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Chapter 3 PROCESS COSTING SYSTEM References: CMA Excel Learning System – Exam Review Part 1 and Part 2 (2019) Publisher: Wiley. Weygandt, J., Kimmel, P., and Kieso, D. (2015). Accounting Principles 12th edition, John Wiley and Sons, Singapore. Job Order vs. Process Costing Systems – Job order and process costing are different approaches to tracking costs through the accounting system. – Both approaches track material, labor, and overhead costs in and out of the work-in-process account. – Job order costing is able to use a customer focus as the means to track production costs to a specific job as the costs flow through the accounting system. – Process costing is used by organizations that can’t identify the customer before building the product or service.
Instead, these organizations build inventory now that is sold later when customers purchase completed products. • Determining the cost of producing a product or service basically involves summing up the costs going into the production process and dividing by the number of units that complete the process. • Since organizations using process costing can’t track production costs and production output to a particular job or customer, the costs and outputs are tracked to a period of time (a day, a week, a month, etc.). Job Order vs. Process Costing Systems Examples of companies that primarily use either a process cost system or a job order cost system: Uses of a Process Cost System • Use to apply costs to similar products that are mass-produced in a continuous fashion. • Examples: the production of cereal, paint, manufacturing steel, oil refining and soft drinks. Job Order vs. Process Costing Systems Job Order Cost System Process Cost System Costs assigned to each job. Costs tracked through a series of connected manufacturing processes or departments. Products have unique characteristics.
Products are uniform or relatively homogeneous and produced in a large volume. Job Order vs. Process Costing Systems Which of the following items is not a characteristic of a process cost system: a. Once production begins, it continues until the finished product emerges. b. The focus is on continually producing homogenous products. c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead. d. The products produced are heterogeneous in nature. Job Order vs. Process Costing Systems Cost Flow Job Order vs. Process Costing Systems SIMILARITIES DIFFERENCES Manufacturing cost elements. Number of work in process accounts used.
Accumulation of the costs of materials, labor, and overhead. Documents used to track costs. Flow of costs. Point at which costs are totaled. Unit cost computations. Job Order vs. Process Costing Systems Job Order vs. Process Costing Systems Indicate which of the following statements is not correct: a. Both a job order and a process cost system track the same three manufacturing cost elements – direct materials, direct labor, and manufacturing overhead. b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used. c. Manufacturing costs are accumulated the same way in a job order and in a process cost system. d. Manufacturing costs are assigned the same way in a job order and in a process cost system.
What About the Service Companies? • Service companies that provide individualized, non-routine services will probably benefit from using a job order cost system. • Example: consulting on a business acquisition and a major lawsuit. •Those that perform routine, repetitive services will probably be better off with a process cost system. • Example: perform oil changes and tax practices. Job Order vs. Process Costing Systems Indicate whether the following statements are true or false. False 1. A law firm is likely to use process costing for major lawsuits. True 2. A manufacturer of paintballs is likely to use process costing. False 3. Both job order and process costing determine product costs at the end of a period of time, rather than when a product is completed. False 4. Process costing does not keep track of manufacturing overhead.
Flow of Cost in a Process Costing System Tyler Company manufactures roller blade and skateboard wheels that it sells to manufactures and retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining Department shapes, hones, and drills the raw materials. The Assembly Department assembles and packages the parts. Accumulating Manufacturing Costs • However! • Accumulation of the cost of materials, labor, and overhead is the same as in job order costing. • Debit Raw Materials Inventory for purchases of raw materials. • Debit Factory Labor for factory labor incurred. • Debit Manufacturing Overhead for overhead cost incurred. Assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system.
