1. 14-1 Process Costing and the Cost Accounting Cycle Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University 14

2. 14-2  Determine when process costing is appropriate.  Explain the concept of equivalent unit production.  Determine unit costs, inventories, and costs transferred.  Use the backflush costing method.  Describe and apply the cost accounting cycle for manufacturers. ObjectivesObjectives After reading this chapter, you should be able to:

3. 14-3 Process Costing The essence of process costing is the accumulation of costs by process, or department, for a period of time.

4. 14-4 Process Costing Unit cost = Production costs Production Basic process costing formula used by a manufacturer of a single, homogeneous product.

5. 14-5 Equivalent unit production is the sum of (1) the units finished during the period and (2) the equivalent units in the ending inventory of work in process. Equivalent Unit Production and Unit Cost

6. 14-6 Equivalent Unit Production and Unit Cost Equivalent production = Units completed + Units in ending inventory x Percentage complete Equivalent production =50,000+ 10,000x 60% Equivalent production =56,000

7. 14-7 Equivalent Unit Production and Unit Cost The weighted-average unit cost formula is: Unit cost= Cost of beginning inventory + Current period cost Weighted-average equivalent unit production

8. 14-8 Equivalent Unit Production and Unit Cost The weighted-average unit cost formula is: Unit cost= Cost of beginning inventory + Current period cost Weighted-average equivalent unit production $112,000 ÷ 56,000 = $2.00 Unit cost=

9. 14-9 Data for Kelco Company Production costs$112,000$128,400 Unit data: WIP, beg. of month 010,000 Completed in month 50,00070,000 WIP, end of month 10,00020,000 WIP, percentage completed 60%40% MayJune

10. 14-10 Ending Inventory and Transfers Production costs accounted for = $100,000 + (10,000 units x 60% x $2) Production costs accounted for = $112,000 Cost of units transferred +Cost of to finished goodsending inventory

11. 14-11 Effects of Beginning Inventory June Equivalent Units for Kelco Units completed70,000 Equivalent units in ending inventory, 20,000 x 40% 8,000 Weighted-average equivalent unit production78,000

12. 14-12 Effects of Beginning Inventory Unit cost= Cost of beginning inventory + Current period cost Weighted-average equivalent unit production $12,000 + $128,400 78,000 Unit cost== $1.80

13. 14-13 Effects of Beginning Inventory The disposition of the costs follows: Ending inventory of work in process, 20,000 x 40% x $1.80$ 14,400 To finished goods inventory, 70,000 x $1.80 126,000 Total$140,400

14. 14-14 Materials and Conversion Costs Ending inventory: Material cost (15,000 units x 100% x $1.10)$16,500 Conversion cost (15,000 units x 40% x $0.90) 5,400 Total cost of ending WIP inventory$21,900 Transferred to finished goods: Material cost (45,000 units x $1.10)$49,500 Conversion cost (45,000 units x $0.90) 40,500 Total cost transferred to finished goods$90,000

15. 14-15 Materials and Conversion Costs Total costs to be accounted for: Costs in beginning inventory ($8,000 + $4,900)$ 12,900 Costs for current month ($58,000 + $41,000) 99,000 Total$111,900 Total costs accounted for as: Cost of finished units transferred to finished goods$ 90,000 Cost of ending inventory 21,900 Total$111,900

16. 14-16 Multiple Processes Unit Data: Unit on hand at beginning of June0 Transferred in from Cutting Department45,000 Completed and transferred to finished goods40,000 On hand at end of period (80% complete)5,000 Cost Data: Beginning inventory$ 0 Transferred in from Cutting Department$ 90,000 Sanding Department conversion costs for June$132,000

17. 14-17 Multiple Processes Calculate the Equivalent Production for the Sanding Process Units completed40,000 Equivalent units in ending inventory, 5,000 x 80% 4,000 Weighted –average equivalent unit production44,000 $0 + $132,000 44,000 Unit cost = = $3.00

18. 14-18 Multiple Processes The cost of a unit transferred from Sanding to finished goods is the $2.00 from the Cutting Department plus $3.00 from the Sanding Department, a total of $5.00. Ending work in process: Cost from prior department, 5,000 x $2.00$10,000 Sanding Department conversion costs, 5,000 x 80% x $3.00 12,000 Ending work in process$22,000

19. 14-19 Multiple Processes Transferred to finished goods, 40,000 x $5.00$200,000 Ending inventory of work in process (from Slide 14-18) 22,000 Total$222,000

20. 14-20 The Cost Accounting Cycle Bryan Company produces a plywood countertop backing. Bryan had no beginning inventories of work in process.

