21-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College.
-
Upload
ronald-melvyn-wood -
Category
Documents
-
view
229 -
download
0
Transcript of 21-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College.
21-1
Prepared byCoby Harmon
University of California, Santa BarbaraWestmont College
21-2
Learning ObjectivesAfter studying this chapter, you should be able to:
[1] Understand who uses process cost systems.
[2] Explain the similarities and differences between job order cost and process cost systems.
[3] Explain the flow of costs in a process cost system.
[4] Make the journal entries to assign manufacturing costs in a process cost system.
[5] Compute equivalent units.
[6] Explain the four steps necessary to prepare a production cost report.
[7] Prepare a production cost report.
[8] Explain just-in-time (JIT) processing.
[9] Explain activity-based costing (ABC).
21 Process Costing
21-3
Preview of Chapter 21
Accounting PrinciplesEleventh Edition
Weygandt Kimmel Kieso
21-4
To apply costs to similar products that are mass-
produced in a continuous fashion
Examples include the production of Cereal, Paint,
Manufacturing Steel, Oil Refining and Soft Drinks
Illustration 21-1
LO 1 Understand who uses process cost systems.
Uses of Process Cost Systems
The Nature of Process Cost Systems
21-5
Illustration 21-2
LO 1 Understand who uses process cost systems.
Process and Job Cost Comparison
The Nature of Process Cost Systems
21-6
Which of the following items is not a characteristic of a
process cost system:
a. Once production begins, it continues until the finished product emerges.
b. The focus is on continually producing homogenous products.
c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
d. The products produced are heterogeneous in nature.
Question
LO 1 Understand who uses process cost systems.
The Nature of Process Cost Systems
21-7
Service companies that
provide specific, nonroutine services will probably benefit from
using a job order cost system.
perform routine, repetitive services will probably be better off
with a process cost system.
LO 1 Understand who uses process cost systems.
Process Costing for Service Companies
The Nature of Process Cost Systems
21-8LO 2 Explain the similarities and differences between
job order cost and process cost systems.
Similarities and Differences Between Job Order Cost and Process Cost Systems
Job Order Cost
Costs assigned to each job.
Products have unique characteristics.
Process Cost
Costs tracked through a series of connected manufacturing processes or departments.
Products are uniform or relatively homogeneous and produced in a large volume.
The Nature of Process Cost Systems
21-9
Illustration 21-3
LO 2 Explain the similarities and differences between job order cost and process cost systems.
Illustration 21-3Job order cost and process cost flow
The Nature of Process Cost Systems
21-10LO 2 Explain the similarities and differences between
job order cost and process cost systems.
Similarities
1. Manufacturing cost elements.
2. Accumulation of the costs of materials, labor, and overhead.
3. Flow of costs.
1. Number of work in process accounts used.
2. Documents used to track costs.
3. Point at which costs are totaled.
4. Unit cost computations.
Differences
The Nature of Process Cost Systems
21-11LO 2 Explain the similarities and differences between
job order cost and process cost systems.
Illustration 21-4Job order versus process cost systems
The Nature of Process Cost Systems
21-12
a. Both a job order and a process cost system track the same
three manufacturing cost elements – direct materials, direct
labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is used, whereas in a process cost system, multiple work in process accounts are used.
c. Manufacturing costs are accumulated the same way in a job
order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order
and in a process cost system.
Indicate which of the following statements is not correct:
LO 2
Question
The Nature of Process Cost Systems
21-13
Indicate whether the following statements are true or false.
1. A law firm is likely to use process costing for major
lawsuits.
2. A manufacturer of paintballs is likely to use process
costing.
3. Both job order and process costing determine product
costs at the end of a period of time, rather than when a
product is completed.
4. Process costing does not keep track of manufacturing
overhead.
False
True
False
LO 2
False
Advance slide in presentation mode to reveal answers.
DO IT!>
21-14
Process Cost Flow
LO 3 Explain the flow of costs in a process cost system.
Illustration 21-5
Tyler Company manufactures roller blade and skateboard wheels that
it sells to manufacturers and retail outlets. Manufacturing consists of
two processes: machining and assembly. The Machining Department
shapes, hones, and drills the raw materials. The Assembly Department
assembles and packages the parts.
The Nature of Process Cost Systems
21-15
Accumulation of materials, labor, and overhead costs is the same as in job order costing.
► Debit - Raw Materials Inventory for purchases of raw materials.
► Debit - Factory Labor for factory labor incurred.
► Debit - Manufacturing Overhead for overhead cost incurred.
Assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Assigning Manufacturing Costs—Journal Entries
The Nature of Process Cost Systems
21-16
A process cost system requires fewer material
requisition slips than a job order cost system.
► Materials are used for processes and not specific
jobs.
► Requisitions are for larger quantities of materials.
► Journal entry to record materials used:
Material Costs
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
The Nature of Process Cost Systems
21-17
Time tickets may be used in both systems.
All labor costs incurred within a production
department are a cost of processing.
The journal entry to record factory labor costs:
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Factory Labor Costs
The Nature of Process Cost Systems
21-18
Objective of assigning overhead is to allocate overhead to
production departments on objective and equitable basis.
