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Process Costing

Process Costing. Chapter 17. Illustrating Process Costing. Direct Materials, Direct Labor Indirect Manufacturing Costs. Department A. Department B. Finished Goods. Cost of Goods Sold. Five Steps in Process Costing. Step 1: Summarize the flow of physical units of output.

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Process Costing

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  1. Process Costing Chapter 17

  2. Illustrating Process Costing Direct Materials, Direct Labor Indirect Manufacturing Costs Department A Department B Finished Goods Cost of Goods Sold

  3. Five Steps in Process Costing Step 1: Summarize the flow of physical units of output. Step 2: Compute output in terms of equivalent units. Step 3: Compute equivalent unit costs. Step 4: Summarize total costs to account for. Step 5: Assign total costs to units completed and to units in ending work in process inventory.

  4. Physical Units (Step 1) Physical units Flow of Production Work in process, beginning 0 Started during current period 35,000 To account for 35,000 Completed and transferred out during current period 30,000 Work in process, ending (100%/20%) 5,000 Accounted for 35,000

  5. Compute Equivalent Units(Step 2) Equivalent units Direct Conversion Flow of Production Materials Costs Completed and transferred out 30,000 30,000 Work in process, ending 5,000 (100%) 1,000 (20%) Current period work 35,000 31,000

  6. Compute Equivalent Unit Costs(Step 3) Total production costs are $146,050. Direct Conversion MaterialsCosts $84,050 $62,000 Equivalent units 35,000 31,000 Cost per equivalent unit $2.4014 $2.00

  7. Summarize and Assign TotalCosts (Steps 4 and 5) Step 4: Total costs to account for: $146,050 Step 5: Assign total costs: Completed and transferred out 30,000 × $4.4014 $132,043 Work in process, ending (5,000 units) Direct materials 5,000 × $2.4014 12,007 Conversion costs 1,000 × $2.00 2,000 Total $146,050

  8. Journal Entries Example Assume that Omaha, Inc. has two processing departments – Assembly and Finishing. Omaha, Inc., purchases direct materials as needed. What is the journal entry for materials? Work in Process, Assembly 84,050 Accounts Payable Control 84,050 To record direct materials purchased and used

  9. Journal Entries Example What is the journal entry for conversion costs? Work in Process, Assembly 62,000 Various accounts 62,000 To record Assembly Department conversion costs What is the journal entry to transfer completed goods from Assembly to Finishing?

  10. Journal Entries Example Work in Process, Finishing 132,043 Work in Process, Assembly 132,043 To record cost of goods completed and transferred from Assembly to Finishing during the period

  11. Flow of Costs Example Accounts Payable 84,050 WIP Assembly 84,050 132,043 62,000 14,007 Various Accounts 62,000 WIP Finishing 132,043

  12. Physical Units (Step 1) Work in process, beginning: 100% material 60% conversion costs 1,000 Units started in process 35,000 36,000 Units transferred out: 31,000 Units in ending inventory: 100% material 20% conversion costs 5,000 36,000

  13. Compute Equivalent Units (Step 2) MaterialsConversion Completed and transferred 31,000 31,000 Ending inventory 5,000 1,000 Equivalent units 36,000 32,000 100% 20%

  14. Compute EquivalentUnit Costs (Step 3) MaterialsConversion Beginning inventory $ 2,350 $ 5,200 Current costs 84,050 62,000 Total $86,400 $67,200 Equivalent units 36,000 32,000 Cost per unit $2.40 $2.10

  15. Summarize and Assign TotalCosts (Steps 4 and 5) Work in process beginning inventory: Materials $ 2,350 Conversion 5,200 Total beginning inventory $ 7,550 Current costs in Assembly Department: Materials $ 84,050 Conversion 62,000 Costs to account for $153,600

  16. Summarize and Assign Total Costs (Steps 4 and 5) This step distributes the department’s costs to units transferred out: 31,000 units × $4.50 = $139,500 And to units in ending work in process inventory: $12,000 + $2,100 = $14,100

