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

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Distinguish between process costing and job order costing

3. Copyright © 2007 Prentice-Hall. All rights reserved 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 © 2007 Prentice-Hall. All rights reserved 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 © 2007 Prentice-Hall. All rights reserved 5 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

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Key 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

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Objective 2 Compute equivalent units

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 E20-16E20-16 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 ++ +

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 E20-16E20-16 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

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 E20-16E20-16 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 2,000 units are 30% complete as to conversion costs Given the costs incurred, 600 units could have been fully completed

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Objective 3 Use process costing to assign costs to units completed and to units in ending work in process inventory

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 E20-16E20-16 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 pre equivalent unit $4,800 ÷ 8,000 $0.45$0.6 0 $2,970 ÷ 6,600

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 E20-16E20-16 Direct Materials Conversi on 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

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 E20-16E20-16 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory blending department7,770 Materials inventory4,800 Manufacturing wages800 Manufacturing overhead2,170 Record the costs incurred in the blending department

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 E20-16E20-16 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory packaging department6,300 Work in process inventory blending department6,300 Record the transfer of the inventory completed in the blending department to the packaging department

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 Objective 4 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

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 E20-23E20-23 Step 1: Summarize the flow of physical units Units to account for Units accounted for Bottling Department Beginning WIP Units placed in production + Units completed Units in Ending WIP 8,000160,000154,00014,000 ++ +

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 E20-23E20-23 Step 1: Summarize the flow of physical units Beg. Bal. 8,000 Transferred in 160,000 End Bal. 14,000 Work in process, bottling department (units) 154,000

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 E20-23E20-23 Materials added Start 100% complete 40% complete Step 2: Compute output in terms of equivalent units 146,000 units started and completed 8,000 units in process and 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

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 E20-23E20-23 Equivalent units: Transferred in costs Completed and transferred out154,000 Ending work in process14,000 Total168,000

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 E20-23E20-23 Equivalent units: Direct materials Completed and transferred out154,000 Ending work in process -0- Total154,000 Remember, material costs are added at the end of the process

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 E20-23E20-23 Equivalent units for conversion costs: Completed and transferred out154,000 Ending WIP -14,000 x 70% 9,800 Total163,800 Conversion costs are added evenly throughout the process

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 Step 3: Compute the cost per equivalent unit E20-23E20-23 Costs to be Accounted For: Trans inDir. Mat. Conv. Costs Total Beginning WIP $ 1,760$ 0$ 1,120$ 2,880 Costs added 136,00030,80056,21022,3010 Total costs $137,760$30,800$57,330 ÷ equivalent unit 168,000154,000163,800 Cost/equiv unit $0.82$0.20$0.35 Total costs to account for $225,890

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 Step 3: Compute the cost per equivalent unit E20-23E20-23 Trans inDir. Mat. Conv. Costs Total Completed & transferred out 154,000 x ($.82+$.20+$.35)$210,980 Ending WIP Transferred in14,000x.82 11,480 Direct materials 0 x.20 0 Conversion cost 9,800x.353,430 Total WIP14,910 Total costs accounted for $225,890

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 E20-16E20-16 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory bottling department223,010 Work in process inventory department 1136,000 Materials inventory30,800 Manufacturing wages33,726 Manufacturing overhead22,484 Record the costs incurred in the bottling department

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 E20-16E20-16 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Finished goods inventory210,980 Work in process inventory bottling department210,980 Record the transfer of the inventory completed in the bottling department to finished goods

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 End of Chapter 20