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BA213: Chapter 18—Process CostingProcess Cost AccountingStudy Objectives for Process Costing:Understand who uses process cost systems.Explain the similarities and differences between job order cost and process cost systems.Explain the flow of costs in a process cost system.Make the journal entries to assign manufacturing costs in a process cost systemCompute equivalent units.Explain the four steps necessary to prepare a production cost report.Prepare a production cost report.THE NATURE OF PROCESS COST SYSTEMSUSES OF PROCESS COST SYSTEMSProcess cost systems are used to apply costs to similar products that are mass produced in a continuous fashion.In a process cost system, costs are tracked through a series of connected manufacturing processes or departments, rather than by individual jobs (as in job order cost systems).A process cost accounting system is used for continuous process manufacturing, and it is necessary to record both the accumulation and assignment of manufacturing costs. A distinctive feature of process cost accounting is that individual Working Process Inventory accounts are maintained for each production department or manufacturing process.In a beverage company, there would be a Work in Process Inventory account for each of the manufacturing processes.SIMILARITIES AND DIFFERENCES BETWEEN JOB ORDER AND PROCESS COST SYSTEMSSIMILARITIES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS—Job order and process cost systems are similar in three ways :The 3 manufacturing cost elements. They both track direct materials, direct labor, and manufacturing overhead.The accumulation of the costs of materials, labor, and overhead:Both debit the purchase of raw materials to Raw Materials Inventory.Both debit the cost of factory labor to Factory Labor.Both debit all manufacturing overhead costs to Manufacturing Overhead.The flow of costs (although the methods of assigning costs differ significantly). The flow of costs of the two systems is shown below:Job Order Cost FlowDMDLMO→WIPJob No. 101Job No. 102→FG Inventory→COGSProcess Cost FlowDMDLMO→WIP—Dept. A→WIP—Dept B→FG Inventory→COGSDIFFERENCES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS are different in three ways:The number of work in process accounts used.In a job order system, there is only one Work in Process account.In a process cost system, there are multiple Work in Process accounts—separate accounts for each production department or manufacturing process.Documents used to track costs.In a job order system, costs are assigned to individual jobs and summarized in a job cost sheet.In a process cost system, costs are tracked through a series of connected manufacturing processes or departments, rather than by individual jobs. Thus, process cost systems are used when a large volume of uniform or relatively homogenous products are produced (Examples: Ben & Jerry’s ice cream; Kellogg and General Mills cereal; Exxon-Mobil oil refining; Sherwin Williams paint products; Coca-Cola beverages, etc.A feature of process costing is that costs charged to work in process are summarized in production cost reports.The point at which costs are totaled.In a job order system, total costs are determined when the job is completed.In a process cost system, total costs are determined at the end of a period of time, usually a month.Unit cost computations.In a job order cost system, the unit cost is the total cost per job divided by the units produced as follows:Total Cost per Job÷Units Produced=Cost per UnitUnit costs are calculated by dividing total manufacturing costs for the period by the units produced during the period and calculated for materials costs and conversion costs as explained later.The major differences between job order cost accounting and process cost accounting are summarized below:FeatureJob Order Cost SystemProcess Cost SystemWork in process accountsOne for each jobOne for each processDocuments usedJobs cost sheetsProduction cost reportsDetermination of total manufacturing costsEach jobEach periodUnit-cost computationsCost of each job ÷ Units produced for the jobTotal manufacturing costs ÷ Units produced during the periodFLOW OF COSTS IN PROCESS COST SYSTEM that shows the flow of costs through various accounts in process cost accounting:Separate work in process accounts are provided for each producing department.Manufacturing costs are accumulated by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.These costs are then assigned to Work in Process, Finished Goods Inventory, and Cost of Goods Sold.As the flow of costs indicates, materials, labor, and manufacturing overhead can be added in both Machining and Assembly Departments.When the Machining Department finishes its work, the partially completed units are transferred to the Assembly Department.In the Assembly department, the goods are finished and are then transferred to the finished goods inventory.The goods are removed from finished goods inventory when sold.ASSIGNMENT OF MANUFACTURING COSTS—JOURNAL ENTRIESThe accumulation of materials and labor costs is the same in process costing as in job order costing.All raw materials are debited to Raw Materials Inventory when the materials are purchased.All factory labor is debited to Factory Labor when the labor costs are incurred.Overhead costs are debited to Manufacturing Overhead as they are incurred.However, the assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system. Making the journal entries to assign manufacturing costs in a process cost system area as follows:Materials CostsIn a process cost system, fewer materials requisitions slips are usually required