mcgraw-hill/irwin © the mcgraw-hill companies, inc., 2005 20-1 process cost accounting chapter 20

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

20-1

Process Cost Accounting

Chapter

2020


20-2

Learning objectivesLearning objectives

1. Process Operation

2. Process Cost Accounting

3. Equivalent Units of Production

4. Process Costing Illustration

– GenX Company

5. Hybrid Costing System

6. Process Costing Typical Accounting Entries


20-3

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.

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.

1. Process Manufacturing Operations1. Process Manufacturing Operations


20-4

Job Order Systems

Custom orders

Heterogeneous products

Low production volume

High product flexibility

Low to medium standardization

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

Process Systems

Repetitive operations

Homogeneous products

High production volume

Low product flexibility

High standardization

1. Process Operation - Comparing Job Order & Process Production

1. Process Operation - Comparing Job Order & Process Production

Exh. 20-2


20-5

DirectMaterials

FinishedGoods

Cost per unit for

each job

DirectLabor

FactoryOverhead

Jobs

The Goods in Process account consists of individual jobs in a job order system.

2. Process Cost Accounting - Comparing Job Order & Process Production2. Process Cost Accounting - Comparing Job Order & Process Production


20-6

DirectMaterials

FinishedGoods

DirectLabor

FactoryOverhead

Processes

The Goods in Process account consists of

specific processes in a process cost system.

Cost per unit

processed

2. Process Cost Accounting - Comparing Job Order & Process Production2. Process Cost Accounting - Comparing Job Order & Process Production


20-7

Same objective: to determine the cost of products

Same inventory accounts: raw materials, work in process, and finished goods

Same overhead assignment method:predetermined rate times actual activity

2. Process Cost Accounting - Job and Process Costing Similarities2. Process Cost Accounting - Job and Process Costing Similarities


20-8

Costs are accumulated for a period of time by process or department.

Costs are accumulated for a period of time by process or department.

Unit cost is computed by dividing the accumulated costs by the number of

equivalent units produced in the period.

Unit cost is computed by dividing the accumulated costs by the number of

equivalent units produced in the period.

3. Equivalent Units of Production3. Equivalent Units of Production


20-9

Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Two one-half full pitchers are equivalent to one full pitcher.

+ =

Equivalent Units of ProductionEquivalent Units of Production


20-10

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



a. 10,000

b. 11,500

c. 1,500

d. 15,000

QuestionQuestion


20-11



a. 10,000

b. 11,500

c. 1,500

d. 15,000



a. 10,000

b. 11,500

c. 1,500

d. 15,000

10,000 units + (5,000 units × .30) = 11,500 equivalent units

Question

QuestionQuestion


20-12

Cost perequivalent

unit

= Product costs for the periodEquivalent units for the period

Cost Per Equivalent UnitCost Per Equivalent Unit


20-13

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


a. $1.84

b. $2.40

c. $2.76

d. $2.90

QuestionQuestion


20-14


a. $1.84

b. $2.40

c. $2.76

d. $2.90


a. $1.84

b. $2.40

c. $2.76

d. $2.90

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

Question

QuestionQuestion


20-15

Equivalent units may be different for material and labor

and overhead at different stages of a process.

Equivalent units may be different for material and labor

and overhead at different stages of a process.

At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only

25% complete.

At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only

25% complete.

Stage 1

40% ofMaterial

25% ofLabor andOverhead

Equivalent UnitsEquivalent Units


20-16

Stage 2


60% ofMaterial

Stage 1

40% ofMaterial


+

+

=

=

100%

50%



20-17

Stage 3


The process is now complete. The process is now complete.

Stage 2


60% ofMaterial

Stage 1

40% ofMaterial




20-18

GenX makes a product called Profen in two departments,

Grinding (G) and Mixing (M).

4. Process Manufacturing Operations - GenX Example4. Process Manufacturing Operations - GenX Example


20-19

Goods in ProcessGrinding

Labor

Materials

Ind

irec

tIn

dir

ect

FactoryOverhead

Direct

Direct

Deliveredto

Customers

Goods in ProcessMixing

FinishedGoodsApplied

Overhead

Process Manufacturing Operations GenXProcess Manufacturing Operations GenX Exh.

20-5


20-20

Let’s look at actual units

processed and actual costs incurred for

GenX.

