Copyright © 2007 Prentice-Hall. All rights reserved 1 Process Costing Chapter 20.

Copyright © 2007 Prentice-Hall. All rights reserved 1

Process CostingProcess CostingProcess CostingProcess Costing

Chapter 20


Objective 1Objective 1Objective 1Objective 1

Distinguish between process

costing and job order costing


Cost of GoodsSold

Manufacturing Wages

Materials Inventory

FinishedGoods

Manufacturing

Overhead

Job Order CostingJob Order CostingJob Order CostingJob Order Costing

Work in ProcessJob 90

Job 91Job 92


Cost of GoodsSold

Manufacturing Wages

Materials Inventory

FinishedGoods

Process CostingProcess CostingProcess CostingProcess Costing

Work in Process,Mixing Dept

Work in Process,Molding Dept

Work in Process,Packaging Dept

Manufacturing

Overhead


Tracking Costs Tracking Costs

• Account for the goods completed and transferred out

• Account for the cost of incomplete units that remain as a department’s ending work in process inventory


Key ConceptsKey ConceptsKey ConceptsKey Concepts

• Conversion costs– Costs incurred to convert raw materials into a

finished product– Direct labor plus manufacturing overhead

• Equivalent unit of production– Amount of work done during a period in terms

of fully complete units of output



Compute equivalent units


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Step 1: Summarize the flow of physical units

Units to account for Units accounted for

Blending Department

Beginning WIP

Units placed in production

+ Units completed

Units in Ending WIP

0 8,000 6,000 2,000+ +

+


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Start

Dyes added

100%complete

30%complete

2,000 units startedbut not finished

6,000 units completed and transferred out

Step 2: Compute output in terms of equivalent units


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• Equivalent units for direct materials:

8,000 units x 100% complete 8,000

• Equivalent units for conversion costs:

6,000 units x 100% complete 6,000

2,000 units x 30% complete 600

6,600

2,000 units are 30% complete as to conversion costs

Given the costs incurred, 600 units could have been fully completed



Use process costing to assign costs to units completed and to units in ending

work in process inventory


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Blending Department

Direct Materials

Conversion Costs

Beginning work in process $ 0 $ 0

Costs added during period

Divide by equivalent units

Cost per equivalent unit

Step 3: Compute the cost pre equivalent unit

$4,800

÷ 8,000

$0.45$0.60

$2,970

÷ 6,600


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Direct Materials

Conversion Costs

Total

Completed and transferred out (6,000)

Ending WIP (2,000)

Direct materials

Conversion costs

Total cost of ending WIP

Total costs accounted for

Step 4: Assign costs to units completed and to units in ending work in process inventory

6,000 x ($0.60 + 0.45) $6,300

2,000 x $0.60

600 x 0.45

$7,770

1,470

270

$1,200


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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Work in process inventoryblending department 7,770

Materials inventory 4,800

Manufacturing wages 800

Manufacturing overhead 2,170

Record the costs incurred in the blending department


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Work in process inventorypackaging department 6,300

Work in process inventory blending department 6,300

Record the transfer of the inventory completed in the blending department to the packaging department



Use the weighted-average method to assign costs to units completed and to

units in ending work in process inventory in a second department

When working with a second department, we have to consider the costs transferred in from the previous department as well as costs added in the second department


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Units to account for Units accounted for

Bottling Department

Beginning WIP

Units placed in production

+ Units completed

Units in Ending WIP

8,000 160,000 154,000 14,000+ +

+


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Beg. Bal. 8,000

Transferred in 160,000

End Bal. 14,000

Work in process, bottling department (units)

154,000


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Start 100%complete

40%complete

• Step 2: Compute output in terms of equivalent units

146,000 units started and completed

8,000 units in processand completed

70%complete

14,000 units started but not finished

If the work in process was 40% complete during the previous period, then 60% is completed this period and transferred to finished goods. The weighted average method combines the work in process at the beginning with the work done during the period to get the average cost of the units


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Equivalent units:

Transferred in costs

Completed and transferred out 154,000

Ending work in process 14,000

Total 168,000


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Equivalent units:

Direct materials

Completed and transferred out 154,000

Ending work in process -0-

Total 154,000

Remember, material costs are added at the end of the process


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Equivalent units for conversion costs:Completed and transferred out 154,000Ending WIP -14,000 x 70% 9,800 Total 163,800

Conversion costs are added evenly throughout the process


Step 3: Compute the cost per equivalent unit

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Costs to be Accounted For:

Trans in Dir. Mat.

Conv. Costs

Total

Beginning WIP $ 1,760 $ 0 $ 1,120 $ 2,880

Costs added 136,000 30,800 56,210 22,3010

Total costs $137,760 $30,800 $57,330

÷ equivalent unit 168,000 154,000 163,800

Cost/equiv unit $0.82 $0.20 $0.35

Total costs to account for $225,890


Step 3: Compute the cost per equivalent unit

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Mat.Conv. Costs

Total

Completed & transferred out

154,000 x ($.82+$.20+$.35) $210,980

Ending WIP

Transferred in 14,000x.82 11,480

Direct materials 0 x .20 0

Conversion cost

9,800x.35 3,430

Total WIP 14,910

Total costs accounted for $225,890


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Work in process inventorybottling department 223,010

Work in process inventory department 1 136,000

Materials inventory 30,800

Manufacturing wages 33,726

Manufacturing overhead 22,484

Record the costs incurred in the bottling department


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Finished goods inventory 210,980

Work in process inventory bottling department 210,980

Record the transfer of the inventory completed in the bottling department to finished goods


End of Chapter 20End of Chapter 20End of Chapter 20End of Chapter 20

Copyright © 2007 Prentice-Hall. All rights reserved 1 Process Costing Chapter 20.

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