cost per EUP for Transferred In Cost per EUP for Transferred In = Total transferred in costs Equivalent units of production for transferred in Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-128
129. Step 3: Compute the Cost— Cost per EUP for Transferred In Cost per EUP for Transferred In = Total transferred in costs Equivalent units of production for transferred in = $176,000 40,000 EUP = $4.40 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-129
130. Step 3: Compute the Cost— Cost per EUP for Direct Materials Cost per EUP for Direct Materials = Total direct materials costs Equivalent units of production for direct materials Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-130
131. Step 3: Compute the Cost— Cost per EUP for Direct Materials Cost per EUP for Direct Materials = Total direct materials costs Equivalent units of production for direct materials = $19,000 38,000 EUP = $0.50 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-131
132. Step 3: Compute the Cost— Cost per EUP for Conversion Costs Cost per EUP for Conversion Costs = Total conversion costs Equivalent units of production for conversion costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-132
133. Step 3: Compute the Cost— Cost per EUP for Conversion Costs Cost per EUP for Conversion Costs = Total conversion costs Equivalent units of production for conversion costs = $14,840 37,100 EUP = $0.40 per EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-133
134. Production Cost Report—Cutting Department— FIFO Method—Costs to Account For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-134
135. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-135
136. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Beginning WIP $ 22,000 To complete beginning WIP 0 EUP × $4.40 per EUP = 0 Started and Completed 33,000 EUP × $4.40 per EUP = 145,200 Transferred to FG 167,200 In process: 7,000 EUP × $4.40 per EUP = 30,800 Total $ 198,000 Direct Materials Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-136
137. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Beginning WIP $ 22,000 To complete beginning WIP 0 EUP × $4.40 per EUP = 0 Started and Completed 33,000 EUP × $4.40 per EUP = 145,200 Transferred to FG 167,200 In process: 7,000 EUP × $4.40 per EUP = 30,800 Total $ 198,000 Direct Materials Beginning WIP $ 0 To complete beginning WIP 5,000 EUP × $0.50 per EUP = 2,500 Started and Completed 33,000 EUP × $0.50 per EUP = 16,500 Transferred to FG 19,000 In process: 0 EUP × $0.50 per EUP = 0 Total $ 19,000 Conversion Costs Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-137
138. Step 4: Assign Costs to Units Completed and Units In Process Transferred In Beginning WIP $ 22,000 To complete beginning WIP 0 EUP × $4.40 per EUP = 0 Started and Completed 33,000 EUP × $4.40 per EUP = 145,200 Transferred to FG 167,200 In process: 7,000 EUP × $4.40 per EUP = 30,800 Total $ 198,000 Direct Materials Beginning WIP $ 0 To complete beginning WIP 5,000 EUP × $0.50 per EUP = 2,500 Started and Completed 33,000 EUP × $0.50 per EUP = 16,500 Transferred to FG 19,000 In process: 0 EUP × $0.50 per EUP = 0 Total $ 19,000 Conversion Costs Beginning WIP $ 700 To complete beginning WIP 2,000 EUP × $0.40 per EUP = 800 Started and Completed 33,000 EUP × $0.40 per EUP = 13,200 Transferred to FG 14,700 In process: 2,100 EUP × $0.40 per EUP = 840 Total $ 15,540 *Adjusted for $1 to correct rounding error Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-138
139. Production Cost Report—Cutting Department— FIFO Method—Costs Accounted For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-139
140. Production Cost Report—Cutting Department— Costs Accounted For Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-140
141. Bishop Company uses the FIFO method in its process costing system. The Finishing Department started the month with 500 units in process that were 20% complete, received 2,000 units from the Assembly Department, and transferred 2,100 units to the finished goods storage area. All materials are added at the beginning of the process. The units in process at the end of the month are 45% complete with respect to conversion costs. The department incurred the following costs: Beginning WIP Added this month Total Transferred In $ 6,250 $ 25,000 $ 31,250 Direct Materials 500 2,000 2,500 Conversion Costs 1,250 5,450 6,700 Total $ 8,000 $ 32,450 $ 40,450 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-141
142. 13. How many units are still in process at the end of the month? Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-142
143. 13. How many units are still in process at the end of the month? To account for = Beginning balance + Amount transferred in = 500 units + 2,000 units = 2,500 units Accounted for = Beginning balance + Started and completed + In process 2,500 units = 500 units + 1,600 units + In process 2,500 units = 2,100 units + In process 400 units = In process Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-143
144. 14. Compute the equivalent units of production for the Finishing Department for the current month. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-144
145. 14. Compute the equivalent units of production for the Finishing Department for the current month. Transferred In Beginning WIP units 500 units × 0% = 0 EUP Started and completed units 1,600 units × 100% = 1,600 EUP In process units 400 units × 100% = 400 EUP Total EUP for transferred in 2,000 EUP Direct Materials Beginning WIP units 500 units × 0% = 0 EUP Started and completed units 1,600 units × 100% = 1,600 EUP In process units 400 units × 100% = 400 EUP Total EUP for direct materials 2,000 EUP Conversion Costs Beginning WIP units 500 units × 80% = 400 EUP Started and completed units 1,600 units × 100% = 1,600 EUP In process units 400 units × 45% = 180 EUP Total EUP for conversion costs 2,180 EUP Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-145
146. 15. Determine the cost per equivalent unit for the current period for transferred in, direct materials, and conversion costs. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-146
147. 15. Determine the cost per equivalent unit for the current period for transferred in, direct materials, and conversion costs. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-147 Transferred In: $25,000 2,000 EUP = $12.50 per EUP Direct Materials: $2,000 2,000 EUP = $1.00 per EUP Conversion Costs: $5,450 2,180 EUP = $2.50 per EUP
148. 16. Determine the cost to be transferred to Finished Goods Inventory. Transferred In Beginning WIP $ 6,250 To complete beginning WIP 0 EUP × $12.50 per EUP = 0 Started and Completed 1,600 EUP × $12.50 per EUP = 20,000 Transferred to FG $ 26,250 Direct Materials Beginning WIP $ 500 To complete beginning WIP 0 EUP × $1.00 per EUP = 0 Started and Completed 1,600 EUP × $1.00 per EUP = 1,600 Transferred to FG 2,100 Conversion Costs Beginning WIP $ 1,250 To complete beginning WIP 400 EUP × $2.50 per EUP = 1,000 Started and Completed 1,600 EUP × $2.50 per EUP = 4,000 Transferred to FG 6,250 Total $ 34,600 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-148
149. End of Chapter 20 20-149Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