Accounting for GenXAccounting for GenX


20-21

GenX Grinding Department Production Data for April

Beginning Inventory:

Units of product 30,000

Percentage of completion - direct materials 100%

Percentage of completion - direct labor 33 1/3%

Units started in April 90,000

Units transferred from grinding to mixing 100,000

Ending Inventory:



Percentage of completion - direct labor 25%

GenX Grinding Department Production Data for April

Beginning Inventory:



Percentage of completion - direct labor 33 1/3%

Units started in April 90,000

Units transferred from grinding to mixing 100,000

Ending Inventory:



Percentage of completion - direct labor 25%

Accounting for GenXAccounting for GenX Exh. 20-12


20-22

Exh. 21-5BAccounting for GenXAccounting for GenX Exh.

20-12


20-23

GenX uses a FIFO cost flow systemwith the following four steps:

Physical flow of units. Computing equivalent units of production. Computing cost per equivalent unit. Cost reconciliation.

GenX uses a FIFO cost flow systemwith the following four steps:

Physical flow of units. Computing equivalent units of production. Computing cost per equivalent unit. Cost reconciliation.

Accounting for GenXAccounting for GenX


20-24

GenX Grinding Department Physical Flow for April

Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000

Units accounted for as:Units transferred from grinding to mixing 100,000 Ending inventory 20,000 Total number of units 120,000

GenX Grinding Department Physical Flow for April

Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000

Units accounted for as:Units transferred from grinding to mixing 100,000 Ending inventory 20,000 Total number of units 120,000

Physical Flow of Units Physical Flow of Units Exh. 20-13


20-25

GenX Grinding DepartmentDirect Materials Equivalent Units of Production for April

Units of Percent Added EquivalentProduct This Period Units

Beginning goods in process 30,000 0% 0

Goods started and completed 70,000 100% 70,000

Ending goods in process 20,000 100% 20,000

Total units 120,000 90,000

Computing Equivalent Units of Production Computing Equivalent Units of Production Exh.

20-14


20-26






Total units 120,000 90,000

} 100,000

100,000 units transferredfrom grinding to mixing.


20-14


20-27






Total units 120,000 90,000

Since materials are added at the beginning of the process in Grinding, no

additional materials are necessary to complete the beginning inventory.


20-14


20-28

GenX Grinding Department Direct Labor and FactoryOverhead Equivalent Units of Production for April


Beginning goods in process 30,000 66 2/3% 20,000



Total units 120,000 95,000


20-15


20-29






Total units 120,000 95,000

} 100,000Transferred


20-15


20-30






Total units 120,000 95,000

Since labor and overhead were 331/3 percent complete in the beginning inventory, 662/3 percent of the work

must be completed in April.


20-15


20-31

GenX Grinding DepartmentEquivalent Units of Production for April

Direct Direct FactoryActivities during April 2002 Materials Labor OverheadBeginning goods in process 0 20,000 20,000

Goods started and completedin current period 70,000 70,000 70,000

Ending goods in process 20,000 5,000 5,000

Equivalent units of productionfor period 90,000 95,000 95,000


20-16


20-32

GenX Grinding DepartmentCost Per Equivalent Unit for April

Direct Direct FactoryActivities during April 2002 Materials Labor OverheadCosts assigned to grinding

in the current period 9,900$ 5,700$ 4,275$

Equivalent units of productionin the current period ÷ 90,000 ÷ 95,000 ÷ 95,000

Cost per equivalent unit forthe current period = 0.11$ = 0.06$ = 0.045$


20-17


20-33

In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the:

A. 100,000 units transferred from grinding to mixing.

B. 20,000 units remaining in ending inventory.

In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the:

A. 100,000 units transferred from grinding to mixing.

B. 20,000 units remaining in ending inventory.

Cost Reconciliation Cost Reconciliation


20-34

Exh. 20-18


20-35

Exh. 20-18


20-36

Exh. 20-18


20-37

Exh. 20-18


20-38

ProcessCost

Summary

Process Cost SummaryProcess Cost Summary

Helps managerscontrol theirdepartments.

Provides costinformation for

financial statements.

Shows the flowof units and coststhrough work in

process.

Helps factorymanagers evaluate

department managerperformance.


20-39

We will illustrate the process cost summary for the Grinding Department

of GenX in three sections: Costs charged to department. Equivalent unit processing costs. Assignment of costs to output of

department.

We will illustrate the process cost summary for the Grinding Department

of GenX in three sections: Costs charged to department. Equivalent unit processing costs. Assignment of costs to output of

department.