21. 14-21 The Cost Accounting Cycle Purchase of materials: Bryan bought 1,400,000 feet of wood at $0.095 per foot. 1.Materials Inventory $133,000 Cash or Accounts Payable$133,000

22. 14-22 The Cost Accounting Cycle Bryan used 1,300,000 feet of wood. 2.Work in Process $123,500 Materials Inventory$123,500

23. 14-23 The Cost Accounting Cycle Direct laborers earned $344,400 for 41,000 hours of work at $8.40 per hour. 3a.Direct Labor $344,400 Cash or Accrued Payroll$344,400 3b.Work in Process Inventory$344,400 Direct Labor$344,400

24. 14-24 The Cost Accounting Cycle Bryan incurred various overhead costs. 4. Variable Manufacturing Overhead $251,300 Fixed Manufacturing Overhead461,000 Various, Cash, Accrued Expenses, Accumulated Depreciation$712,300

25. 14-25 The Cost Accounting Cycle Bryan finished 40,000 square yards of plywood. Another 3,000 square yards were still in process at the end of 20X5. 5.Work in Process Inventory $251,300 Variable Mfg. Overhead$251,300 Work in Process Inventory$461,000 Fixed Mfg. Overhead$461,000

26. 14-26 The Cost Accounting Cycle Materials (Slide 14-23)$ 123,500 Direct labor (Slide 14-24)344,400 Variable overhead (Slide 14-26)251,300 Fixed overhead (Slide 14-26) 461,000 Total$1,180,200 Divided by equivalent production 42,000 Equals cost per unit$ 28.10

27. 14-27 The Cost Accounting Cycle The $28.10 cost per unit is used to transfer to Finished Goods Inventory (40,000 units). 6.Finished Goods Inventory $1,124,000 Work in Process Inventory$1,124,000

28. 14-28 The Cost Accounting Cycle Bryan sold 35,000 square yards that cost $28.10 at $40 each. 7a.Cash or Accounts Receivable $1,400,000 Sales$1,400,000 7b.Cost of Goods Sold$983,500 Finished Goods Inventory$983,500

29. 14-29 The Cost Accounting Cycle The company incurred $340,000 in selling and administrative expenses. 8.Selling and Administrative Expenses $340,000 Cash, Accrued Expenses$340,000

30. 14-30 The Cost Accounting Cycle Work in Process Inventory (2)$ 123,500 (3b)344,400 (5)251,300$1,124,000 (6) (5) 461,000 1,180,200$1,124,000 Bal.$ 56,200

31. 14-31 The Cost Accounting Cycle Finished Goods Inventory (6)$1,124,000 $983,500 (7b) Bal.$ 140,500 Cost of Goods Sold (7b)$983,500

32. 14-32 The Cost Accounting Cycle Income Statement for Bryan Company, Actual Process Costing Sales (Slide 14-28)$1,400,000 Cost of goods sold (Slide 14-28) 983,500 Gross profit$ 416,500 Selling and administrative expenses (Slide 14-29) 340,000 Income$ 76,500

33. 14-33 Illustration of Job-Order Costing Portland Mill Works makes industrial products in a highly mechanized environment. The company uses activity-based costing. The company has established the following predetermined overhead rates: Machine-Related Total budgeted overhead$600,000 Divided by budgeted levels of activity100,000MH Equals predetermined overhead rates$6 perMH Continued

34. 14-34 Illustration of Job-Order Costing Setup-Related Total budgeted overhead$250,000 Divided by budgeted levels of activity10,000SH Equals predetermined overhead rates$25 perSH Total applied overhead ($660,000 + $225,000)$885,000 Total actual overhead ($645,000 + $235,000) 880,000 Total overapplied overhead$ 5,000

35. 14-35 Illustration of Job-Order Costing Materials are purchased. 1. Materials Inventory$720,000 Cash, Accounts Payable$720,000 Materials are placed into production. 2. Work in Process Inventory$650,000 Materials Inventory$650,000