Use the activity that “drives” or causes the costs.
Primary driver is machine time used.
Journal entry to allocate overhead:
Manufacturing Overhead Costs
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
The Nature of Process Cost Systems
21-19
Transfer to next department:
LO 4
Transfer to Finished Goods:
Transfer to record Cost of Goods sold :
Transfers
The Nature of Process Cost Systems
21-20
In making the journal entry to assign raw materials costs:
a. The debit is to Finished Goods Inventory.
b. The debit is often to two or more work in process accounts.
c. The credit is generally to two or more work in process accounts.
d. The credit is to Finished Goods Inventory.
Question
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
The Nature of Process Cost Systems
21-21
Blue Diamond Company manufactures ZEBO through two
processes: blending and bottling. In June, raw materials used were
Blending $18,000 and Bottling $4,000. Factory labor costs were
Blending $12,000 and Bottling $5,000. Manufacturing overhead
costs were Blending $6,000 and Bottling $2,500. The company
transfers units completed at a cost of $19,000 in the Blending
Department to the Bottling Department. The Bottling Department
transfers units completed at a cost of $11,000 to Finished Goods.
Journalize the assignment of these costs to the two processes and
the transfer of units as appropriate.
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
DO IT!>
21-22
Journalize the assignment of these costs to the two processes.
To Record Materials Used:
Work in Process—Blending 18,000
Work in Process—Bottling 4,000
Raw Materials Inventory 22,000
To Assign Factory Labor to Production:
Work in Process—Blending 12,000
Work in Process—Bottling 5,000
Factory Labor17,000
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
DO IT!>
21-23
To Assign Overhead to Production:
Work in Process—Blending 6,000
Work in Process—Bottling 2,500
Manufacturing Overhead 8,500
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
Journalize the assignment of these costs to the two processes.
DO IT!>
21-24
Journalize the transfer of units as appropriate.
To Record Transfer of Units to the Bottling Department:
Work in Process—Bottling 19,000
Work in Process—Blending 19,000
To Record Transfer of Units to Finished Goods:
Finished Goods Inventory 11,000
Work in Process—Bottling 11,000
LO 4 Make the journal entries to assign manufacturing costs in a process cost system.
DO IT!>
21-25 LO 5 Compute equivalents units.
Illustration: Suppose you have a work-study job in the office of
your college’s president, and she asks you to compute the cost of
instruction per full-time equivalent student at your college. The
college’s vice president for finance provides the following
information.
Costs:
Total cost of instruction $9,000,000
Student population:
Full-time students 900
Part-time students 1,000
Illustration 21-6
Equivalent Units
21-26
Total cost of instruction $9,000,000
Number of full-time equivalent students ÷ 1,500
$ 6,000
LO 5 Compute equivalents units.
Illustration 21-7
Illustration: Part-time students take 60% 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.
Cost of instruction per full-time equivalent student =
Equivalent Units
21-27
Considers the degree of completion (weighting) of units
completed and transferred out and units in ending work in
process.
Beginning work in process not part of computation of
equivalent units.Illustration 21-8
LO 5 Compute equivalents units.
Weighted Average Method
Equivalent Units
21-28
Illustration: The output of Kori Company’s Packaging Department
during the period consists of 10,000 units completed and transferred
out, and 5,000 units in ending work in process which are 70%
completed.
Calculate the equivalent units of production.
LO 5 Compute equivalents units.
Completed units 10,000
Work in process equivalent units (5,000 x 70%) + 3,500
13,500
Weighted Average Method
Equivalent Units
21-29
Illustration: Kellogg Company has produced Eggo® Waffles
since 1970. Three departments produce these waffles: Mixing,
Baking, and Freezing/Packaging. The Mixing Department
combines dry ingredients, including flour, salt, and baking
powder, with liquid ingredients, including eggs and vegetable oil,
to make waffle batter.
Illustration 21-9 [on next slide] provides information related to the
Mixing Department at the end of June.
LO 5 Compute equivalents units.
Refinements on the Weighted-Average Method
Equivalent Units
21-30
Illustration: Information related to the Mixing Department at the
end of June.Illustration 21-9
LO 5 Compute equivalents units.
Refinements on the Weighted-Average Method
Equivalent Units
21-31
Conversion costs are labor costs plus overhead costs.
Beginning work in process is not part of the equivalent-units-
of-production formula.
LO 5 Compute equivalents units.
Illustration 21-10
Equivalent Units
21-32
Illustration 21-11 Refined Equivalent Units of Production Formula
LO 5 Compute equivalents units.
Equivalent Units
21-33
The Mixing Department’s output during the period consists of
20,000 units completed and transferred out, and 5,000 units in
ending work in process 60% complete as to materials and
conversions costs. Beginning inventory is 1,000 units, 40%
complete as to materials and conversion costs. The equivalent
units of production are:
a. 22,600 b. 23,000
c. 24,000 d. 25,000
LO 5 Compute equivalents units.
Equivalent Units
Question
21-34
21-35
The fabricating department has the following production and
cost data for the current month.
LO 5 Compute equivalents units.