As we learned in Chapter 19, companies that manufacture batches of unique products or provide specialized services use job order costing to determine product or service costs. Smart Touch Learning used job order costing for tracking costs of its tablets.

In contrast, companies which manufacture large quantities of homogenous products through a series of uniform steps or processes use process costing to determine product costs. Examples of manufacturers which use process costing are soft drink bottlers, paint manufacturers, and gasoline refiners.

Job order costing accumulates costs by job, but process costing accumulates costs by process.

Job order costing uses a single work-in-process inventory account, whereas process costing has a separate work-in-process inventory account for each process or department.

Records are kept through the use of a job cost sheet for each job when job order costing is used. When process costing is used, records are kept through the use of a production cost report for each process or department.

Under job order costing, the transfer of costs occurs when each job is completed. Under process costing, this transfer takes place at the end of an accounting period.

Process costing uses one of two methods: weighted-average, which is illustrated in the chapter, and first-in, first-out, which is explained in the appendix to the chapter.

As we look at how process costing works, we will be using Cheerful Colors, a fictitious crayon manufacturing company, for our examples. Cheerful Colors has three processes in its production process: mixing, molding, and packaging. The Mixing Department combines direct materials such as paraffin wax and pigments. The heated mixture is pumped to the Molding Department, where it is poured into molds. After the molds cool, the crayons are removed from the molds and transferred to the Packaging Department, where paper wrappers are added to each crayon and the crayons are boxed. The crayons accumulate production costs during each process. The company then assigns these costs to the crayons passing through that process.

The total cost to produce 10,000 crayons is the sum of the costs incurred for the three processes ($600).

The cost per crayon is the total cost of $600 divided by the number of crayons, or $0.06 per crayon.

Why does a manager need to know the cost per unit of each process? Knowing this amount enables a manager to control costs. The company can look for ways to cut the costs where actual process exceed what was planned.

The cost per unit is also needed so that the manager can set the selling price. The selling price must be greater than the costs of making the product so that the company can earn a profit.

In addition, the cost per unit is needed in order to calculate account balances. The company needs to know the ending balances in work-in-process inventory and finished goods inventory for the balance sheet and the cost of goods sold for the income statement.

