21-1 prepared by coby harmon university of california, santa barbara westmont college

21-1

Prepared byCoby Harmon

University of California, Santa BarbaraWestmont College

21-2

Learning ObjectivesAfter studying this chapter, you should be able to:

[1] Understand who uses process cost systems.

[2] Explain the similarities and differences between job order cost and process cost systems.

[3] Explain the flow of costs in a process cost system.

[4] Make the journal entries to assign manufacturing costs in a process cost system.

[5] Compute equivalent units.

[6] Explain the four steps necessary to prepare a production cost report.

[7] Prepare a production cost report.

[8] Explain just-in-time (JIT) processing.

[9] Explain activity-based costing (ABC).

21 Process Costing

21-3

Preview of Chapter 21

Accounting PrinciplesEleventh Edition

Weygandt Kimmel Kieso

21-4

To apply costs to similar products that are mass-

produced in a continuous fashion

Examples include the production of Cereal, Paint,

Manufacturing Steel, Oil Refining and Soft Drinks

Illustration 21-1

LO 1 Understand who uses process cost systems.

Uses of Process Cost Systems

The Nature of Process Cost Systems

21-5

Illustration 21-2


Process and Job Cost Comparison


21-6

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.

Question



21-7

Service companies that

provide specific, nonroutine services will probably benefit from

using a job order cost system.

perform routine, repetitive services will probably be better off

with a process cost system.


Process Costing for Service Companies


21-8LO 2 Explain the similarities and differences between

job order cost and process cost systems.

Similarities and Differences Between Job Order Cost and Process Cost Systems

Job Order Cost

Costs assigned to each job.

Products have unique characteristics.

Process Cost

Costs tracked through a series of connected manufacturing processes or departments.

Products are uniform or relatively homogeneous and produced in a large volume.


21-9

Illustration 21-3

LO 2 Explain the similarities and differences between job order cost and process cost systems.

Illustration 21-3Job order cost and process cost flow




Similarities

1. Manufacturing cost elements.

2. Accumulation of the costs of materials, labor, and overhead.

3. Flow of costs.

1. Number of work in process accounts used.

2. Documents used to track costs.

3. Point at which costs are totaled.

4. Unit cost computations.

Differences




Illustration 21-4Job order versus process cost systems


21-12

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.

Indicate which of the following statements is not correct:

LO 2

Question


21-13

Indicate whether the following statements are true or false.

1. A law firm is likely to use process costing for major

lawsuits.

2. A manufacturer of paintballs is likely to use process

costing.

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.

4. Process costing does not keep track of manufacturing

overhead.

False

True

False

LO 2

False

Advance slide in presentation mode to reveal answers.

DO IT!>

21-14

Process Cost Flow

LO 3 Explain the flow of costs in a process cost system.

Illustration 21-5

Tyler Company manufactures roller blade and skateboard wheels that

it sells to manufacturers 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.


21-15

Accumulation of materials, labor, and overhead costs 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

LO 4 Make the journal entries to assign manufacturing costs in a process cost system.

Assigning Manufacturing Costs—Journal Entries


21-16

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:

Material Costs



21-17

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:


Factory Labor Costs


21-18

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.

Primary driver is machine time used.

Journal entry to allocate overhead:

Manufacturing Overhead Costs



21-19

Transfer to next department:

LO 4

Transfer to Finished Goods:

Transfer to record Cost of Goods sold :

Transfers


21-20

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.

Question



21-21

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.


DO IT!>

21-22

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:



Factory Labor17,000


DO IT!>

21-23

To Assign Overhead to Production:



Manufacturing Overhead 8,500


Journalize the assignment of these costs to the two processes.

DO IT!>

21-24

Journalize the transfer of units as appropriate.

To Record Transfer of Units to the Bottling Department:



To Record Transfer of Units to Finished Goods:

Finished Goods Inventory 11,000



DO IT!>

21-25 LO 5 Compute equivalents units.