Assigning Manufacturing Costs 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: Work in Process—Machining XXXXX Work in Process—Assembly XXXXX Raw Materials Inventory XXXXX Assigning Manufacturing Costs 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: Work in Process—Machining XXXXX Work in Process—Assembly XXXXX Factory Labor XXXXX Assigning Manufacturing Costs 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 is a primary driver. Journal entry to allocate overhead: Work in Process—Machining XXXXX Work in Process—Assembly XXXXX Manufacturing Overhead XXXXX Flow of Cost in a Process Costing System Monthly Entry to transfer goods to next department: Work in Process—Assembly XXXXX Work in Process—Machining XXXXX Entry to transfer completed goods to Finished Goods: Finished Goods Inventory XXXXX Work in Process—Assembly XXXXX Entry to record Cost of Goods sold at the time of sale: Cost of Goods Sold Finished Goods Inventory XXXXX XXXXX Flow of Cost in a Process Costing System In making the journal entry to assign raw materials costs: a. The debit is to Finished goods Inventory. b. The debit is often to two or more work in process accounts. c.
The credit is generally to two or more work in process accounts. d. The credit is to Finished Goods Inventory. Test Your Knowledge (1) Blue Diamond Company manufactures ZEBO through two processes: blending and bottling. In June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending $6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The Bottling Department transfers units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.
Answer Journalize the assignment of these costs to the two processes. To Record Materials Used: Work in Process—Blending 18,000 Work in Process—Bottling 4,000 Raw Materials Inventory 22,000 To Assign Factory Labor to Production: Work in Process—Blending 12,000 Work in Process—Bottling 5,000 Factory Labor 17,000 Answer Journalize the assignment of these costs to the two processes. To Assign Overhead to Production: Work in Process—Blending 6,000 Work in Process—Bottling 2,500 Manufacturing Overhead 8,500 Answer Journalize the transfer of units as appropriate. To Record Transfer of Units to the Bottling Department: Work in Process—Bottling 19,000 Work in Process—Blending 19,000 To Record Transfer of Units to Finished Goods: Finished Goods Inventory Work in Process—Bottling 11,000 11,000 Equivalent Unit .
•Process costing is used by organizations with production processes that make it impractical to identify the customer’s product or cost as a “job” during the process. • Without a potential customer to target costs moving through the accounting system, the process costing method uses a production period of time to group together costs and output until they are eventually transferred to the finished goods inventory. •The challenge in this approach is that there tends to be partially complete products or services at the beginning and/or end of a production period. • Dealing with this challenge requires the computation of equivalent units of production. Cost are then tracked on these equivalent units as they move through the production process. •This lesson worked through a series of computations to track costs of goods manufactured and transferred forward, and computations to measure the value of the ending balance in the working-process inventory account. Equivalent Unit • The challenge with using a period of time to track costs is the problem of partially complete units of work. • Organizations with process costing systems need to solve this problem before production costs can be divided by output in order to create cost-per-unit measures needed in accounting and management processes. • The challenge of partially complete units of work is handled by using “equivalent units” of production. Equivalent Unit Suppose you have a work-study job in the office of your college’s president, and she asks you to compute the cost of instruction per full-time equivalent student at your college. The college’s vice president for finance provides the following information: Costs: Total cost of instruction $9,000,000 Student population: Full-time students 900 Part-time students 1,000 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: Equivalent Unit 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 Computing the Equivalent Unit Using the Weighted-Average Method • The FIFO and weighted-average methods are two comment methods to compute the equivalent unit. (For more information regarding the FIFO method, please refer to https://www.efficientlearning.com/ ). •The Weighted-average method Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process. • Beginning work in process not part of computation of equivalent units. (Number of units in the Ending WIP x % of completion) Computing the Equivalent Unit Using the Weighted-Average Method The output of Kori Company’s Packaging Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending work in process which are 70% completed. Calculate the equivalent units of production. Completed units