Exhibit 20-2 provides a comparison of cost flows in Smart Touch Learning's job order costing system with Cheerful Crayons' process costing system. First, we'll look at Panel A which depicts Smart Touch Learning.

Recall from the previous chapter that, in a job order costing system, direct materials, direct labor, and manufacturing overhead costs are recorded for each job. These costs are recorded in the work-in-process inventory account. As jobs are completed, the costs are transferred to finished goods inventory account. Then, when a job is sold, the cost of the job is transferred to cost of goods sold.

Note that there is a single work-in-process Inventory control account. The work-in-process inventory account in the general ledger is supported by an individual subsidiary cost record for each job.

Panel B diagrams the flow of costs for Cheerful Crayons' process costing system.

The most obvious difference between job order costing and process costing is that, in process costing, each process (in this case, mixing, molding, and packaging) is a separate department; and each department has its own work-in-process inventory account.

Direct materials, direct labor, and manufacturing overhead are assigned to work-in-process inventory for each process that uses them.

When the Mixing Department's process is complete, the cost of the mixture is transferred from the Mixing Department's work-in-process inventory account into the Molding Department's work-in-process inventory account. Then, when the Molding Department's process is complete, the cost of the crayons is transferred from the Molding Department's work-in-process inventory account into the Packaging Department's work-in-process inventory account.

When production is complete, the cost of the crayons is transferred from the Packaging Department's work-in-process inventory into finished goods inventory. As the crayons are sold, their cost is transferred from finished goods inventory to cost of goods sold.

The total cost of the crayons includes the costs of mixing, molding, and packaging. The costs incurred in the first process are transferred to the second process. The costs incurred in the first and second processes are then transferred to the third process. Then the entire cost is transferred to finished goods inventory.

Exhibit 20-3 illustrates the point that all costs must be accounted for.

Because the production process takes time, companies may have products that are not completed and are still in process at the end of the accounting period. We accumulate production costs by process. Then, at the end of the period, the total production costs incurred must be split between the following: units that have been completed in that process and transferred to the next process (or to finished goods inventory if it is the last process); and units not completed and remaining in work-in-process inventory for that department.

So, looking at Exhibit 20-3, costs are accumulated in Department 1 during the period. At the end of the period, those costs have either been transferred to the next department (Department 2) or they still remain in Department 1.

When the production costs have to be split, we cannot just divide the total cost by the number of units started to get a unit cost because some units are not complete and, therefore, have not incurred the same amount of costs. The unit cost of the completed units is more than the unit cost of the incomplete units. So how are the costs divided? We use the concept of equivalent units of production.

Equivalent units of production (EUP) allows businesses to measure the amount of materials added to or work done on a partially finished group of units during a period and to express it in terms of fully complete units of output.

Let's see how this is done using Cheerful Colors as an example.

At the end of the accounting period, Cheerful Colors has 10,000 crayons remaining in the Packaging Department. These crayons are partially completed. Each of the 10,000 crayons has the paper wrapper attached, but they are not yet packaged in the box. Both the paper wrapper and the box are considered direct materials for the Packaging Department. If the cost of the wrappers is 40% of the total cost of direct materials in this process, then the crayons are 40% complete.

To calculate equivalent units of production, we take the actual number of crayons and multiply by the percentage that has been completed for materials. So, 100,000 crayons multiplied by 40% is the equivalent of 4,000 crayons with 100% of the materials.

The same procedure is used to calculate the equivalent units of production for conversion costs. We multiple 10,000 crayons by the percentage complete for conversion costs (80%) for 8,000 equivalent units of production.

Conversion is direct labor and manufacturing overhead. Many manufacturing companies that use process costing are highly automated, so direct labor is a small part of total manufacturing costs. This is why, to simplify the accounting, direct labor is often combined with manufacturing overhead and called conversion costs. This term is used because it is the cost to convert raw materials into finished goods.

If conversion costs are incurred evenly throughout the process (which is usually true for conversion costs), then the cost of getting 10,000 crayons 80% through the process has the equivalent cost of getting 8,000 crayons completely through the process.

Note that the equivalent units of production can be different for direct materials and conversion costs and therefore must be calculated separately.

For a comprehensive example of a process costing system, let's look at Puzzle Me, a fictitious company that manufactures jigsaw puzzles. Exhibit 20-4 illustrates the two major production processes.

The first process is the Assembly Department which applies glue to the cardboard and then presses a picture onto the cardboard.

