1. Copyright © 2008 Prentice Hall All rights reserved 4-1 Process Costing Chapter 4

2. Copyright © 2008 Prentice Hall All rights reserved 4-2 Objective 1 Distinguish between the flow of costs in process costing and job costing

3. Copyright © 2008 Prentice Hall All rights reserved 4-3 Cost of Goods Sold Manufacturing Wages Materials Inventory Finished Goods Manufacturing Overhead Job Order Costing Work in Process Job 90 Job 91 Job 92

4. Copyright © 2008 Prentice Hall All rights reserved 4-4 Cost of Goods Sold Manufacturing Wages Materials Inventory Finished Goods Process Costing Work in Process, Mixing Dept Work in Process, Molding Dept Work in Process, Packaging Dept Manufacturing Overhead

5. Copyright © 2008 Prentice Hall All rights reserved 4-5 Building Blocks of Process Costing 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 Inventory flow assumptions  Weighted average  First-in, first-out

6. Copyright © 2008 Prentice Hall All rights reserved 4-6 Objective 2 Compute equivalent units

7. Copyright © 2008 Prentice Hall All rights reserved 4-7 E4-28: Equivalent Units Calculation Example 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 08,0006,0002,000 ++ +

8. Copyright © 2008 Prentice Hall All rights reserved 4-8 Start Dyes added 100% complete 30% complete 2,000 units started but not finished 6,000 units completed and transferred out Step 2: Compute output in terms of equivalent units

9. Copyright © 2008 Prentice Hall All rights reserved 4-9 E4-28: Equivalent Units for Direct Materials and for Conversion Costs Equivalent units for direct materials: 8,000 units x 100% complete8,000 Equivalent units for conversion costs: 6,000 units x 100% complete6,000 2,000 units x 30% complete600 6,600

10. Copyright © 2008 Prentice Hall All rights reserved 4-10 Objective 3 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a first department

11. Copyright © 2008 Prentice Hall All rights reserved 4-11 E4-28: Assign manufacturing costs to units completed Step 3: Summarize total costs for which to account: Beginning work in process inventory $ 0 Costs added during May: Direct materials (dyes) 4,800 Direct labor 800 Manufacturing overhead 1,840 Total costs to account for$7,440

12. Copyright © 2008 Prentice Hall All rights reserved 4-12 E4-28 Blending Department Direct Materials Conversion Costs Beginning work in process$ 0 Costs added during period Divide by equivalent units Cost per equivalent unit Step 3: Compute the cost per equivalent unit $4,800 $0.40 $2,640 ÷ 6,600 Refer back to the calculation of equivalent units for Direct Materials.

13. Copyright © 2008 Prentice Hall All rights reserved 4-13 E4-28 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 + 0.40) $6,000 600 x 0.40 $7,440 1,440 240 $1,200 Refer back to the equivalent cost per equivalent unit calculation to compute the total cost of direct materials.

14. Copyright © 2008 Prentice Hall All rights reserved 4-14 E4-28: General Journal Entry for WIP GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory blending department7,440 Materials inventory4,800 Manufacturing wages800 Manufacturing overhead1,840

15. Copyright © 2008 Prentice Hall All rights reserved 4-15 E4-28: General Journal Entry - WIP GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory packaging department6,000 Work in process inventory blending department6,000

16. Copyright © 2008 Prentice Hall All rights reserved 4-16 E4-28: T-account view of General Journal Entry for Transferred Out Work in process inventory - blending 7,4406,000 Bal. 1,440

17. Copyright © 2008 Prentice Hall All rights reserved 4-17 E4-28: Average Cost Used to assign cost to Transferred Out Average cost per gallon transferred out of blending is: $6,000 ÷ 6,000 gallons = $1.00 per gallon

18. Copyright © 2008 Prentice Hall All rights reserved 4-18 Objective 4 Use process costing to assign manufacturing costs to units completed and to units in ending work in process inventory in a second or later department

