weygandt ap 10e powerpoint ch21

7/28/2019 Weygandt AP 10e PowerPoint Ch21

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CHAPTER 21ProcessCosting


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Preview of CHAPTER 21


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To apply costs to s imi lar products that are massed p roduced in a con t inuous fashion.

(Cereal, Paint, and Soft Drinks)

SO 1 Unders t and wh o uses p rocess cos t sys t ems .

The Nature of Process Cost Systems

Uses o f Proc ess Cost Sys tems


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21-5 SO 1 Unders t and wh o uses p rocess cos t sys t ems .


Uses o f Proc ess Cost Sys tems


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Which of the following items is not a characteristic of a processcost system:

a. Once production begins, it continues until the finishedproduct emerges.

b. The focus is on continually producing homogenousproducts.

c. When the finished product emerges, all units have preciselythe same amount of materials, labor, and overhead.

d. The products produced are heterogeneous in nature.

Question




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Service companies that provide specific, nonroutineservices will probably benefit from using a job order cost

system.Those that perform routine, repetitive services will probablybe better off with a process cost system.

Process Cost ing for Service Com panies




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21-8 SO 2 Explain the sim ilari t ies and differences between jo b o rder c o s t and p ro ces s co s t s y s tem s .

Job Order Cost

Costs assigned to each job .

Products have uniquecharacteristics .

Process Cost

Costs tracked through aseries of connectedmanufacturing processesor departments .

Products are uniform or relatively homogeneous andproduced in a large volume .


Similar i t ies and Differences B etween J ob Order Cos t and Process Cost Sys tems


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Similar i t ies and Differences B etween J ob Order Cos t and Process Cost Sys tems Illustration 21-3

SO 2 Explain the sim ilari t ies and differences between jo b o rd er an d p ro ces s co s t s y s tem s .


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Similarities1. Both costing systems track three manufacturing cost

elements direct materials , direct labor , andmanufacturing overhead .

2. Both costing systems debit

Raw materials to Raw Materials Inventory;

Factory labor to Factory Labor; and

Manufacturing overhead costs to ManufacturingOverhead.


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Similarities3. Both systems accumulate all manufacturing costs by debits to

Raw Materials Inventory,

Factory Labor, andManufacturing Overhead.

Both systems then assign these costs to the same

accounts Work in Process, Finished Goods Inventory, andCost of Goods Sold.


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1. Number of WIP accounts used.

Job order uses one Work in Process account.

Process uses multiple work in process accounts.

2. Documents used to track costs.

Job order charges costs to individual jobs and

summarizes them in a job cost sheet.Process summarizes costs in a production cost reportfor each department.


Differences



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3. Point at which costs are totaled.

Job order totals costs when the job is completed.

Process totals costs at the end of a period of time.

4. Unit cost computations.

Job order, unit cost is the total cost per job divided by

units produced.Process, unit cost is total manufacturing costs for theperiod divided by units produced during the period.


Differences



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Illustration 21-4Job order versus processcost systems


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Indicate which of the following statements is not correct:

a. Both a job order and a process cost system track the same threemanufacturing 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 processaccounts 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 andin a process cost system.



Question


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Indicate whether the following statements aretrue or false .

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

2. A manufacturer of paintballs is likely to use processcosting.

3. Both job order and process costing determine totalcosts at the end of a period of time.

4. Process costing does not keep track of manufacturing overhead.

False

True

False

False


SO 2


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21-17 SO 3 Expla in the f low of cos ts in a proc ess cos t sys tem.


Process Cost F low Illustration: Tyler Company manufactures automatic canopeners that it sells to retail outlets. Manufacturing consists of twoprocesses: machining and assembly. The Machining Department

shapes, hones, and drills the raw materials. The AssemblyDepartment assembles and packages the parts.

Illustration 21-5


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Accumulation of materials, labor, and overhead costs isthe 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 costincurred.

