2. 21 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Process Cost Chapter 21

3. 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

4. 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

5. 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

6. 21 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Record process costing transactions. Objective 2

7. 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?

8. 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

9. 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.

10. 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?

11. 21 - 10©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

12. 21 - 11©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.

13. 21 - 12©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?

14. 21 - 13©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

15. 21 - 14©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.

16. 21 - 15©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.

17. 21 - 16©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:

18. 21 - 17©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

19. 21 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 3 Compute equivalent units.

20. 21 - 19©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

21. 21 - 20©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.

22. 21 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Physical Units Beginning inventory -0- + 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

23. 21 - 22©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 units25,00021,000 100% 20%

24. 21 - 23©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 -0- -0- Production Started25,000 Direct Materials$ 70,000 Conversion Costs 42,000 Total25,000$112,000

25. 21 - 24©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

26. 21 - 25©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

27. 21 - 26©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 × (2.80 + 2.00)$ 96,000 Units in ending inventory: Materials:5,000 × 2.80 14,000 Conversion:1,000 × 2.00 2,000 Total costs$112,000

28. 21 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Work in Process Inventory – Shaping Balance, Aug. 31 -0-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

29. 21 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Account for a second processing department by the FIFO method. Objective 5

30. 21 - 29©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.

31. 21 - 30©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.

32. 21 - 31©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.

33. 21 - 32©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

34. 21 - 33©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?

35. 21 - 34©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 4,000 800 3,000 Started and completed17,00017,00017,000 Ending WIP 3,000 2,700 1,200 Equivalent units20,50021,200 90%40%

36. 21 - 35©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

37. 21 - 36©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

38. 21 - 37©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

39. 21 - 38©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

40. 21 - 39©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

41. 21 - 40©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

42. 21 - 41©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

43. 21 - 42©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

44. 21 - 43©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?

45. 21 - 44©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%

46. 21 - 45©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

47. 21 - 46©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

48. 21 - 47©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

49. 21 - 48©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 21