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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 20

Process Cost Accounting

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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.

Process OperationsC 1

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Comparing Job Orderand Process Operations

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

A 1

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DirectMaterials

FinishedGoods

Cost for each job

DirectLabor

FactoryOverhead

Jobs

The goods in process account consists of individual jobs in a job order system.

Comparing Job Orderand Process Operations

A 1

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DirectMaterials

FinishedGoods

DirectLabor

FactoryOverhead

Processes

The goods in process account consists of

specific processes in a process cost system.

Costper unit

processed

Comparing Job Orderand Process Operations

A 1

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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

Comparing Job Orderand Process Operations

A 1

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Journal entries for both job order and

process costing are identical

The difference between job order and

process costing lies in how the cost of goods transferred to finished goods is determined.

Comparing Job Orderand Process Operations

A 1

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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.

Process costing

The cost of goods transferred to finished

goods equals the number of completed units times the cost per equivalent unit.

Comparing Job Orderand Process Operations

A 1

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GenX Company ─An Illustration

GenX makes a product called

Profen in a process cost

system.

A 1

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Labor

Materials

Indi

rect

Indi

rect

FactoryOverhead

Direct

Direct

Cost ofGoodsSold

Goods in Process

FinishedGoods

AppliedOverhead

Process Operationsand Costs – GenX

A 1

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Equivalent Units of Production

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.

C 2

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Equivalent Units of Production 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.

+ =So, 4,000 units that are 60 percent complete

would total 2,400 equivalent units.

C 2

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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?

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

C 2

Equivalent Units of Production

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Cost perequivalent

unit

= Product costs for the periodEquivalent units for the period

Cost Per Equivalent UnitC 2

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit

If PencilCo incurred $27,600 in production costs during the period, what is the cost

per equivalent unit for the period?

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Equivalent units may be different for material, labor, and overhead, given that costs may be added 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.

Stage 1

40% ofMaterial

25% ofLabor andOverhead

Equivalent UnitsC 2

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Stage 2

25% ofLabor andOverhead

60% ofMaterial

Stage 1

40% ofMaterial

25% ofLabor andOverhead

+

+

=

=

100%

50%

Equivalent UnitsC 2

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Stage 3

50% ofLabor andOverhead

The process is now complete.

Stage 2

25% ofLabor andOverhead

60% ofMaterial

Stage 1

40% ofMaterial

25% ofLabor andOverhead

Equivalent UnitsC 2

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Process Costing Illustration

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.

C 2

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GenX Production Data for April

Beginning Inventory: Units of product 30,000

Percentage of completion - direct materials 100%Percentage of completion - direct labor 65%

Units started in April 90,000

Units transferred from grinding to mixing 100,000

Ending Inventory:Units of product 20,000 Percentage of completion - direct materials 100%Percentage of completion - direct labor 25%

Process Operations – GenXC 2

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Process Operations – GenXC 2

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GenX 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

Determine PhysicalFlow of UnitsThese two amounts are reconciled.

C 2

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GenX Direct Materials Equivalent Units of Production for April

Units of Percentage EquivalentProduct of Completion Units

Equivalent units completed andtransferred out 100,000 100% 100,000

Ending goods in process 20,000 100% 20,000 Total units 120,000 120,000

Compute Equivalent Units of Production – Materials

C 2

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GenX Direct Labor and FactoryOverhead Equivalent Units of Production for April

Units of Percentage EquivalentProduct of Completion Units

Equivalent units completed andtransferred out 100,000 100% 100,000

Ending goods in process 20,000 25% 5,000 Total units 120,000 105,000

Compute Equivalent Units of Production – Direct Labor and Factory Overhead

C 2

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GenX Equivalent Units of Production for April

Direct Direct FactoryMaterials Labor Overhead

Equivalent units completed andtransferred out 100,000 100,000 100,000

Equivalent units for endinggoods in process 20,000 5,000 5,000

Equivalent units of productionfor period 120,000 105,000 105,000

Compute Equivalent Units of Production

C 2

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GenX Cost Per Equivalent Unit for April

Direct Direct FactoryMaterials Labor Overhead

Costs of beginning goodsin process inventory 3,300$ 600$ 720$

Costs incurred this period 9,900 5,700 6,840 Total costs 13,200$ 6,300$ 7,560$ ÷ Equivalent units of

production ÷ 120,000 ÷ 105,000 ÷ 105,000 = Cost per equivalent unit

of production = 0.11$ = 0.06$ = 0.072$

Compute the CostPer Equivalent Unit

C 2

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In the cost reconciliation, we will account for all costs incurred by

assigning unit costs to the:

A. 100,000 units transferred out. B. 20,000 units remaining in ending

inventory.

Assign and Reconcile CostsC 2

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C 2

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ProcessCost

Summary

Process Cost Summary

Helps managerscontrol theirdepartments.

Provides costinformation for

financial statements.

Shows the flowof units and coststhrough work in

process.

Helps factorymanagers evaluate

department managerperformance.

C 3

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We will illustrate the process cost summary for GenX in three sections:

Costs charged to production. Equivalent units of production and cost per

equivalent unit. Cost assignment and reconciliation

Process Cost SummaryC 3

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Process Cost SummaryC 3

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Process Cost SummaryC 3

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Process Cost SummaryC 3

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Trends in Process Operations

Process Process designdesign

Just-in-time Just-in-time productionproduction

AutomationAutomation ServicesServices

Customer Customer orientationorientation

C 3

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Global ViewAs part of a series of global environmental goals, Anheuser-Busch InBev set targets to reduce its water usage. To meet these goals,

the company followed recent trends in process operations, including extensive redesign of

production processes and the use of advanced technology to increase efficiency at wastewater

treatment plants. As a result, water usage decreased by almost 37 percent.

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

Job OrderCosting

ProcessCosting

Hybrid Costing

Material costs areaccounted for usinga job order system.

Conversion costs areaccounted for usinga process system.

Hybrid Costing SystemsA 2

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Process Costing Journal Entries

Let’s look at theaccounting journal entries

for the process costsystem at GenX.

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Process Costing Journal EntriesP 1

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Process Costing Journal EntriesP 2

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Process Costing Journal EntriesP 3

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Process Costing Journal EntriesP 4

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Appendix 20A: FIFO Methodof Process Costing

C 4

The same GenX data for April will also be used to illustrate the FIFO method.

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Determine PhysicalFlow of Units

C 4

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Compute Equivalent Units of Production

C 4

*Units completed this period 100,000

  Less units in beginning goods in process 30,000

  Units started and completed this period 70,000

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Compute Cost PerEquivalent Unit – FIFO

C 4

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Assign and Reconcile CostsC 4

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Assign and Reconcile CostsC 4

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End of Chapter 20