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Chapter 16. Process Costing and Analysis. Conceptual Learning Objectives. C1: Explain process operations and the way they differ from job order operations C2: Define equivalent units and explain their use in process cost accounting
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Chapter 16 Process Costing and Analysis
Conceptual Learning Objectives C1: Explain process operations and the way they differ from job order operations C2: Define equivalent units and explain their use in process cost accounting C3: Explain the four steps in accounting for production activity in a period C4: Define a process cost summary and describe its purposes C5: Appendix 16A: Explain and illustrate the four steps in accounting for production activity using FIFO
Analytical Learning Objectives A1: Compare process cost accounting and job order cost accounting A2: Explain and illustrate a hybrid costing system
Procedural Learning Objectives P1:Record the flow of direct materials costs in process cost accounting P2: Record the flow of direct labor costs in process cost accounting P3: Record the flow of factory overhead costs in process cost accounting P4: Compute equivalent units produced in a period P5: Prepare a process cost summary P6: Record the transfer of completed goods to Finished Goods Inventory and Cost of Goods Sold
Process Manufacturing Operations C1 • Used for production of small, identical, low-cost items. • Mass produced in automated continuous production process. • Costs cannot be directly traced to each unit of product.
Job Order Systems Custom orders Heterogeneous products Low production volume High product flexibility Low to medium standardization Process Systems Repetitive operations Homogeneous products High production volume Low product flexibility High standardization Comparing Job Order and Process Production A1 Exh. 20-2
The Goods in Process account consists of individualjobsin ajob ordersystem. Job Order and Process Cost Accounting A1 DirectMaterials DirectLabor FinishedGoods Jobs FactoryOverhead Cost per unit for each job
Job Order and Process Cost Accounting A1 The Goods in Process account consists of specificprocessesin aprocess cost system. DirectMaterials DirectLabor FinishedGoods Processes FactoryOverhead Cost per unit processed
Sameobjective:to determine the cost of products Sameinventory accounts:raw materials, work in process, and finished goods Sameoverhead assignment method:predetermined rate times actual activity Job and Process Costing Similarities A1
The difference between job order and process costing lies in how the cost of goods transferred to finished goods is determined. Journal entries for both job order and process costing are the identical Job and Process Costing Similarities and Differences A1
Job Order and Process Costing Differences A1 Process costing The cost of goods transferred to finished goods equals the number of completed units times the cost per equivalent unit Job order costing The cost of goods transferred to finished goods is equal to the sum of all of the completed jobs for that period
Equivalent Units of Production C2 Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number ofequivalentunits produced in the period.
+ = Equivalent Units of Production C2 Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Twoone-half full pitchers are equivalent to one full pitcher.
Question C2 For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000
Question C2 For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units
Cost perequivalent unit Product costs for the periodEquivalent units for the period = Cost Per Equivalent Unit C2
Question C2 Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90
C2 Question Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit
Equivalent Units C2 40% ofMaterial Equivalent units may be different for material and labor and overhead at different stages of a process. Stage 1 25% ofLabor andOverhead At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only25% complete.
Equivalent Units C2 40% ofMaterial 60% ofMaterial + = 100% Stage 1 Stage 2 25% ofLabor andOverhead 25% ofLabor andOverhead = + 50%
Equivalent Units C2 40% ofMaterial 60% ofMaterial Stage 1 Stage 2 Stage 3 25% ofLabor andOverhead 25% ofLabor andOverhead 50% ofLabor andOverhead The process is now complete.
GenX makes a product called Profen Process Manufacturing Operations GenX Example C3
FinishedGoods DeliveredtoCustomers Process Manufacturing Operations GenX C3 Exh. 20-5 Direct Materials Indirect Goods in Process FactoryOverhead AllocatedOverhead Indirect Direct Labor
Let’s look at actual units processed and actual costs incurred for GenX. Accounting for GenX C3
Accounting for GenX C4 Exh. 21-5B
Accounting for GenX C5 GenX uses a weighted average cost flow system with the following four steps: • Determine physical flow of units. • Compute equivalent units of production. • Compute cost per equivalent unit. • Assign and reconcile costs.
Determine Physical Flow of Units C5 Exh. 20-13
These two amounts are reconciled Determine Physical Flow of Units C5 Exh. 20-13
Compute Equivalent Units of Production - Materials C5 Exh. 20-14
Compute Equivalent Units of Production – Direct Labor and Factory Overhead C5 Exh. 20-15
In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the: • A. 100,000 units transferred out. • B. 20,000 units remaining in ending inventory. Cost Reconciliation C5
Exh. 20-18 C5
Shows the flowof units and coststhrough work inprocess. Provides costinformation forfinancial statements. ProcessCostSummary Helps factorymanagers evaluatedepartment managerperformance. Helps managerscontrol theirdepartments. Process Cost Summary C4
We will illustrate the process cost summary for GenX in three sections: • Costs charged to production. • Equivalent unit of production and costs per equivalent unit. • Cost assignment and reconciliation Process Cost Summary C4
Hybrid Costing Systems A2 Hybrid costing systems contain featuresof both job order and process operations. Job OrderCosting Hybrid Costing ProcessCosting Materialcosts areaccounted for usinga job order system. Conversioncosts areaccounted for usinga process system.
Let’s look at the accounting journal entries for a process cost system. We’ll omit the numbers so that we can focus on accounts. Process CostingTypical Accounting Entries C4