Work in process equivalent units (5,000 x 70%) 10,000 3,500 13,500 Refinements on the Weighted-Average Method Kellogg Company has produced Eggo® Waffles since 1970. Three departments produce these waffles: Mixing, Baking, and Freezing/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. Table below provides information related to the Mixing Department at the end of June. Refinements on the Weighted-Average Method Materials are added at the Conversion costs are sum of: Beginning work in process is not part of beginning of the process -> 100% completed labor costs overhead costs (Number of units in the Ending WIP x % of completion) the equivalent-units-ofproduction formula. Answer Test Your Knowledge The Mixing Department’s output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversions costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are: a. 22,600 b. 23,000 c. 24,000 d. 25,000 Test Your Knowledge The fabricating department Outdoor Essentials has the following production and cost data for the current month. Beginning Work in Process –0– Units Transferred Out 15,000 Ending Work in Process 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. Answer the equivalent units of production for (a) materials: Units transferred out 15,000 Ending work in process units 10,000 25,000 the equivalent units of production for (b) conversion costs: Units transferred out 15,000 Equivalent unit in ending WIP (10,000 x 30%) 3,000 18,000 Production Cost Report • It is a key document used to understand activities. • Prepared for each department. • It shows Production Quantity and Cost data. Four steps in preparation: Step 1: Compute physical unit flow Quantity Step 2: Compute equivalent units of production Cost Step 3: Compute unit production costs Step 4: Prepare a cost reconciliation schedule Production Cost Report Flow of costs to make an Eggo® Waffle and the related production cost reports for each department. Unit and cost data— Mixing Department Compute Equivalent Units of Production (Step 2) Mixing Department ▪ Department adds materials at beginning of process and ▪ Incurs conversion costs uniformly during the process.
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: 1.Materials 2.Conversion 3.Total Manufacturing Compute Unit Production Costs (Step 3) Compute total materials cost related to Eggo® Waffles: Work in process, June 1 Direct materials costs $ 50,000 Cost added to production during June Direct material cost Total material costs 400,000 $450,000 Compute Unit Production Costs (Step 3) Compute total conversion cost related to Eggo® Waffles: Work in process, June 1 Conversion costs $ 35,000 Costs added to production during June Conversion costs Total conversion costs 170,000 $205,000 Compute Unit Production Costs (Step 3) Compute total manufacturing costs per unit: Prepare a Cost Reconciliation Schedule (Step 4) Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows.
Costs to be accounted for Work in process, June 1 Started into production Total costs $ 85,000 570,000 $655,000 Cost to be accounted for = Cost accounted for Prepare a Cost Reconciliation Schedule (Step 4) Production Cost Report – Mixing Department Test Your Knowledge Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is: a. $45,000. b. $55,000. c. $75,000. d. $100,000. 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.
Test Your Knowledge In March, Rodayo Manufacturing had the following unit production costs: materials $6 and conversion costs $9. On March 1, it had zero work in process. During March, Rodayo transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process. Costs transferred out (12,000 x $15) Work in process, March 31 Materials (800 x $6) Conversion costs (200* x $9) Total costs *800 x 25% $180,000 $4,800 1,800 6,600 $186,600 P21-2A Rosenthal Company manufactures bowling balls through two processes: Molding and Packaging. In the Molding Department, the urethane, rubber, plastics, and other materials are molded into bowling balls.
In the Packaging Department, the balls are placed in carton and sent to the finished goods warehouse. All materials are entered at the beginning of each process. Labor and manufacturing overhead are incurred uniformly throughout each process Production and cost data for the Molding Department during June 2017 are presented below Production Data June -0- Beginning work in process units Units started into production 22,000 Ending work in process units 2.000 40% Percent complete ending inventory Cost Data Materials Labor Overhead Total $198.000 53,600 112.800 $364,400 Instructions (a) Prepare a schedule showing physical units of production, (b) Determine the equivalent units of production for materials and conversion costs. (c) Compute the unit costs of production (d) Determine the costs to be assigned to the units transferred out and in process for June te) Prepare a production cost report for the Molding Department for the month of June S0882611016301171.txt 202 ACC224 cour….docx S1061951817300514.txt S156601411630185….txt
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