The Cutting Department cuts the board into puzzle pieces and packages the puzzles in a box. The box is then moved to finished goods storage.

The production process uses materials, machines, and labor in both departments, and there are two work-in-process inventory accounts: one for the Assembly Department and one for the Cutting Department.

We are going to complete a lot of calculations in this chapter. As you work through the computations, keep the picture in Exhibit 20-4 in mind so you don't confuse inputs with outputs. The inputs are the materials, labor, and overhead. The outputs are the completed puzzles.

A production cost report must be completed for each department. The production cost reports show the calculations for the physical flows and the cost flows of the products.

There are four steps to preparing a production cost report. The first step is to summarize the flow of physical units. The next step is to compute output in terms of equivalent units of production. The third step is to compute the cost per equivalent unit of production. And the last step is to assign costs to units completed and units in process.

There are two unique terms used on a production cost report. "To account for" includes the amount in process at the beginning of the period plus the amount started or added during the period. "Accounted for" shows what happened to the amounts to account for. They are either still in process or completed and transferred out.

These terms are used for both units and costs. "To account for" and "accounted for" must always be equal. To illustrate the use of these terms, let's prepare production cost reports for Puzzle Me's two departments for the month of July.

The following is Puzzle Me's data for the month of July for the Assembly Department and the Cutting Department. We will be preparing the production cost report using the weighted-average method. In Appendix 20A, we will use the first-in, first-out (FIFO) method.

We begin with Puzzle Me's first department, the Assembly Department. The first step is to summarize the physical flow of units. We begin by calculating units to account for, which is the sum of the number of units in the beginning balance and the number of units started.

For Puzzle Me's Assembly Department, there were no units in beginning inventory, and 50,000 units were started during July, for a total of 50,000 units to account for.

Next, we have to account for all of the units. The units were either transferred out or are still in process.

The number of units to account for must equal the number of units accounted for. The Assembly Department completed the assembly process on 40,000 units and transferred those units to the Cutting Department. Therefore, 10,000 units must still be in process. So, we have accounted for all units.

Exhibit 20-5 shows how units to account for and units accounted for on the production cost report. Step 1 completes the units section of the report.

Step 2 is to compute the output in terms of equivalent units of production. The Assembly Department adds all direct materials at the beginning of the process. In contrast, conversion costs are incurred evenly throughout the process. Thus, we must compute equivalent units of production separately for direct materials and conversion costs.

The Assembly Department worked on 50,000 puzzle boards during July. We have already determined that 40,000 puzzle boards are completed and have been transferred to the next department. If they are completed and transferred out, then they are 100% complete for both direct materials and conversion costs in this department. Because the direct materials are added at the beginning of the process, the units which were started have had 100% of the materials added. Therefore, the equivalent units of production for direct materials total 50,000 because all the direct materials have been added to all 50,000 units worked on during July.

As stated previously, 40,000 puzzle boards were completed and have been transferred to the next department. If they are completed and transferred out, then they are 100% complete for conversion costs. Only 25% of the conversion work has been done on the 10,000 puzzle boards in ending work-in-process inventory. As a result, there are 42,500 equivalent units for conversion costs.

Exhibit 20-6 shows the updated production cost report with information on the equivalent units. Notice that there are no entries in the transferred in column. The Assembly Department is the first department in the manufacturing process, so there are no units transferred in from a previous department. We will use this column when we complete the production cost report for the Cutting Department.

Now that we have completed the units section of the report, it is time to complete the costs section.

Step 3 is to compute the cost per equivalent unit of production. Separate computations are required for direct materials and conversion costs. We need to take the total direct materials cost and divide by the equivalent units of production for direct materials.

The total cost of the direct materials was $140,000. We divide by the 50,000 equivalent units computed in step 2, and the result is $2.80 per equivalent unit for direct materials.

Similarly, we take the total conversion costs and divide by the equivalent units of production for conversion costs.

The result is $1.60 per equivalent unit for conversion costs.

Exhibit 20-7 shows how we use the information from step 3 to complete the costs to account for section of the production cost report.

The last step is to assign costs to the units. This step shows where the $208,000 total costs to be accounted for by the
Assembly Department should be assigned.

For direct materials and for conversion costs, the costs must be divided between two categories: the 40,000 completed puzzle boards that have been transferred out to the Cutting Department; and the 10,000 partially completed puzzle boards remaining in the Assembly Department's ending work-in-process inventory.

This is accomplished by multiplying the cost per equivalent units of production times the equivalent units of production.