36. 14-36 Illustration of Job-Order Costing Direct labor is incurred. 3a. Direct Labor$800,000 Cash or Accrued Payroll$800,000 3b. Work in Process Inventory$800,000 Direct Labor$800,000

37. 14-37 Illustration of Job-Order Costing Overhead was incurred and applied. 4a. Factory Overhead-machine— related$645,000 Factory Overhead—setup- related235,000 Various Credits, Cash, Accrued Expenses, Accumulated Depreciation$880,000

38. 14-38 Illustration of Job-Order Costing Overhead was incurred and applied (continued). 4b. Work in Process Inventory$885,000 Factory Overhead— machine-related$660,000 Factory Overhead—setup- related225,000

39. 14-39 Illustration of Job-Order Costing Completed jobs are transferred to finished goods. 5. Finished Goods Inventory$2,262,000 Work in Process Inventory$2,262,000 The cost of goods sold is recorded. 6. Cost of Goods Sold$2,100,000 Finished Goods Inventory$2,100,000

40. 14-40 Factory Overhead—setup-related (4a)$235,000$225,000 (4b) Bal.$ 10,000 Illustration of Job-Order Costing Factory Overhead—machine-related (4a)$645,000$660,000 (4b) Bal.$ 15,000

41. 14-41 Illustration of Job-Order Costing Work in Process Inventory (2)$ 650,000 (3b)800,000 (4b) 885,000$2,262,000(5) 2,335,000$2,262,000 Bal.$ 73,000

42. 14-42 Illustration of Job-Order Costing Finished Goods Inventory (5)$2,262,000$2,100,000 (6) Bal.$ 162,000 Cost of Goods Sold (6)$2,100,000

43. 14-43 Illustration of Standard Costing Materials are purchased. 1. Materials Inventory$100,000 Material Price Variance4,000 Cash or Accounts Payable$104,000 Materials are placed into production. 2. Work in Process Inventory$90,000 Materials Use Variance1,000 Materials Inventory$89,000 20,000 x $5.00 18,000 x $5 17,800 x $5

44. 14-44 Illustration of Standard Costing Direct labor is incurred. 3a. Direct Labor$75,200 Cash or Accrued Payroll$72,850 Direct Labor Rate Variance2,350 3b. Work in Process Inventory$72,000 Direct Labor Efficiency Variance3,200 Direct Labor$75,200 4,700 x $16 4,500 x $16

45. 14-45 Illustration of Standard Costing Variable overhead was incurred and applied. 4a. Variable Manufacturing Overhead$56,400 Variable Overhead Spending Variance2,600 Various Credits, Cash, Accrued Expenses$59,000 4,700 x $12

46. 14-46 Illustration of Standard Costing Overhead was incurred and applied (continued). 4b. Work in Process Inventory$54,000 Variable Overhead Efficiency Variance2,400 Variable Manufacturing Overhead$56,400 4,500 x $12

47. 14-47 Illustration of Standard Costing 5a. Fixed Manufacturing Overhead$100,000 Fixed Overhead Budget Variance$ 2,000 Various Credits, Cash, Accrued Expenses98,000

48. 14-48 Illustration of Standard Costing Overhead was incurred and applied (continued). 5b. Work in Process Inventory$90,000 Factory Overhead Volume Variance10,000 Factory Manufacturing Overhead$100,000 9,000 x $10

49. 14-49 Illustration of Standard Costing Completed jobs are transferred to finished goods. 6. Finished Goods Inventory$306,000 Work in Process Inventory$306,000 The cost of goods sold is recorded. 7. Cost of Goods Sold$272,000 Finished Goods Inventory$272,000 9,000 x $34 8,000 x $34

50. 14-50 Illustration of Standard Costing Work in Process Inventory (2)$ 90,000 (3b)72,000 (4b) 54,000 (5b) 90,000$306,000 (6) $306,000$306,000 Materials Inventory (1)$100,000$89,000 (2) Bal.$ 11,000

51. 14-51 Illustration of Standard Costing Finished Goods Inventory 3-1 Bal$ 34,000 (6) 306,000$272,000 (7) 340,000 272,000 3-31 Bal.$ 68,000 Cost of Goods Sold (7)$272,000

52. 14-52 Backflushing Backflushing concentrates on completed units, rather than on the units making their way through work in process. Backflushing therefore requires relatively few entries.

53. 14-53 The End Chapter 14

54. 14-54