than in a job order cost system, since materials are used for processes rather than for specific jobs.For example, in the manufacture of Hershey candy bars, Tyler Manufacturing Company, by the end of the period, has accumulated the materials, labor, and overhead costs in each production department’s Work in Process account and therefore the journal entry shows two debits to the two work in process accounts as follows:General JournalPage 1DateAccount TitleP.RDebitCredit201XMon.DayWork in Process Inventory—Machining XXXXWork in Process Inventory—AssemblyXXXXRaw Materials Inventory XXXX(To record materials used)Factory Labor CostsIn process costing, as in fob order costing, time tickets may be used to determine the cost of labor assignable to the production departments.The labor cost chargeable to a process can be obtained from the payroll register to departmental payroll summaries.The entry to assign these costs is:General JournalPage 1DateAccount TitleP.RDebitCredit201XMon.DayWork in Process Inventory—MachiningXXXXWork in Process Inventory—AssemblyXXXXFactory Labor XXXX(To assign factory labor to production)Manufacturing Overhead CostsIn process cost accounting, the objective in assigning overhead is to allocate the overhead costs to the production departments on an objective and equitable basis.That basis is the activity the “drives” or causes the costs.A primary driver of overhead costs is continuous manufacturing operations in machine time used, not direct labor.The entry to allocate overhead in the 2 processes is:General JournalPage 1DateAccount TitleP.RDebitCredit201XMon.DayWork in Process Inventory—MachiningXXXXWork in Process Inventory—AssemblyXXXXManufacturing Overhead XXXX(To assign overhead to processes)Transfer to Next DepartmentAt the end of the month, an entry is needed to record the cost of the goods transferred out of the department.The transfer is to the Assembly Department and the following entry is made:General JournalPage 1DateAccount TitleP.RDebitCredit201XMon.DayWork in Process Inventory—AssemblyXXXXWork in Process Inventory—MachiningXXXX(To record the transfer of units to the Assembly Department).Transfer to Finished GoodsThe units completed in the Assembly Department are transferred to the finished goods warehouse.The entry for this transfer is as follows:General JournalPage 1DateAccount TitleP.RDebitCredit201XMon.DayFinished Goods Inventory XXXXWork in Process Inventory—Assembly XXXX(To record transfer of units to finished goods).Transfer to Cost of Goods Sold—when finished goods are sold, the entries to record the sale and the cost of goods sold are as follows:General JournalPage 1DateAccount TitleP.RDebitCredit201XMon.DayAccounts Receivable XXXXSales XXXX(To record sale of units)DayCost of Goods SoldXXXXFinished Goods InventoryXXXX (To record the cost of units sold)EQUIVALENT UNITSDetermining the amounts to assign.By the end of the period, Tyler Manufacturing Company has accumulated the materials, labor, and overhead costs in each production department’s Work in Process account.These accumulated costs must now be assigned to:The units transferred out of each department and The units in the ending Work in Process in each department.The procedures used in calculating and assigning the costs present the most difficult challenge to your understanding of process cost account.For each process, it is necessary to perform the following procedures at the end of the period:Calculate the physical units.Calculate equivalent units of production.Calculate unit costs of production.Assign costs to the units transferred and in process.Prepare the production cost reportCompute Equivalent UnitsEquivalent units of production are the work done during the period on the physical units of output, expressed in terms of fully completed units.Equivalent units of production are determined by applying the percentage of work done to the physical units of output.Equivalent units are the sum of the work performed to:Finish the units of beginning work in process plete the units started into production during the period.Start, but only partially complete, the units in ending work in process pute the cost of instruction at your college per full-time equivalent student:Part-time students take 60 percent of the classes of a full-time student during the year.To compute the number of full-time equivalent students per year, you would make the following computation:Full-time Students+Equivalent Units ofPart-time Students=Full-time Equivalent Students900+(60% x 1,000)=1,500The cost of instruction per full-time equivalent student is therefore the total cost of instruction ($9,000,000) divided by the number of full-time equivalent students (1,500), which is $6,000 ($9,000,000 / 1,500).In a process cost system, the same idea, called equivalent units of production, is used. Equivalent units of production measure the work done during the period expressed in fully completed units. This concept is used to determine the cost per unit of completed product.WEIGHTED-AVERAGE METHODThe formula to compute equivalent units of production is as follows:Units Completed and Transferred Out+Equivalent Units ofEnding Work in Process=Equivalent Units of ProductionBlending Department0+(60% x 4,000)=2,400Packaging Department10,000+(70% x 5,000)=13,500This method of computing equivalent units is referred to as the weighted-average method.It considers the degree of completion (weighting) of the units (1) completed and (2) transferred out and the (3) ending work in process.It is the method most widely used in practice. REFINEMENTS ON THE WEIGHTED-AVERAGE METHODEXAMPLE: Kellogg Company has produced Eggo? Waffles since 