SO 4 Make the journal ent r ies to ass ign m anufactur ing cos t s i n a p rocess cos t sys t em.


As s ign ing Manu fac tu r ing Cos t s


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Process cost system requires fewer material requisitionslips 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:


Assigning Manufacturing Costs

Material Costs


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Time tickets may be used in both systems.

All labor costs incurred within a production department are a

cost of processing .Journal entry to record materials used:


Factory Labor Costs



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Objective is to allocate overhead to departments on anobjective and equitable basis .

Use the activity that drives or causes the costs.

Machine time used is the primary driver in continuousmanufacturing operations.

Journal entry to record materials used:

SO 4

Manufacturing Overhead Costs



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Transfer to Next Department (Assembly)


Work in Process Assembly XXXXXWork in Process Machining XXXXX

Transfer to Finished GoodsFinished Goods Inventory XXXXX

Work in Process Assembly XXXXX

Transfer to Cost of Goods SoldCost of Goods Sold XXXXX

Finished Goods Inventory XXXXX

SO 4


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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 processaccounts.

c. The credit is generally to two or more work in

process accounts.d. The credit is to Finished Goods Inventory.



Question


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Ruth Company manufactures ZEBO throughtwo 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. Thecompany 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.




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Journalize the assignment of these costs tothe 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 Labor 17,000

SO 4



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Journalize the assignment of these costs tothe two processes.

To Assign Overhead to Production:



Manufacturing Overhead 8,500




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Journalize the transfer of units asappropriate.

To Record Transfer of Units to the Bottling Department:



To Record Transfer of Units to Finished Goods:

Finished Goods Inventory 11,000Work in Process Bottling 11,000




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Illustration: Suppose you have a work-study job in the officeof your colleges president, and she asks you to compute thecost of instruction per full-time equivalent student at your college. The colleges vice president for finance provides thefollowing information.

Costs:

Total cost of instruction $9,000,000

Student population:Full-time students 900

Part-time students 1,000

Illustration 21-6

SO 5 Comp ute equivalents uni t s .

Equivalent Units


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Total cost of instruction $9,000,000Number of full-time equivalent students / 1,500

$ 6,000

Illustration: Part-time students take 60% of the classes of afull-time student during the year. To compute the number of full-time equivalent students per year, you would make thefollowing computation.

Cost of instruction per full-time equivalent student =


Equivalent Units

Illustration 21-7


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Illustration 21-8Equivalent units of production formula

Equivalent Units


Weigh ted-A verage Metho d

Considers degree of completion (weighting) of units completedand transferred out and units in ending work in process.

Most widely used method.Beginning work in process not part of computation of equivalentunits.


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Illustration: The output of Kori Companys PackagingDepartment during the period consists of 10,000 unitscompleted and transferred out, and 5,000 units in ending workin process which are 70% completed.

Calculate the equivalent units of production.

Completed units 10,000Work in process equivalent units (5,000 x 70%) 3,500

13,500

Equivalent Units


Weigh ted-A verage Metho d


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Illustration: Kellogg Company has produced Eggo Wafflessince 1970. Three departments produce these waffles: Mixing,Baking, and Freezing/Packaging. The Mixing Departmentcombines dry ingredients, including flour, salt, and bakingpowder, with liquid ingredients, including eggs and vegetableoil, to make waffle batter.

Illustration 21-9 provides information related to the MixingDepartment at the end of June.

Equivalent Units


Refinem ents o n the Weigh ted-A verage Method


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Equivalent Units


Refinem ents o n the Weigh ted-A verage Method Illustration 21-9Information for MixingDepartment


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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

Refinements on Weighted-Average Method



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21-36 SO 5 Comp ute equivalents uni t s .


Illustration 21-11Refined equivalent units of production formula


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The Mixing Departments output during the period consists of 20,000 units completed and transferred out, and 5,000 units inending work in process 60% complete as to materials andconversions costs. Beginning inventory is 1,000 units, 40%complete as to materials and conversion costs. Theequivalent units of production are:

a. 22,600 b. 23,000

c. 24,000 d. 25,000

Question




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The fabricating department has thefollowing production and cost data for thecurrent month.