This process is repeated for conversion costs.

So, this step must be completed four times to assign direct materials cost to the completed units and the in process units and to assign the conversion costs to the completed units and the in process units. The cost of each input must be assigned to each completed output and partially completed output.

Exhibit 20-8 shows the completed production cost report. We have now accounted for all units and costs for the Assembly Department, and it is time to complete the same process for the Cutting Department.

Let's review the cost information presented earlier for Puzzle Me.

The Cutting Department receives the puzzle boards from the Assembly Department and cuts the boards into puzzle pieces before inserting the pieces into the box at the end of the process. Glued puzzle boards with pictures are transferred in from the Assembly Department at the beginning of the Cutting Department's process. The Cutting Department's conversion costs are added evenly throughout the process. The Cutting Department's direct materials (boxes) are added at the end of the process.

Keep in mind that direct materials in the Cutting Department refers to the boxes added in that department and not to the materials (cardboard, pictures, and glue) added in the Assembly Department. The costs of the materials from the Assembly Department that are transferred into the Cutting Department are called transferred in costs.

Likewise, conversion costs in the Cutting Department refers to the direct labor and manufacturing overhead costs incurred only in the Cutting Department. The conversion costs incurred in the Assembly Department are also transferred in costs for the Cutting Department.

We follow the same four steps to prepare the production cost report as we did for the Assembly Department. Remember that amounts that are transferred out for the Assembly Department become transferred in for the Cutting Department.

The units to account for is equal to the units in the beginning work-in-process inventory account for the department plus the number of units transferred in from the previous department.

The Cutting Department's beginning work-in-process inventory consisted of 5,000 puzzle boards. Another 40,000 puzzle boards were transferred in from the Assembly Department, for a total of 45,000 puzzle boards to account for.

Next, we have to account for all of the units. The units were either transferred out to finished goods inventory or they are still in process.

The units to account for must equal the units accounted for. The Cutting Department completed the cutting and boxing process on 38,000 units and transferred those units to finished goods inventory. Therefore, 7,000 units must still be in process. We have now accounted for all units.

Exhibit 20-9 shows this information on the production cost report for the Cutting Department. Just as we did with the Assembly Department, we start with the units section of the report.

Step 2 is to compute the output in terms of equivalent units of production. The Cutting Department adds direct materials at the end of the process, and conversion costs are incurred evenly throughout the process. Additionally, the units have costs that were transferred in with them that must be accounted for. Thus, we must compute equivalent units of production separately for transferred in, direct materials, and conversion costs.

The Cutting Department receives units from the Assembly Department. These units are the transferred in units. The equivalent units of production for transferred in is always 100% because these units came in with costs assigned to them from the previous department. The costs assigned to them were calculated on the production cost report for the Assembly Department.

Units completed in the Cutting Department are 100% complete for direct materials. However, the units that are in process do not yet have any direct materials added in this department because the box is added at the end of the process. Because they are still in process, the box has not yet been added. Therefore, they are 0% complete for direct materials.

Units completed in the Cutting Department are 100% complete for conversion costs. The 38,000 puzzle boards have been completed and transferred out to finished goods inventory. Only 30% of the conversion work has been done on the puzzle boards that are still in process.

This information is added to the production cost report, as shown in Exhibit 20-10. The units section is now complete.

The Cutting Department has $233,040 of costs to account for, as illustrated in Exhibit 20-11. The beginning balances and the additional costs incurred were given in the original data. The amount transferred in from the Assembly Department, $176,000, is the amount calculated on the production cost report for the Assembly Department for July as the amount completed and transferred out in the costs accounted for section.

Step 3 is to calculate the cost per equivalent unit. The formulas to compute the cost per equivalent unit of production are the same as used for the Assembly Department; we just need to add the calculation for the transferred in costs. The Cutting Department has three inputs and therefore must make three calculations for cost per equivalent unit of production.

The cost per equivalent unit for transferred in costs is $4.40 per equivalent unit of production.

We use the same formula for direct materials.

The result is $0.50 per equivalent unit of production for direct materials.

We repeat the formula for a third time to compute cost per equivalent unit for conversion costs.

The result is $0.40 per equivalent unit of production for conversion costs.

The information on costs to account for and the computation of cost per equivalent unit of production is added to the production cost report, as shown in Exhibit 20-12.

