chapter 18 process costing. learning objectives 1.describe the flow of costs through a process...

Chapter 18Process Costing

Learning Objectives

1. Describe the flow of costs through a process costing system

2. Calculate equivalent units of production for direct materials and conversion costs

3. Prepare a production cost report using the weighted-average method

18-2© 2016 Pearson Education, Inc.

Learning Objectives

4. Prepare journal entries for a process costing system

5. Use a production cost report to make decisions

6. Prepare a production cost report using the first-in, first-out method (Appendix 18A)


Learning Objective 1

Describe the flow of costs through a process costing system


How Do Costs Flow Through a Process Costing System?

• Job order costing system– Allocates costs by job– Used by companies that manufacture a unique

product or provide specialized services

• Process costing system– Allocates costs by process– Used by companies manufacturing identical

units– A process is one of the steps in manufacturing

production


Job Order Costing Versus Process Costing


Flow of Costs Through a Process Costing System

• Companies use process costing to determine the per unit cost in order to:– Control costs– Set selling prices– Calculate account balances for

• Work-in-Process Inventory• Finished Goods Inventory• Cost of Goods Sold


Flow of Costs Through a Process Costing System



Calculate equivalent units of production for direct materials and conversion costs


What Are Equivalent Units of Production, and How Are They

Calculated?


Equivalent Units of Production

• Equivalent units of production (EUP)– Measures the amount of materials added to or

work done on partially completed units during a period

– Expressed in terms of fully complete units of output


Conversion Costs

• Direct labor is a small part of manufacturing costs for highly automated manufacturers.

• To simplify accounting, direct labor is combined with manufacturing overhead and called conversion costs.

• Conversions costs are the costs to convert raw materials into finished goods.



Prepare a production cost report using the weighted-average method


How Is a Production Cost Report Prepared?


Production Cost Report—First Process—Assembly Department

A production cost report show the calculations for the physical flows and the cost flows of the products.

1.Summarize the flow of physical units.2.Compute output in terms of equivalent units of production.3.Compute the cost per equivalent unit of production.4.Assign costs to units completed and units in process.


• Two unique terms are used on the production cost report:

• To account for includes the amount in process at the beginning of the period plus the amount started or added during the period.

• Accounted for shows what happened to the amounts to account for. They are either still in process or completed and transferred out.



• The costs of materials from the Assembly Department are transferred into the Cutting Department.– The transferred costs are called transferred in

costs.

• The weighted-average method combines the average cost of equivalent units of production by combining beginning inventory costs with current period costs.

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Production Cost Report—Second Process—Cutting Department

© 2016 Pearson Education, Inc.


Prepare journal entries for a process costing system


What Journal Entries Are Required in a Process Costing System?

• Costs flow through the process costing system in four steps:– Accumulate– Assign– Allocate– Adjust

• Costs flow from one Work-in-Process Inventory account to the next and eventually to Finished Goods Inventory and Cost of Goods Sold.


Transaction 1—Raw Materials Purchased

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During July, the company purchased materials on account for $175,000.


Transaction 2—Raw Materials Used in Production

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During July, direct materials were assigned to the two production departments: $140,000 to the Assembly Department and $19,000 to the Cutting Department; $2,000 in indirect materials were accumulated in Manufacturing Overhead.


Transaction 3—Labor Costs Incurred

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During the month, Puzzle Me incurred $20,000 in direct labor costs in the Assembly Department; $3,840 in direct labor costs in the Cutting Department; and $1,500 in indirect labor costs accumulated in Manufacturing Overhead.


Transaction 4—Additional Manufacturing Costs Incurred

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In addition to the indirect materials and indirect labor costs, Puzzle Me incurred $35,000 in machinery depreciation and $20,000 in indirect costs that were paid in cash, which included rent and utilities.


Transaction 5—Allocation ofManufacturing Overhead

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Puzzle Me used a predetermined overhead allocation rate to allocate indirect costs to the departments: $48,000 to the Assembly Department and $11,000 to the Cutting Department.


Transaction 6—Transfer from the Assembly Department to the Cutting

Department

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At the end of July, when the production cost report for the Assembly Department was prepared, Puzzle Me assigned $176,000 to the 40,000 units transferred from the Assembly Department to the Cutting Department.


Transaction 7—Transfer from Cutting Department to Finished Goods Inventory

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At the end of July, when the production cost report for the Cutting Department was prepared, Puzzle Me assigned $201,400 to the 38,000 units transferred from the Cutting Department to Finished Goods Inventory. This is the cost of goods manufactured.


Transaction 8—Puzzles SoldDuring July, Puzzle Me sold 35,000 puzzles. We have already determined from the production cost report for the Cutting Department that the cost of goods manufactured is $5.30 per puzzle. Therefore, the cost of 35,000 puzzles is $185,500 (35,000 puzzles × $5.30). The puzzles were sold on account for $8.00 each, which is a total of $280,000 (35,000 puzzles × $8.00).

© 2016 Pearson Education, Inc. 18-36

Transaction 9—Adjust Manufacturing Overhead

The actual manufacturing overhead costs incurred were $58,500, which includes the indirect materials in Transaction 2, the indirect labor in Transaction 3, and the accumulated depreciation and other indirect costs in Transaction 4. The amount of manufacturing overhead allocated to the two departments was $59,000, as shown in Transaction 5.

© 2016 Pearson Education, Inc. 18-37


Use a production cost report to make decisions


How Can the Production Cost Report Be Used to Make Decisions?

• Controlling costs• Evaluating performance• Pricing products• Identifying the most profitable products• Preparing the financial statements



Prepare a production cost report using the first-in, first-out method (Appendix 18A)


How Is a Production Cost Report Prepared Using the FIFO Method?

• Equivalent unit of production cost methods:– Weighted-average method– First-in, first-out

• The first-in, first-out method determines the cost of equivalent units by accounting for beginning inventory separately.



How Is a Production Cost Report Prepared Using the Weighted-Average Method?

chapter 18 process costing. learning objectives 1.describe the flow of costs through a process...

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