Illustration: 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

Illustration 21-6

Equivalent Units

21-26

Total cost of instruction $9,000,000

Number of full-time equivalent students ÷ 1,500

$ 6,000

LO 5 Compute equivalents units.

Illustration 21-7

Illustration: 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.

Cost of instruction per full-time equivalent student =

Equivalent Units

21-27

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.Illustration 21-8


Weighted Average Method

Equivalent Units

21-28

Illustration: 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 10,000

Work in process equivalent units (5,000 x 70%) + 3,500

13,500

Weighted Average Method

Equivalent Units

21-29

Illustration: 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.

Illustration 21-9 [on next slide] provides information related to the

Mixing Department at the end of June.


Refinements on the Weighted-Average Method

Equivalent Units

21-30

Illustration: Information related to the Mixing Department at the

end of June.Illustration 21-9


Refinements on the Weighted-Average Method

Equivalent Units

21-31

Conversion costs are labor costs plus overhead costs.

Beginning work in process is not part of the equivalent-units-

of-production formula.


Illustration 21-10

Equivalent Units

21-32

Illustration 21-11 Refined Equivalent Units of Production Formula


Equivalent Units

21-33

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


Equivalent Units

Question

21-35

The fabricating department has the following production and

cost data for the current month.


Beginning Units EndingWork in Process Transferred Out Work in Process

–0– 15,000 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.

DO IT!>


Compute the equivalent units of production for (a) materials and (b) conversion costs.

Units transferred out 15,000

Ending work in process units + 10,000

25,000




–0– 15,000 10,000

DO IT!>


Compute the equivalent units of production for (a) materials and (b) conversion costs.

Units transferred out 15,000

Equivalent unit in ending WIP (10,000 x 30%) + 3,000

18,000




–0– 15,000 10,000

DO IT!>

21-38

A production cost report is the

Key document used to understand activities.

Shows Production Quantity and Cost data for each department.

Four steps in preparation:

Step 1: Compute physical unit flow

Step 2: Compute equivalent units of production

Step 3: Compute unit production costs

Step 4: Prepare a cost reconciliation schedule

LO 6 Explain the four steps necessary to prepare a production cost report.

Production Cost Report

21-39

Illustration 21-12Flow of costs in makingEggo® Waffles



21-40

Illustration 21-13 Unit and cost data—Mixing Department



21-41

Physical units - actual units to be accounted for during

a period, irrespective of any work performed.

Total units to be accounted for - units started (or

transferred) into production during the period + units in

production at beginning of period.

Total units accounted for - units transferred out

during period + units in process at end of period.

Compute the Physical Unit Flow (Step 1)



21-42 LO 6 Explain the four steps necessary to prepare a production cost report.

Illustration 21-14

Compute the Physical Unit Flow (Step 1)


21-43

Mixing Department

Department adds materials at beginning of process and

Incurs conversion costs uniformly during the process.

Illustration 21-15


Compute Equivalent Units of Production (Step 2)


21-44

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)


21-45 LO 6

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 400,000

Total material costs $450,000

Illustration 21-17

Illustration 21-16



21-46 LO 6

Compute total conversion costs related to Eggo® Waffles:

Work in process, June 1

Conversion costs $ 35,000

Costs added to production during June

Conversion costs 170,000

Total conversion costs $205,000

Illustration 21-19


Illustration 21-18


21-47

Compute total manufacturing costs per unit: Illustration 21-20

Compute Unit Production Costs (Step 3)Illustration 21-19



21-48

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 $ 85,000

Started into production 570,000

Total costs $655,000

Illustration 21-21


Prepare a Cost Reconciliation Schedule (Step 4)


21-49

Illustration 21-22


Prepare a Cost Reconciliation Schedule (Step 4)


21-50

Prepare the Production Cost Report

LO 7

Illustration 21-23

21-51

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.

LO 7 Prepare a production cost report.