The final step in preparing the production cost report for the Cutting Department is to assign the costs of the three inputs (transferred in, direct materials, and conversion costs) to the two outputs (completed units and units still in process).

To assign costs to the units transferred in, the equivalent units of production calculated in step 2 are multiplied by the cost per equivalent unit of production from step 3.

This calculation is repeated for direct materials.

The same procedure is used for conversion costs.

Exhibit 20-13 shows the completed production cost report for Puzzle Me's Cutting Department. We have accomplished our goal of splitting the $233,040 total cost between the completed units and the in process units.

Next, we will take a look at the journal entries used to record transactions in a process costing system. You will notice that they are they same or very similar to what we did for the job order costing system. First, let's look at what happens when raw material is purchased on account.

Raw Materials Inventory, an asset account, is increased with a debit, and the liability, Accounts Payable, is increased with a credit.

Direct materials are used in production in both the Assembly and the Cutting Departments. In addition, indirect materials are used.

The Work-in-Process Inventory accounts for each department are increased with a debit for the direct materials that are used. Manufacturing Overhead is increased with a debit for the indirect materials used. Raw Materials Inventory is decreased for the total of all materials used.

Direct labor is used in production in both the Assembly and the Cutting Departments. In addition, indirect labor is used.

The Work-in-Process Inventory accounts for each department are increased with a debit for the direct labor that is incurred. Manufacturing Overhead is increased with a debit for the indirect labor incurred. Wages Payable is increased for the total of all labor incurred.

Additional manufacturing overhead is incurred for depreciation and rent and utilities.

Depreciation is recorded with a debit to Manufacturing Overhead and a credit to Accumulated Depreciation. Rent and utilities is recorded with a debit to Manufacturing Overhead and a credit to cash.

Next, Puzzle me will allocate manufacturing overhead using a predetermined overhead rate. The amounts of the allocation are given to you.

To allocate the manufacturing overhead, Puzzle Me will debit the Work-in-Process Inventory accounts for each department and credit Manufacturing Overhead.

At the end of the month, when the production cost report for the Assembly Department was prepared, the cost of the units transferred from the Assembly Department to the Cutting Department is recorded.

The Cutting Department's work-in-process inventory account is increased, and the Assembly Department's work-in-process inventory account is decreased.

At the end of the month, when the production cost report for the Cutting Department was prepared, the cost of the units transferred from the Cutting Department to Finished Goods Inventory was recorded.

Finished Goods Inventory is increased, and the Cutting Department's work-in-process inventory account is decreased. This is the cost of goods manufactured.

Next, we show how to record the sale of puzzles on account.

The sale increases Accounts Receivable and Sales Revenue. It also increases Cost of Goods Sold, but decreases Finished Goods Inventory.

Our last transaction shows how to adjust manufacturing overhead. The T-account for Manufacturing Overhead shows that the amount of manufacturing overhead allocated was $500 more than the actual costs incurred. This means the overhead was overallocated. The adjusting entry for overallocated or underallocated manufacturing overhead is usually prepared at the end of the year. We are showing it here at the end of the month so we can illustrate all journal entries for a process costing system.

To bring the account to a zero balance, Manufacturing Overhead must be debited. The credit is to Cost of Goods Sold, to decrease the expense account for the amount the puzzles were overcosted.

The diagram below shows key accounts after the journal entries in the process costing system have been posted. Notice how the costs flow through the accounts. What was transferred out of the Assembly Department's work-in-process inventory account is transferred in to the Cutting Department's work-in-process inventory account. Completed puzzle boards are transferred out of the Cutting Department and into the finished goods inventory account. The cost of puzzles sold are transferred out of the finished goods inventory account and into the cost of goods sold account.

So far in the chapter, we have learned how to prepare the production cost report. Now let's consider how managers can use the reports to make decisions for their companies.

Puzzle Me uses product cost data to look for ways to reduce costs. This may include changing suppliers to reduce the cost of raw materials or changing a component in the production process to reduce direct materials costs. To reduce labor costs, a manager may need employees with different skill levels paid at different hourly rates. Perhaps more skilled employees would require a higher pay rate but be more efficient. The increase in cost per labor hour may be more than offset by the increased productivity of the workers. Managers may also evaluate the efficiency of the production equipment. Newer, more efficient equipment may reduce manufacturing overhead costs.

Production cost reports are also used to evaluate a manager's performance. Managers are often rewarded based on how well they meet the budget. Puzzle Me compares the actual direct materials and conversion costs with expected amounts. If actual costs are too high, managers look for ways to cut. If actual costs are less than expected, the managers may receive a bonus.

