21 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Process Cost Chapter 21

21 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Distinguish between the flow of costs in process costing and job costing. Objective 1

21 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Direct materials, Direct labor, Overhead Job 100Job 101Job 102 Finished Goods Cost of Goods Sold Job Costing

21 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber WIP Chopping Department WIP Mixing & Bottling Department Finished Goods Cost of Goods Sold Process Costing Direct materials, Direct labor, Overhead

21 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Record process costing transactions. Objective 2

21 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Costs Example n Assume that Pace Foods transfers $4,000 of partially completed items from the Chopping Department to the Mixing & Bottling Department. n What is the journal entry?

21 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Costs Work in Process Inventory – Mixing & Bottling 4,000 Work in Process Inventory – Chopping 4,000 To transfer costs from the Chopping Department to the Mixing & Bottling Department

21 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Work-in-Process Inventory – Mixing & Bottling 3,000 Materials Inventory 3,000 To requisition materials Recording Costs n Assume that additional materials costing $3,000 were added in the Mixing & Bottling Department.

21 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Costs n Manufacturing wages amounted to $6,000 and manufacturing overhead was $12,000 in the Mixing & Bottling Department. n What are the journal entries?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Costs Work in Process Inventory – Mixing & Bottling 6,000 Manufacturing Wages 6,000 Work in Process Inventory – Mixing & Bottling12,000 Manufacturing Overhead12,000 To record the additional labor and overhead cost of the Mixing & Bottling Department

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Finished Goods Inventory19,000 Work in Process Inventory – Mixing and Bottling19,000 To transfer the cost of goods completed Recording Costs n $19,000 worth of finished items were transferred to Finished Goods Inventory.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Costs n Assume $1,000 beginning Work in Process Inventory in the Mixing & Bottling Department. n What is the ending Work in Process Inventory?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording Costs Work in Process Beg. Balance 1,000 Transferred In 4,000Transferred Out Materials 3,00019,000 Labor 6,000 Overhead12,000 End. Balance 7,000

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Tracking the Flow of Costs n In process costing, the accounting task is to track the flow of costs through the production process. 1 Account for the goods completed and transferred out. 2 Account for the cost of incomplete units that remain as a department’s ending work in process inventory.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Tracking the Flow of Costs Example n Key Largo Co. manufactures diving masks. n The Shaping Department shapes the masks. n Direct materials are added at the beginning of the process. n Conversion costs are incurred evenly throughout the shaping process. n The partially completed masks then move to the Finishing Department.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Direct materials$ 70,000 Conversion costs: Direct labor$12,250 Mfg. overhead 29,750 42,000 Costs to account for$112,000 Tracking the Flow of Costs Example n Assume that during September, the Shaping Department incurs these costs in processing 25,000 masks:

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Tracking the Flow of Costs Example n Assume the shaping process is complete for all 25,000 masks. n What is the cost transferred to the Finishing Department? n $112,000 n What is the unit cost? n $112,000 ÷ 25,000 = $4.48/mask

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 3 Compute equivalent units.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Equivalent Units Example n Assume that on September 30, the Key Largo Co.’s Shaping Department still had 5,000 masks that were only 20% of the way through the shaping process. n What are the conversion equivalent units in ending work in process inventory? n 5,000 ×.20 = 1,000 masks

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Steps in Process Cost Accounting 1 Summarize the flow of physical units. 2 Compute output in terms of equivalent units. 3 Summarize total costs to account for. 4 Compute the cost per equivalent unit. 5 Assign costs to units completed and to units in ending work in process.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Physical Units Beginning inventory Started in production25,000 = Total to account for25,000 Completed and transferred20,000 + Work in process 5,000 = Total accounted for25,000 Summarize the Flow of Physical Units

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Compute Output in Terms of Equivalent Units Flow of PhysicalDirect Conv. Units Mtls. Costs Units to account for:25,000 Started and completed20,00020,00020,000 Ending WIP 5,000 5,000 1,000 Equivalent units25,00021, % 20%

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Summarize Total Costs to Account for Department 1 – Shaping For the Month Ended September 30, 20xx Physical Units Dollars Beginning Inventory Production Started25,000 Direct Materials$ 70,000 Conversion Costs 42,000 Total25,000$112,000

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Department 1 – Shaping For the Month Ended September 30, 20xx Direct Conversion Materials Costs Costs added this month$70,000$42,000 ÷ Equivalent Units 25,000 21,000 = Cost per EU$2.80$2.00 Compute the Cost per Equivalent Unit

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Assign costs to units completed and to units in ending work-in-process inventory. Objective 4