  17. Summarize and Assign Total Costs (Steps 4 and 5) Costs transferred out: 31,000 × ($2.40 + $2.10) $139,500 Costs in ending inventory: Materials 5,000 × $2.40 12,000 Conversion 1,000 × $2.10 2,100 Total costs accounted for: $153,600

  18. Journalizing: Weighted-Average What are the journal entries in the Assembly Department? Work in Process, Assembly 84,050 Accounts Payable Control 84,050 To record direct materials purchased and used Work in Process, Assembly 62,000 Various accounts 62,000 To record Assembly Department conversion costs

  19. Journalizing: Weighted-Average Work in Process, Finishing 139,500 Work in Process, Assembly 139,500 To record cost of goods completed and transferred from Assembly to Finishing during the period

  20. Key T-Account:Weighted-Average Work in Process Inventory, Assembly Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,500 Balance 14,100

  21. Compute EquivalentUnits (Steps 1 and 2) Quantity schedule (Step 1) is the same as the weighted-average method. MaterialsConversion Completed and transferred: From beginning inventory 0 400 Started and completed 30,000 30,000 Ending inventory 5,000 1,000 35,000 31,400

  22. Compute EquivalentUnits (Step 2) MaterialsConversion Completed and transferred: 31,000 31,000 Ending inventory 5,000 (100%) 1,000 (20%) 36,000 32,000 Beginning inventory 1,000 (100%) 600 (60%) Equivalent units 35,000 31,400

  23. Compute EquivalentUnit Costs (Step 3) MaterialsConversion Current costs $84,050 $62,000 Equivalent units 35,000 31,400 Cost per unit $2.40 $1.975

  24. Summarize and Assign TotalCosts (Steps 4 and 5) Work in process beginning inventory: $ 7,550 Current costs: Material 84,050 Conversion 62,000 Total $153,600 Same as using weighted-average

  25. Summarize and Assign TotalCosts (Steps 4 and 5) Costs transferred out: From beginning inventory: $7,550 Conversion costs added: 1,000 × 40% × $1.975 790 $ 8,340 From current production: 30,000 × $4.375 131,250 Total $139,590

  26. Summarize and Assign TotalCosts (Steps 4 and 5) Work in process ending inventory: Materials: 5,000 × $2.40 $12,000 Conversion: 5,000 × 20% × $1.975 1,975 Total $13,975

  27. Summarize and Assign TotalCosts (Steps 4 and 5) Costs transferred out $139,590 + Cost in ending inventory $ 13,975 = $153,565 ($35 rounding error) An alternative approach: Costs to account for $153,600 – Cost in ending inventory $ 13,975 Costs transferred out $139,625 =

  28. Key T-Account: FIFO Work in Process Inventory, Assembly Beg. Inv. 7,550 Transferred Materials 84,050 to Finishing Conversion 62,000 139,625 Balance 13,975

  29. Comparison of Weighted-Average and FIFO Methods Weighted AverageFIFODifference Costs of units completed and transferred out $139,500 $139,625 +$125 Work in process, ending 14,100 13,975 –$125 Total costs accounted for $153,600 $153,600 0

  30. Transferred-In CostsWeighted-Average Example Finishing Department beginning WIP inventory: 4,000 units (60% materials) (25% conversion) Ending work in process inventory: 2,000 units (100% materials) (40%) conversion) 31,000 units transferred-in from Assembly.

  31. Physical Units (Step 1) Beginning inventory 4,000 Units started in process 31,000 35,000 Units completed and transferred to finished goods 33,000 Ending inventory 2,000 35,000

  32. Compute EquivalentUnits (Step 2) Equivalent units for transferred-in costs: Transferred to finished goods 33,000 Ending inventory 2,000 35,000 Inventory is 100% complete for the work performed in the Assembly Department.