Another use is to set the price for the product. Puzzle Me's selling price must be high enough to cover the manufacturing cost of each puzzle plus marketing and distribution costs. We know from preparing the production cost report for the Cutting Department that the total production cost of manufacturing a puzzle (direct materials, direct labor, and manufacturing overhead) is $5.30. Obviously, the puzzle must be priced more than this for the company to be profitable.

We can also identify the most profitable products. Selling price and cost data help managers figure out which products are most profitable. They can then promote these products to help increase profits.

Finally, the production cost report aids in preparing the financial statements. It provides inventory data for the balance sheet and cost of goods sold for the income statement.

Earlier, we said that there are two methods that can be used for process costing: weighted-average and first-in, first-out (or FIFO). We have shown the weighted-average method for Puzzle Me's Assembly Department and Cutting Department. In the weighted-average method, the costs from the beginning balance in work-in-process inventory are combined with the current period costs when determining the costs per equivalent unit of production.

In this appendix, we will learn the FIFO method, in which the costs from the beginning balance in work-in-process inventory that were incurred in the prior period are accounted for separately from the current period costs.

The Assembly Department of Puzzle Me did not have a beginning inventory in July. Therefore, all the costs to be accounted for in July were costs incurred that month. Because there was no intermingling of costs from a prior month, the calculations for weighted-average method and FIFO method would be the same for the Assembly Department. The Cutting Department, however, did have costs brought forward from June as well as additional costs incurred in July. We will use the July data for the Cutting Department to illustrate the FIFO method.

The initial data for July for Puzzle Me are repeated here with one difference: the costs in beginning work-in-process—conversion costs have been changed from $1,200 to $700.

We will use the same four-step procedure as we did for the weighted-average method. Step 1 is to summarize the physical flow of goods. Units to account for, as in the previous example, is the beginning balance plus the units transferred in.

The beginning balance of 5,000 units plus the 40,000 units transferred in equals 45,000 units to account for.

Using the FIFO method creates three groups of units to be accounted for:
• Units in beginning inventory that were started in June and completed in July.
• Units started in July and completed in July.
• Units started in July but not completed in July. These units are still in process at the end of July and will be completed in August.

Exhibit 20A-1 shows the units accounted for during July in the Cutting Department

The data for the Cutting Department shows 5,000 units in beginning inventory and 38,000 units transferred out. Therefore, the 38,000 units which were completed and transferred out include the 5,000 units in beginning inventory plus another 33,000 units that were started in July. Remember, FIFO stands for first-in, first-out. Therefore, it is assumed that the first units in (those in beginning inventory) are the first units out.

We know that we must account for 45,000 units. If 38,000 were transferred out, then that leaves 7,000 still in process at the end of July. We have now accounted for all units. We can also conclude that 40,000 units were started in July.

The formula for units accounted for is: units in beginning inventory plus units started and completed plus units in process in ending inventory.

Again, we know that the units accounted for must equal the 45,000 units to account for. We know that the beginning inventory is 5,000 units, and that there are 7,000 units that are still in process in ending inventory. Therefore, the units started and completed were 33,000.

Exhibit 20A-2 shows the production cost report with the whole units completed.

Step 2 is to compute the equivalent units of production for the three inputs (transferred in, direct materials, and conversion costs).

In the FIFO method, costs from the previous period are not merged with the costs from the current period. Therefore, the equivalent units of production calculation is for the current period.

We'll first take a look at what was transferred in. The Cutting Department receives units transferred in from the Assembly Department. The current-period equivalent units of production for transferred in units in beginning inventory is zero because these units were transferred in last period. Therefore, no additional costs for these units were transferred in this period. Remember, we are calculating equivalent units of production for the current period only. So, the 5,000 units in beginning inventory is multiplied by 0%.

However, the equivalent units of productions for the units transferred in during the current period will be 100%. They came into the Cutting Department this period. If they were not 100% complete with respect to the previous process, then they would not have been transferred in. Therefore, any costs associated with the work done in the Assembly Department stays with them at 100% for the current period.

Current-period equivalent units of production for direct materials is 100% for the completed units, both beginning work-in-process units and units started and completed this period, because they are 100% complete and direct materials (boxes) are added at the end of the process. However, the units that are in process do not yet have any direct materials added in this department because the box has not yet been added.