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Assign Costs to Units Department 1 – Shaping For the Month Ended September 30, 20xx Units completed and transferred out: 20,000 × ( )$ 96,000 Units in ending inventory: Materials:5,000 × ,000 Conversion:1,000 × ,000 Total costs$112,000

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Work in Process Inventory – Shaping Balance, Aug Transferred to Direct Materials70,000Finishing 96,000 Direct Labor*12,250 Overhead*29,750 Balance Sept. 3016,000 *Conversion costs: $12,250 + $29,750 = $42,000 Assign Costs to Units

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Account for a second processing department by the FIFO method. Objective 5

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Process Costing for a Second Department – FIFO n A batch of swim masks were transferred out of the Shaping Department and into the Finishing Department at the end of July. n These masks did not make it completely through the Finishing Department during August. n They become the beginning inventory in September.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Process Costing for a Second Department – FIFO n Assume that the Finishing Department of Key Largo Co. had 4,000 units in beginning inventory on September 1, and 3,000 in inventory on September 30.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Process Costing for a Second Department – FIFO n The beginning inventory was 80% complete for materials and 25% for conversion. n The ending inventory was 90% complete for materials and 40% for conversion. n 20,000 units were transferred in from the Shaping Department.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Physical Units Beginning inventory 4,000 + Transferred in from Shaping20,000 = Total to account for24,000 From beginning inventory 4,000 Started and completed17,000 Total units completed21,000 Units in ending inventory 3,000 Total units accounted for24,000 Summarize the Flow of Physical Units

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Started and completed17,000 Ending inventory 3,000 Equivalent units20,000 Compute Output in Terms of Equivalent Units n What are the equivalent units for transferred in?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Compute Output in Terms of Equivalent Units Flow of PhysicalDirect Conv. Units Mtls. Costs Units to account for:24,000 Beginning inventory 4, ,000 Started and completed17,00017,00017,000 Ending WIP 3,000 2,700 1,200 Equivalent units20,50021,200 90%40%

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Summarize Total Costs Costs added during September are: Transferred in$ 96,000 Materials 55,350 Conversion 42,400 Total$193,750 Information given now

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Summarize Total Costs Costs in the beginning work in process:$ 29,840 Costs added during September: 193,750 Total$223,590 Information given now

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Transferred in:$96,000 ÷ 20,000 = $4.80 Materials:$55,350 ÷ 20,500 = $2.70 Conversion:$42,400 ÷ 21,200 = $2.00 Total $9.50 Compute the Cost Per Equivalent Unit

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Cost in beginning inventory:$ 29,840 Cost to complete the units in beginning inventory: Direct materials (800 × $2.70)$ 2,160 Conversion (3,000 × $2.00) 6,000 Cost of the units started and completed (17,000 × $9.50) 161,500 Total$199,500 Assign Costs to Units Completed

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Assign Costs to Units in Ending Inventory Transferred in:3,000 × $4.80 =$14,400 Materials:2,700 × $2.70 = 7,290 Conversion:1,200 × $2.00 = 2,400 Total$24,090

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Cost in beg. inventory$ 29,840 + Costs added during September 193,750 = Total to account for$223,590 Costs transferred out$199,500 + Cost in ending inventory 24,090 = Total accounted for$223,590 Cost Reconciliation

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Account for a second processing department by the weighted-average method. Objective 6

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Physical Units Beginning inventory 4,000 + Transferred in from Shaping20,000 = Total to account for24,000 Total units completed21,000 + Units in ending inventory 3,000 = Total units accounted for24,000 Summarize the Flow of Physical Units

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Completed and Transferred21,000 Ending inventory 3,000 Equivalent units24,000 Compute Output in Terms of Equivalent Units n What are the equivalent units for transferred in?

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Compute Output in Terms of Equivalent Units Flow of PhysicalDirect Conv. Units Mtls. Costs Units to account for:24,000 Completed21,00021,00021,000 Ending WIP 3,000 2,700 1,200 Equivalent units23,70022,200 90%40%

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Summarize Total Costs Beginning work in process inventory cost consists of: Transferred in:$18,960 Materials: 8,877 Conversion: 2,003 Total$29,840 Information given now

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Transferred in: ($18,960 + $96,000) ÷ 24,000 = $4.79 Materials: ($ 8,877 + $55,350) ÷ 23,700 = $2.71 Conversion: ($ 2,003 + $42,400) ÷ 22,200 = $2.00 Total $9.50 Compute the Cost Per Equivalent Unit

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Assign Total Cost to Units Transferred in:3,000 × $4.79 =$14,370 Materials:2,700 × $2.71 = 7,317 Conversion:1,200 × $2.00 = 2,400 Total$24,090 ($3 difference due to rounding) Units completed: 21,000 × $9.50 = $199,500

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 21