  33. Compute EquivalentUnits (Step 2) Equivalent units for directmaterials costs: Transferred to finished goods 33,000 Ending inventory (100%) 2,000 35,000

  34. Compute EquivalentUnits (Step 2) Equivalent units for conversion costs (ending inventory 2,000): Transferred to finished goods 33,000 Ending inventory (40%) 800 33,800

  35. Compute EquivalentUnit Costs (Step 3) Assume the following costs in the Finishing Department: Work in process beginning inventory from: Assembly Department $30,200 Direct materials 9,400 Conversion costs 8,000 Total cost in beginning inventory $47,600

  36. Compute EquivalentUnit Costs (Step 3) Current costs in Finishing Department are as follows: Costs received from the Assembly Department $139,500 Direct materials 9,780 Conversion 42,640 Total $191,920

  37. Compute EquivalentUnit Costs (Step 3) (Transferred-in costs $30,200 + Costs transferred in from the Assembly Department $139,500) ÷ 35,000 units $4.85 (Direct materials $9,400 + $9,780) ÷ 35,000 units $0.55 (Conversion costs $8,000 + $42,640) ÷ 33,800 units $1.50 Total unit cost $6.90

  38. Summarize and Assign TotalCosts (Steps 4 and 5) Total costs in beginning inventory $ 47,600 Current costs in Finishing Department 191,920 $239,520 Costs to account for: $47,600 + $ 191,920 = $239,520

  39. Summarize and Assign TotalCosts (Steps 4 and 5) Costs in work in process ending inventory: Transferred-in costs: 2,000 × $4.85 $ 9,700 Direct materials: 2,000 × $0.55 1,100 Conversion: 2,000 × 40% × $1.50 1,200 Total cost in ending inventory $12,000

  40. Summarize and Assign TotalCosts (Steps 4 and 5) Costs to account for: $239,520 Costs transferred to finished goods inventory: 33,000 × $6.90 $227,700 Costs in ending work in process inventory: $12,000 – $180 rounding error 11,820 Total $239,520

  41. T-Account Finishing Department Work in Process Inventory, Finishing Beg. Inv. 47,600 Transferred to Transferred-in 139,500 Finished Goods Materials 9,780227,700 Conversion 42,640 Balance 11,820

  42. Transferred-In CostsFIFO Method The physical units (Step 1) is the same as in weighted-average. Beginning inventory 4,000 Units started in process 31,000 35,000 Units transferred to finished goods 33,000 Ending inventory 2,000 35,000

  43. Compute Equivalent UnitsFIFO (Step 2) Equivalent units for transferred-in costs: From beginning work in process 0 Started and completed 29,000 Work in process, ending (100%) 2,000 Total equivalent units 31,000

  44. Compute Equivalent UnitsFIFO (Step 2) Equivalent units for transferred-in costs: Transferred to finished goods 33,000 Ending work in process inventory 2,000 Total 35,000 Beg. work in process inventory – 4,000 Equivalent units 31,000 Inventories are 100% complete for the work performed in the Assembly Department.

  45. Compute Equivalent UnitsFIFO (Step 2) Equivalent units for materials costs: From beginning work in process 1,600 Started and completed 29,000 Work in process, ending (100%) 2,000 Total equivalent units 32,600

  46. Compute Equivalent UnitsFIFO (Step 2) Equivalent units for material costs (beginning inventory 4,000): Transferred to finished goods 33,000 Ending inventory (100%) 2,000 Total 35,000 Beginning inventory (60%) –2,400 Equivalent units 32,600

  47. Compute Equivalent UnitsFIFO (Step 2) Equivalent units for conversion costs: From beginning work in process 3,000 Started and completed 29,000 Work in process, ending (40%) 800 Total equivalent units 32,800

  48. Compute Equivalent UnitsFIFO (Step 2) Equivalent units for conversion costs (beginning inventory 4,000, ending inventory 2,000): Transferred to finished goods 33,000 Ending inventory (40%) 800 Total 33,800 Beginning inventory (25%) –1,000 Equivalent units 32,800

  49. Compute Equivalent Unit CostsFIFO (Step 3) Cost per equivalent unit: Transferred-in: $139,590 ÷ 31,000 $4.50 Direct materials: $9,780 ÷ 32,600 0.30 Conversion: $42,640 ÷ 32,800 1.30 Total unit cost $6.10

  50. Summarize and Assign TotalCosts FIFO (Steps 4 and 5) Current costs in Finishing Department: $192,010 Work in process beginning inventory: 47,600 Costs to account for:(same as weighted-average) $239,610

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