Beginning Units Ending

Work in Process Transferred Out Work in Process 0 15,000 10,000

Materials are entered at the beginning of the process. Theending work in process units are 30% complete as to conversioncosts. Compute the equivalent units of production for (a)materials and (b) conversion costs.

Equivalent Units



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

Units transferred out 15,000Ending work in process units 10,000

25,000

Equivalent Units



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

Units transferred out 15,000Equivalent unit in ending WIP (10,000 x 30%) 3,000

18,000

Equivalent Units



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Key document used to understand activities.

Prepared for each department and shows Production

Quantity and Cost data.Four steps in preparation:

Step 1: Compute physical unit flow

Step 2: Compute equivalent units of productionStep 3: Compute unit production costs

Step 4: Prepare a cost reconciliation schedule

SO 6 Expla in the four s teps necessary to prepare a prod uct ion c os t repor t .

Equivalent Units

Prod uc t ion Cos t Repo r t


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21-42 SO 6 Expla in the four s teps necessary to prepare a prod uct ion c os t repor t .

Equivalent Units

Prod uc t ion Cos t Repo r t Illustration 21-12Flow of costs in makingEggo Waffles


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Illustration 21-13

SO 6

Illustration: Assumed data for the Mixing Department atKellogg Company for the month of June.

Comprehensive Example of Process Costing


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Physical units - actual units to be accounted for during aperiod, regardless of work performed.

Total units to be accounted for - units started (or transferred) into production during the period + units inproduction at beginning of period.

Total units accounted for - units transferred out duringperiod + units in production at end of period.



Com pu te the Phy s ica l Uni t F low (Step 1)


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21-46 SO 6 Expla in the four s teps necessary to prepare a prod uct ion c os t repor t .

Illustration 21-14


Com pu te the Phy s ica l Uni t F low (Step 1)


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Mixing Department

Adds materials at beginning of the process.

Incurs conversion costs uniformly during the process.Illustration 21-15


Com pu te Equ ivalent Uni ts o f Prod uc t ion (Step 2)



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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 arecomputed:

1. Materials

2. Conversion

3. Total Manufacturing


Com pu te Uni t Prod uc t ion Co sts (S tep 3)



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Com pu te Uni t Prod uc t ion Co sts (S tep 3) 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 materials cost 400,000

Total materials costs $450,000

Illustration 21-17

Illustration 21-16



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Com pu te Uni t Prod uc t ion Co sts (S tep 3) 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 21-18

Illustration 21-19



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Com pu te Uni t Prod uc t ion Co sts (S tep 3)

Compute total manufacturing costs per unit:


Illustration 21-19

Illustration 21-20



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Prepare a Cos t Recon ci l ia t ion Sch edule (Step 4) Kellogg charged total costs of $655,000 to the MixingDepartment 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




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Prepare a Cos t Recon ci l ia t ion Sch edule (Step 4)


Illustration 21-22Cost reconciliation schedule Mixing Department


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Prepare th e Produc t ion

Cost Repo r t

SO 7


Illustration 21-23Production cost report


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Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work inprocess, 40% complete as to conversion costs and fully complete

as to materials cost, the total cost assignable to the ending workin process inventory is:

a. $45,000.

b. $55,000.

c. $75,000.

d. $100,000.

Question

SO 7 Prepare a prod uct ion co s t repor t .



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In March, K Christel Manufacturing had thefollowing unit production costs: materials $6 and

conversion costs $9. On March 1, it had zero work in process. DuringMarch, K Christel transferred out 12,000 units. As of March 31, 800units that were 25 percent complete as to conversion costs and 100

percent complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process.

Costs transferred out $180,000

Work in process, March 31

Materials (800 x $6) $4,800

Conversion costs (200 x $9) 1,800

Total costs $186,600




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Companies often use a combination of a process costand a job order cost system.

