Chapter 3

2. Chapter 3 Process Costing

3. Learning Objective 3-1 Describe the key features of a process costing system.

4. Basic Concepts in Process Costing Process costing is used by companies that produce homogeneous products or servicesusing a series of standardized processes. Canned and bottled goods, frozen foods, paper products, and petroleum products are examples of homogeneous products that result from a standardized process. Although process costing is most often identified with manufacturing companies, it can also be used by service firms that perform routine processes, such as an insurance company that has a claims and reimbursement process or a financial institution that processes home refinance loans.

5. Flow of Costs in Process Costing

6. Process Costing Production Report The foundation of a process costing system is the production report. In the report we provide information about: The number of units produced. The manufacturing costs transferred into Work in Process Inventory. The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory. The number of units remaining in process at the end of the period. The cost of units remaining in process at the end of the period.

7. Learning Objective 3-2 Reconcile the number of physical units using the weighted-average method.

8. Preparing the Production Report(Weighted-Average Method) Step 1:Reconcile thenumber of physicalunits worked onduring the period. Step 2:Translate thephysical units intoequivalent units. Step 5:Prepare aProduction Report. Step 3:Calculatethe cost perequivalent unit. Step 4:Reconcilethe total cost ofwork in process.

9. Prepare the Production Report(Weighted-Average Method) Step 1: Reconcile the number of physical units. (Unit = 1 Barrel of Wine)

10. Prepare the Production Report(Weighted-Average Method) Step 1: Reconcile the number of physical units. (Unit = 1 Barrel of Wine)

11. Learning Objective 3-3 Calculate the number of equivalent units using the weighted-average method.

12. Process Costing Production Report Step 2: Convert Physical Units Into Equivalent Units The next step in preparing the production report is to calculate the number of equivalent units. An equivalent unit is a measure used to convert partially completed unitsinto the equivalent of a full unit. Consider the information below.

13. Process Costing Production Report Step 2: Convert Physical Units Into Equivalent Units

14. Process Costing Production Report Step 3: Calculate Cost Per Equivalent Unit

15. Process Costing Production Report Step 4: Reconcile the total cost of Work in Process

16. Process Costing Production Report Step 4: Reconcile the total cost of Work in Process Completed andtransferred to bottling = ($715,200 + $868,800 ) = $1,584,000 Ending Inventory = ($178,800 + $130,320) = $309,120

17. Process Costing Production Report Step 4: Reconcile the total cost of Work in Process

18. Learning Objective 3-4 Prepare a process costing production report using the weighted-average method.

19. Step 5: Prepare a Production Report Section 1 of the Production Report

20. Step 5: Prepare a Production Report Section 2 of the Production Report

21. Additional Factors in Processing Costing We have not discussed process costing when the FIFO method is applied. This material in covered in Supplement 3A to this chapter. The only difference between the two methods is how we treat beginning inventory. We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department.

22. Supplement 3A FIFO Method

23. Learning Objective 3-S1 Prepare a process costing production report using the first-in, first-out (FIFO) method.

24. Step 1: Reconcile the Number of Physical Units FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period.

25. Step 1: Reconcile the Physical Units Units Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400 OR Units Startedand Completed Units Completed BeginningUnits = ‒ = 1,600 – 200 = 1,400 OR Units Startedand Completed UnitsStarted EndingUnits = ‒ = 1,800 – 400 = 1,400

26. Step 2: Convert Physical Units into Equivalent Units Beginning inventory is 100% complete as to materials and 70% complete as to conversion. 400 units × 60% = 240 Complete as to materials 200 units × 30% = 60

27. Step 3: Calculate Cost per Equivalent Unit Cost per Equivalent Unit Current Period CostsEquivalent Units =

28. Step 4: Reconcile the Total Cost of Work in Process

29. Step 4: Reconcile the Total Cost of Work in Process Inventory Section 1 of the Production Report

30. Step 5: Prepare a Production Report Section 2 of the Production Report

31. Supplement 3B Journal Entries for Process Costing

32. Learning Objective 3-S2 Prepare journal entries to record the flow of manufacturing costs in a process cost system.

33. Journal Entries for Process Costing Purchase of Raw Materials Mondavi purchased $900,000 of materials on account. Issue of Raw Material into Production Mondavi adds $810,000 of grapes to production.

34. Journal Entries for Process Costing Recording Actual Labor Costs Mondavi incurred $108,000 actual labor costs:

35. Journal Entries for Process Costing Record Manufacturing Overhead Costs Assume Mondavi applies $450 in manufacturing overhead to each barrel started in the CFA process. During the most recent period.1,800 barrels were started, resulting in $810,000 in applied overhead (1,800 barrels X $450 = $810,000).

36. Journal Entries for Process Costing Record Actual Overhead Costs Mondavi incurred $800,000 in actual manufacturing overhead costs during the period

37. Summary of Recorded Transactions Raw Materials Work in Process (CFA) Beg. Bal. = 0 Beg. Bal. = 0 Iss. = 810,000 Direct Mat. 810,000 Pur. = 900,000 DL = 108,000 MOH 810,000 Direct Labor DL = 108,000 Work in Process Bottling Manufacturing Overhead Applied Actual 800.000 810,000

38. Journal Entries for Process Costing Transfer from One Process to the Next Assume 1,800 barrels of wine are through the CFA process. At a cost of $990 per barrel, accountants would transfer $1,782,000 (1,800 X $990) from the Work in Process Inventory (CFA) account to the Work in Process Inventory (Bottling) account.

39. Journal Entries for Process Costing Record Cost of Goods Completed When the product is through the last production process, the total manufacturing cost is transferred out of the last Work in Process Inventory account and into Finished Goods Inventory. In our winery example, each bottle of wine completed accumulates $3.75 in total manufacturing cost. When 460,000 bottles are completed, a total of $1,725,000 (460,000 X $3.75) is transferred to Finished Goods Inventory.

40. Journal Entries for Process Costing Record Cost of Goods Sold and Sales Revenue When the product is sold, its total manufacturing cost is reported as cost of goods sold. If Mondavi sells 400,000 bottles, the total manufacturing cost of $1,500,000 (400,000 X $3.75) would be transferred from Finished Goods Inventory to Cost of Goods Sold. If the average sales price was $8.00 per bottle, the company would report $3,200,000 (400,000 X $8.00) in sales revenue.

41. Weighted-Average Vs. FIFOProcess Costing

42. End of Chapter 3