Process Cost SummaryProcess Cost Summary


20-40

Process Cost SummaryProcess Cost Summary Exh. 20-19


20-41

Exh. 20-19


20-42

Exh. 20-19


20-43

Exh. 20-19


20-44

Exh. 20-19


20-45

Current periodunit costs

Exh. 20-19


20-46

Total coststransferred to Mixing

$6,350 + $15,050 = $21,400

Exh. 20-19


20-47

Total coststransferred to Mixing

$6,350 + $15,050 = $21,400

$21,400 ÷ 100,000 units transferred = $0.214

Exh. 20-19


20-48

These unit costs differ because the$0.214 contains costs incurred

in March that differed in amount from costs incurred in April.

Exh. 20-19


20-49



20-50

Material, labor andoverhead are added

at the same rate in Mixing.



20-51

GenX Mixing DepartmentEquivalent Units of ProductionGenX Mixing DepartmentEquivalent Units of Production Exh.

20-22


20-52

75 percent added to completethe units in beginning inventory.

GenX Mixing DepartmentEquivalent Units of ProductionGenX Mixing DepartmentEquivalent Units of Production Exh.

20-22


20-53

Process Cost SummaryProcess Cost Summary Exh. 20-23


20-54GenX Company Mixing Department

Process Cost Summary for Mixing DepartmentFor the Month Ended April 30

EQUIVALENT UNIT PROCESSING COSTSEquivalent

Units of Units ofProduct Production

Units processedBeginning goods in process 16,000 12,000 Units started and completed 85,000 85,000 Ending goods in process 15,000 5,000 Total 116,000 102,000

Total direct materials for April 2,040$ Direct materials cost per equivalent unit

($2,040/102,000 units) 0.020$

Total direct labor cost for April 5,100$ Direct labor cost per equivalent unit

($5,100/102,000 units) 0.050$

Total factory overhead cost for April 1,020$ Factory overhead cost per equivalent unit

($1,020/102,000 units) 0.010$

Exh. 20-23


20-55Exh. 20-23


20-56

Total coststransferred to Finished Goods

$4,480 + $24,990 = $29,470

Exh. 20-23


20-57

Total coststransferred to Finished Goods

$4,480 + $24,990 = $29,470

Unit cost = $29,470 ÷ 101,000 units transferred = $0.2918 (rounded)

Exh. 20-23


20-58

Hybrid costing systems contain featuresof both job order and process operations.

Hybrid costing systems contain featuresof both job order and process operations.

Job OrderCosting

ProcessCosting

Hybrid Costing

Material costs areaccounted for usinga job order system.

Material costs areaccounted for usinga job order system.

Conversion costs areaccounted for usinga process system.

Conversion costs areaccounted for usinga process system.

5. Hybrid Costing Systems5. Hybrid Costing Systems


20-59

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.

6. Process CostingTypical Accounting Entries6. Process CostingTypical Accounting Entries


20-60

GENERAL JOURNAL Page 21

Date DescriptionPost. Ref. Debit Credit

Raw Materials Inventory XXXXX

Accounts Payable XXXXX

Acquired materials on credit for

use in the factory.

Process CostingTypical Accounting EntriesProcess CostingTypical Accounting Entries


20-61



Goods in Process Inv. - Grinding XXXXX

Goods in Process Inv. - Mixing XXXXX


To assign costs of direct material

used in the grinding and mixing

departments.



20-62



Factory Overhead XXXXX


To record indirect materials used

in April.



20-63



Factory Payroll XXXXX

Cash XXXXX

To record factory wages for April.



20-64






To assign costs of direct labor

used in the grinding and mixing

departments.



20-65





To record indirect labor as

overhead.



20-66




Prepaid Insurance XXXXX

Accrued Utilities Payable XXXXX

Cash XXXXX

Accumulated Depreciation XXXXX

To record factory overhead items

incurred during April.



20-67






Allocated factory overhead costs to

the grinding department and to the

mixing department on the basis of

direct labor cost.



20-68





To record the transfer of partially

completed goods from the grinding

department to the mixing

department.



20-69



Finished Goods Inventory XXXXX


To record the transfer of completed

goods out of production.



20-70



Cost of Goods Sold XXXXX

Finished Goods Inventory XXXXX

To record cost of goods sold

during April.



20-71

End of Chapter 20End of Chapter 20

mcgraw-hill/irwin © the mcgraw-hill companies, inc., 2005 20-1 process cost accounting chapter 20

Documents

process operation

process account

process cost system

process cost accounting

mcgrawhill companies

process costing similarities

production of small

cost of products