Called operations costing, this hybrid system is similar to process costing in its assumption that standardizedmethods are used to manufacture the product.

At the same time, the product may have somecustomized, individual features that require the use of a job order cost system.

Cos t ing Sys tem s

Final Com m ents




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Ju st- In-Tim e Pro cess ing A processing system that is dedicated to having the rightproducts or parts as they are needed.

Objective: To eliminate all manufacturing inventories to makefunds and space available for more productive purposes.

Elements of JIT: Dependable suppliers; Multi-skilledworkforce; Total quality control system.

Benefits of JIT: Reduced inventory; Enhanced product quality;Reduced rework and storage costs; Savings from improvedflow of goods.

SO 8 Explain just- in-t ime (JIT) pro cessin g.

Contemporary Developments


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Illustration 21-24Just-in-time processing

SO 8 Explain just- in-t ime (JIT) pro cessin g.



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Ac t iv i ty-Based Cost ing An overhead cost allocation system that focuses on activitiesperformed in producing a product.

Traditional Costing System: allocates overhead to productsusing predetermined unit-based output rate.

ABC System: allocates overhead to multiple activity cost poolsand assigns cost pools to products using cost drivers thatrepresent activities used.

Assumptions of ABC: All overhead costs for an activity musthave the same cost driver and should respond proportionally tochanges in the activity of the cost driver.


SO 9 Explain act ivi ty -based co st in g (ABC).


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Ac t iv i ty-Based Cost ing


SO 9 Explain act ivi ty -based co st in g (ABC).

Illustration 21-25

Activities and costdrivers in ABC


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21-62 SO10 App ly ac t iv i ty-based cos t ing to speci f ic comp any data .

Prod uc t ion and Cos t Data

Illustration: Atlas Company produces two products, The Boot and The Club.The Boot is a high-volume item totaling 25,000 units annually. The Club is a

low-volume item totaling only 5,000 units per year. Each product requiresone 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.

Predetermined overhead rate is $30 ($900,000 30,000) per directlabor hour.

Direct materials cost per unit is $40 for The Boot and $30 for The Club.

Direct labor cost is $12 per unit for each product.

APPENDIX 21ATraditional Costing versus Activity-Based Costing


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Unit Cos ts Under Tradi t ion al Cos t ing Illustration 21A-1Units costs traditional costing

Traditional Costing versus Activity-Based Costing


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Atlas Companys expected annual overhead costs of $900,000 relateto three activities.

Illustration 21A-2Computing overhead rates--ABC

Uni t Cos t s Under AB C


Determining Overhead Rates Under ABC


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In assigning costs, it is necessary to know the expected number of cost drivers for each product.

Illustration 21A-3Expected number of cost drivers

Uni t Cos t s Under AB C


Assigning Overhead Costs to Products Under ABC

T di i l Illustration 21A 2


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TraditionalCosting versusActivity-BasedCosting

SO10 App ly ac t iv i ty-based cos t ing to speci f ic comp any data .

Illustration 21A-3

Illustration 21A-2

Illustration 21A-4 Assignment of overhead

cost to products

T di i l C i A i i B d C i


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Com par ing Uni t Cos t s The comparison shows that unit costs under traditional costing havebeen significantly distorted.

Illustration 21A-5




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Com par ing Uni t Cos t s ABC involves the following steps:

1. Identify the major activities that pertain to the manufacture of specific products.

2. Accumulate manufacturing overhead costs by activities.

3. Identify the cost driver(s) that accurately measure(s) eachactivitys contribution to the finished product.

4. Assign manufacturing overhead costs for each activity toproducts, using the cost driver(s).




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Benef it s and Lim i tat ions of Act iv i ty-Based Cos t ing

Benefits

Enhanced control over overhead costs.Better management decisions.

Limitations

Expense of obtaining the cost data.

ABC does not eliminate arbitrary assignments.


C i h


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