Question

21-52

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) $180,000

Work in process, March 31

Materials (800 x $6) $4,800

Conversion costs (200 x $9) 1,800

Total costs $186,600


DO IT!>

21-53

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.

Costing Systems – Final Comments



21-54

Just-In-Time Processing

A processing system that is dedicated to having the right

products or parts as they are needed.

Objective: To eliminate all manufacturing inventories to make

funds and space available for more productive purposes.

Elements of JIT: Dependable suppliers; Multi-skilled workforce;

Total quality control system.

Benefits of JIT: Reduced inventory; Enhanced product quality;

Reduced rework and storage costs; Savings from improved flow

of goods.

LO 8 Explain just-in-time (JIT) processing.

Contemporary Developments

21-55 LO 8 Explain just-in-time (JIT) processing.


Illustration 21-24Just-in-time processing

21-56

Activity-Based Costing

An overhead cost allocation system that focuses on activities

performed in producing a product.

ABC System: More that one basis of allocating activity costs to

products is needed.

Assumptions of ABC: All overhead costs related to the activity

► must be driven by the cost driver used to assign costs to

products.

► should respond proportionally to changes in the activity level

of the cost driver.


LO 9 Explain activity-based costing (ABC).

21-57

Activity-Based Costing


LO 9 Explain activity-based costing (ABC).

Illustration 21-25Activities and cost drivers in ABC

21-59 LO 10 Apply activity-based costing to specific company data.

Production and Cost Data

Illustration: Atlas Company produces two abdominal-training

products, the Ab Bench and the Ab Coaster. The Ab Bench is a high-

volume item totaling 25,000 units annually. The Ab Coaster is a low-

volume item totaling only 5,000 units per year. Each product requires

one hour of direct labor for completion. Therefore, total annual direct

labor hours are 30,000 (25,000 + 5,000). Expected annual

manufacturing overhead costs are $900,000. The predetermined

overhead rate is $30 ($900,000 ÷ 30,000) per direct labor hour. The

direct materials cost per unit is $40 for the Ab Bench and $30 for the

Ab Coaster. The direct labor cost is $12 per unit for each product.

APPENDIX 21A Traditional Costing versus ABC


Unit Costs Under Traditional Costing


Illustration 21A-1


Unit Costs Under ABC


Illustration 21A-2

Determining Overhead Rates Under ABC

Atlas Company’s expected annual overhead costs of $900,000 relate

to three activities—machine setups, machining, and inspections.


Unit Costs Under ABC


Illustration 21A-3

Assigning Overhead Cost to Products Under ABC

Because of its low volume, the Ab Coaster requires more setups

and inspections than the Ab Bench. The expected number of cost

drivers for each product is as follows.

21-63

Assignment of overhead costs to products follows.



Illustration 21A-3

Illustration 21A-4

21-64


The data shows that under ABC, overhead costs are shifted from

the high-volume product (Ab Bench) to the low-volume product

(Ab Coaster). This shift results in more accurate costing for two

reasons.

1.Low-volume products often require more special handling, such as

more machine setups and inspections, than high-volume products.

2.Assigning overhead using ABC will usually increase the cost per

unit for low-volume products as compared to a traditional overhead

allocation.


LO 10 Apply activity-based costing to specific company data.


Comparing Unit Costs


Illustration 21A-5

The comparison shows that unit costs under traditional costing have

been significantly distorted.


Benefits of ABC


The primary benefit of ABC is more accurate product costing.

Here’s why:

1.ABC leads to more cost pools being used to assign overhead costs

to products.

2.ABC leads to enhanced control over overhead costs.

3.ABC leads to better management decisions.


Limitations of ABC


ABC systems often provide better product cost data than

traditional volume-based systems, there are limitations:

1.ABC can be expensive to use.

2.Some arbitrary allocations continue.

21-68

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21-1 prepared by coby harmon university of california, santa barbara westmont college

Documents

process cost costs

job cost comparison

job order cost system

process accounts

production cost report

manufacturing cost elements

process costing slide

unit cost computations