19. Copyright © 2008 Prentice Hall All rights reserved 4-19 E4-35 Step 1: Summarize the flow of physical units Units to account for Units accounted for Photolithography Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 8,00027,00026,0009,000 ++ +

20. Copyright © 2008 Prentice Hall All rights reserved 4-20 E4-35 Step 1: Summarize the flow of physical units Beg. Bal. 8,000 Transferred in 27,000 End Bal. 9,000 Work in process, Photolithography Dept (units) 26,000

21. Copyright © 2008 Prentice Hall All rights reserved 4-21 E4-35 Materials added Start 100% complete 80% complete Step 2: Compute output in terms of equivalent units 18,000 units started and completed 8,000 units in process & completed 70% complete 9,000 units started but not finished

22. Copyright © 2008 Prentice Hall All rights reserved 4-22 Step 1Step 2EquivalentUnits Flow of Physical Units Transferred InDirect MaterialsConversion Costs Units to account for: Beginning WIP8,000 Transferred In27,000 Total Physical Units to Account for 35,000 Units Accounted For: Completed and Transferred Out 26,00026,000*26,000 Ending WIP-70% Complete 9,0009000*90006,300 Total Physical Units Accounted for 35,000 Equivalent Units35,000*35,00032,300

23. Copyright © 2008 Prentice Hall All rights reserved 4-23 E4-35 Equivalent units transferred in: Completed and transferred out26,000 Ending work in process9,000 Total units to account for35,000

24. Copyright © 2008 Prentice Hall All rights reserved 4-24 E4-35 Equivalent units: Direct materials Completed and transferred out26,000 Ending work in process 9,000 Total35,000

25. Copyright © 2008 Prentice Hall All rights reserved 4-25 E4-35 Equivalent units for conversion costs: Completed and transferred out26,000 Ending WIP -9,000 x 70%6,300 Total32,300

26. Copyright © 2008 Prentice Hall All rights reserved 4-26 Step 3: Compute the cost per equivalent unit E4-35 Costs to be Accounted For: Trans inDir. Mat. Conv. Costs Total Beginning WIP $ 20,050$20,250$19,816$60,116 Costs added 97,20074,25090,650262,100 Total costs $117,250$94,500$110,466 ÷ equivalent unit 35,000 32,300 Cost/equiv unit $3.35$2.70$3.42 Total costs to account for $322,216

27. Copyright © 2008 Prentice Hall All rights reserved 4-27 Step 3: Compute the cost per equivalent unit E4-35 Trans inDir. Mat.Conv CostsTotal Completed & transferred out 26,000 x ($3.35+$2.70+$3.42)$246,220 Ending WIP Transferred in 9,000x$3.35 $30,150 Direct materials 9,000 $2.70 24,300 Conversion 6,300x$3.4221,546 Total WIP $75,996 Total costs accounted for $322,216

28. Copyright © 2008 Prentice Hall All rights reserved 4-28 E4-35 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT a.Raw materials inventory9,000 Accounts payable9,000 b.Work in process inventory Assembly 4,000 Work in process inventory Finishing2,000 Raw materials inventory6,000

29. Copyright © 2008 Prentice Hall All rights reserved 4-29 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT c.Manufacturing wages10,800 Wages payable10,800 d.Manufacturing overhead10,900 Property tax payable1,900 Utilities payable4,500 Prepaid insurance1,100 Accumulated depreciation3,400

30. Copyright © 2008 Prentice Hall All rights reserved 4-30 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT e.Work in process inventory- Assembly7,600 Manufacturing wages4,700 Manufacturing overhead2,900 f.Work in process inventory – Finishing10,600 Manufacturing wages4,400 Manufacturing overhead6,200

31. Copyright © 2008 Prentice Hall All rights reserved 4-31 E4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT g.Work in process inventory Finishing10,250 Work in process inventory Assembly10,250 h.Finished goods inventory15,600 Work in process inventory Finishing15,600

32. Copyright © 2008 Prentice Hall All rights reserved 4-32 End of Chapter 4