1970. Three departments are used to produce these waffles: Mixing, Baking, and Freezing and Packaging.Example:The beginning inventory is:100% complete as to materials cost—both the dry and liquid ingredients (materials) are added at the beginning of the process to make Eggo? Waffles.70% complete as to conversion costs (labor and overhead)—as these are added uniformly and now 70% done.The ending work in process is:100% complete as to materials cost.60% complete as to conversion costs (labor and overhead).Computation of equivalent units:The beginning work in process in not part of the equivalent units of production formula as they would have probably be completed and transferred out.The units transferred out will be 100% complete for both materials and conversion costs. Therefore 700,000 units x 100% = 700,000 under both the Materials and Conversion Costs columns.The ending work in process is 100% complete for materials but only 60% for conversion costs and therefore 200,000 x 60% = 120,000 computed as follows:Equivalent UnitsMaterialsConversion CostsUnits transferred out (700,000 x 100%)700,000700,000Work in process, June 30:200,000 x 100%200,000200,000 x 60%120,000Total equivalent units900,000820,000REFINED EQUIVALENT UNITS OF PRODUCTION FORMULA:Units Completed and Transferred Out--Materials+Equivalent Units ofEnding Work in Process--Materials=Equivalent Units of Production—MaterialsUnits Completed and Transferred Out—Conversion Costs+Equivalent Units ofEnding Work in Process—Conversion Costs=Equivalent Units of Production—Conversion CostsPRODUCTION COST REPORTDefinition—a Cost of Production report is:The key document used by management to understand the activities in a department.It shows:Production quantity andCost data related to that department.It is prepared for each department in a process cost system. Therefore, Kellogg Company will have three production cost reports:Mixing, Baking, and Freezing and PackagingExplain the four steps necessary to prepare a production cost report. PRODUCTION COST REPORT (STEPS):Compute the physical unit flowCompute the equivalent units of pute unit production costs and assign costs to units transferred and in process.Prepare a cost reconciliation PREHENSIVE EXAMPLE OF PROCESS COSTINGData for the Mixing Department at Kellogg Company for the month of June. The data will be used to complete a production cost report for the Mixing DepartmentSTEP 1—COMPUTE THE PHYSICAL UNIT FLOW. Note that when analyzing the physical units without regard to percentages of completion that the following two sections must balance:First, compute the Units to be accounted for (10,000) which are:Units in beginning work in process—2,000 on handout.Add: Units started into production—8,000 on handout.Second, compute the Units accounted for (10,000) which are:Units completed and transferred—9,000 on handout.Add: Units in ending work in process—1,000 on handout.When analyzing the physical units without regard to percentages of completion that the following two sections must balance:First, compute the Units to be accounted for (900,000) which are:Units in beginning work in process—100,000 Mixing Dept.Add: Units started into production—800,000 Mixing Dept.Second, compute the Units accounted for (900,000) which are:Units completed and transferred—700,000 Mixing Dept.Add: Units in ending work in process—200,000 Mixing Dept.STEP 2—COMPUTER EQUIVALENT UNITS OF PRODUCTION:Equivalent UnitsMaterialsConversion CostsUnits transferred out (9,000 x 100%)9,0009,000Work in process:1,000 x 100%1,0001,000 x 80%800Total equivalent units10,0009,800NOTE: Materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. For the Mixing Department shown above.Remember that beginning work in process is ignored in this computation.STEP 3—COMPUTE UNIT PRODUCTION COSTS:Refer to the COST INFORMATION on top of handout and then compute unit costs:Total Materials Cost÷Equivalent Units ofMaterials=UNIT Materials COST$80,000÷10,000=$8.00Total Conversion Costs÷Equivalent Units ofConversion Costs=UNIT Conversion Costs$49,000÷9,800=$5.00UNIT Materials COST+UNIT Conversion Costs=TOTAL MANUFACTURING COST PER UNIT$8.00+$5.00=$13.00The computation of cost per unit of the Eggo? Waffles is as follows:Total Materials Cost÷Equivalent Units ofMaterials=UNIT Materials COST$450,000÷900,000=$0.50Total Conversion Costs÷Equivalent Units ofConversion Costs=UNIT Conversion Costs$205,000÷820,000=$0.25UNIT Materials COST+UNIT Conversion Costs=TOTAL MANUFACTURING COST PER UNIT$0.50+$0.25=$0.75STEP 4—PREPARE A COST RECONCILIATION SCHEDULE. Note that when preparing a cost reconciliation schedule the following two sections must balance:First, compute the Costs to be accounted for ($129,000) which are:Costs in beginning work in process—$25,000 on handout.Add: Costs started into production—$104,000 on handout.Second, compute the Cost accounted for ($129,000) which are:Units completed and transferred—9,000 x $13 = $117,000 on handout.Add: Units in ending work in process—computed as follows:Materials—1,000 x $8 = $8,000Conversion costs—800 x $5 = $4,000Total ending work in process--$12,000.PREPARING THE PRODUCTION COST REPORT:Note: the first section contains:Step 1—Physical Units andStep 2—Equivalent UnitsNote: the second section contains Step 3:Computing unit costs andCosts to be accounted for.Note the last section contains Step 4—Costs accounted for.Production cost report. Note there are two self-checks in the report:(1) Total physical units accounted for must equal the total units to be accounted for.(2) Total costs accounted for must equal the total costs to be accounted for. ................
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