The calculation of equivalent units of production for conversion costs is the section where the difference between the weighted-average and FIFO methods is most obvious.

First, let's look at beginning work-in-process. The 5,000 units that were in process at the beginning of July were 60% complete. That means 60% of the work was done in June. We are concerned with the work completed in July. If 60% of the work was done in June and the units were completed in July, then 40% of the work was done in July (100% – 60% = 40%). Therefore, the equivalent units of production is calculated by multiplying the 5,000 units by 40% for a result of 2,000 equivalent units of production.

For the units that were started and completed, all of the work was done in July, so the equivalent units of production is calculated as 33,000 units multiplied by 100%.

For the units remaining in ending work-in-process inventory, only 30% of the conversion work has been done. Therefore, the equivalent units of production is calculated as 7,000 puzzle boards multiplied by 30%.

Exhibit 20A-3 illustrates the timing of the incurrence of conversion costs.

Exhibit 20A-4 shows the production cost report with the EUP calculations added.

Having completed the units section of the production cost report, we now move to the costs section. Exhibit 20A-5 shows the costs to account for in Puzzle Me's Cutting Department. The beginning balances and the additional costs incurred were given in the original data. The amount transferred in from the Assembly Department, $176,000, is the amount calculated as completed and transferred out in the costs accounted for section on July's production cost report for the Assembly Department.

Recall that step 3 is to calculate the cost per equivalent unit of production. The Cutting Department has three inputs and therefore must make three calculations for cost per equivalent unit of production. We start with the cost per equivalent unit for transferred in.

The cost per equivalent unit for transferred in is $4.40.

Next, we determine the cost per equivalent unit for direct materials.

The result is $0.50 per equivalent unit for direct materials.

Our last input is conversion costs.

The cost per equivalent unit for conversion costs is $0.40 per equivalent unit.

Exhibit 20A-6 shows the production cost report with the costs to account for section completed.

Our final step is to assign the $232,540 total costs to be accounted for by the Cutting Department. There are three inputs: transferred in, direct materials, and conversion costs.

To assign the costs, we start with the costs in beginning work-in-process inventory. To that, we add the costs that are assigned to each output. There are three groups of outputs to which costs need to be assigned:
• The beginning inventory that has now been completed and transferred to finished goods inventory.
• The units started and completed that have been also been transferred to finished goods inventory.
• The partially completed units remaining in the ending work-in-process inventory.

Assigning costs to the outputs is accomplished by multiplying the equivalent units of production by the cost per equivalent unit of production.

We repeat the calculation for direct materials.

And finally, we do the same calculation for conversion costs.

The completed product cost report is shown in Exhibit 20A-7. We have accomplished our goal of splitting the $232,540 total cost between the completed units and the in process units

Notice the cost per unit for the units that were in beginning work-in-process inventory is $5.20, which is calculated by dividing $26,000 by 5,000 units. The cost per unit for the units started and completed in July is $5.30, which is calculated by dividing $174,900 by 33,000 units. This indicates that costs varied from June to July.

Exhibit 20A-8 shows the Cutting Department's completed production cost report for July using the weighted-average method. This is a duplicate of Exhibit 20-13 from the chapter. Take a moment to study the reports, examining the similarities and differences.

In our example, there were no significant differences between the two methods, only $0.10 per unit. In a large company with many products, small fluctuations can have a significant impact.

If a business operates in an industry that experiences significant cost changes, it would be to its benefit to use the FIFO method. The weighted-average method merges costs from the prior period with the current period. This creates a smoothing effect. The FIFO method would create better month-to-month cost comparisons. This would be especially evident when there are substantial quantities of units in process at the end of the period. The more detailed cost information obtained from the FIFO method would allow managers to make better pricing and product mix decisions.

If a business operates in an industry that does not experience significant cost changes, the weighted-average method would be appropriate. This method is easier to use and the additional benefit derived from more detailed calculations would not outweigh the cost of obtaining them.

20-11 the Number of Units in Work in Process Inventory at the End of the Period

Source: https://www.slideshare.net/mrbagzis/accounting-chapter-20

20-11 the Number of Units in Work in Process Inventory at the End of the Period

You are reading a preview.

0 Response to "20-11 the Number of Units in Work in Process Inventory at the End of the Period"

Post a Comment

Iklan Atas Artikel

Iklan Tengah Artikel 1

Iklan Tengah Artikel 2

Iklan Bawah Artikel