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
Materials are entered at the beginning of the process. The
ending work in process units are 30% complete as to conversion
costs. Compute the equivalent units of production for (a)
materials and (b) conversion costs.
DO IT!>
21-36 LO 5 Compute equivalents units.
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out 15,000
Ending work in process units + 10,000
25,000
The fabricating department has the following production and
cost data for the current month.
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
DO IT!>
21-37 LO 5 Compute equivalents units.
Compute the equivalent units of production for (a) materials and (b) conversion costs.
Units transferred out 15,000
Equivalent unit in ending WIP (10,000 x 30%) + 3,000
18,000
The fabricating department has the following production and
cost data for the current month.
Beginning Units EndingWork in Process Transferred Out Work in Process
–0– 15,000 10,000
DO IT!>
21-38
A production cost report is the
Key document used to understand activities.
Shows Production Quantity and Cost data for each department.
Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
LO 6 Explain the four steps necessary to prepare a production cost report.
Production Cost Report
21-39
Illustration 21-12Flow of costs in makingEggo® Waffles
LO 6 Explain the four steps necessary to prepare a production cost report.
Production Cost Report
21-40
Illustration 21-13 Unit and cost data—Mixing Department
LO 6 Explain the four steps necessary to prepare a production cost report.
Production Cost Report
21-41
Physical units - actual units to be accounted for during
a period, irrespective of any work performed.
Total units to be accounted for - units started (or
transferred) into production during the period + units in
production at beginning of period.
Total units accounted for - units transferred out
during period + units in process at end of period.
Compute the Physical Unit Flow (Step 1)
LO 6 Explain the four steps necessary to prepare a production cost report.
Production Cost Report
21-42 LO 6 Explain the four steps necessary to prepare a production cost report.
Illustration 21-14
Compute the Physical Unit Flow (Step 1)
Production Cost Report
21-43
Mixing Department
Department adds materials at beginning of process and
Incurs conversion costs uniformly during the process.
Illustration 21-15
LO 6 Explain the four steps necessary to prepare a production cost report.
Compute Equivalent Units of Production (Step 2)
Production Cost Report
21-44
Costs expressed in terms of equivalent units of
production.
When equivalent units of production are different for
materials and for conversion costs, three unit costs are
computed:
1. Materials
2. Conversion
3. Total Manufacturing
LO 6 Explain the four steps necessary to prepare a production cost report.
Compute Unit Production Costs (Step 3)
Production Cost Report
21-45 LO 6
Compute total materials cost related to Eggo® Waffles:
Work in process, June 1
Direct materials costs $ 50,000
Cost added to production during June
Direct material cost 400,000
Total material costs $450,000
Illustration 21-17
Illustration 21-16
Compute Unit Production Costs (Step 3)
Production Cost Report
21-46 LO 6
Compute total conversion costs related to Eggo® Waffles:
Work in process, June 1
Conversion costs $ 35,000
Costs added to production during June
Conversion costs 170,000
Total conversion costs $205,000
Illustration 21-19
Compute Unit Production Costs (Step 3)
Illustration 21-18
Production Cost Report
21-47
Compute total manufacturing costs per unit: Illustration 21-20
Compute Unit Production Costs (Step 3)Illustration 21-19
LO 6 Explain the four steps necessary to prepare a production cost report.
Production Cost Report
21-48
Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows.
Costs to be accounted for
Work in process, June 1 $ 85,000
Started into production 570,000
Total costs $655,000
Illustration 21-21
LO 6 Explain the four steps necessary to prepare a production cost report.
Prepare a Cost Reconciliation Schedule (Step 4)
Production Cost Report
21-49
Illustration 21-22
LO 6 Explain the four steps necessary to prepare a production cost report.
Prepare a Cost Reconciliation Schedule (Step 4)
Production Cost Report
21-50
Prepare the Production Cost Report
LO 7
Illustration 21-23
21-51
Largo Company has unit costs of $10 for materials and $30 for
conversion costs. If there are 2,500 units in ending work in
process, 40% complete as to conversion costs and fully
complete as to materials cost, the total cost assignable to the
ending work in process inventory is:
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000.
LO 7 Prepare a production cost report.
Production Cost Report
Question
21-52
In March, Rodayo Manufacturing had the following unit production
costs: materials $6 and conversion costs $9. On March 1, it had zero
work in process. During March, Rodayo transferred out 12,000 units.
As of March 31, 800 units that were 25% complete as to conversion
costs and 100% complete as to materials were in ending work in
process. Assign the costs to the units transferred out and in process.
Costs transferred out (12,000 x $15) $180,000
Work in process, March 31
Materials (800 x $6) $4,800
Conversion costs (200 x $9) 1,800
Total costs $186,600
LO 7 Prepare a production cost report.
DO IT!>
21-53
Companies often use a combination of a process cost
and a job order cost system.
Called operations costing, this hybrid system is similar to
process costing in its assumption that standardized
methods are used to manufacture the product.
At the same time, the product may have some
customized, individual features that require the use of a
job order cost system.
Costing Systems – Final Comments
LO 7 Prepare a production cost report.
Production Cost Report
21-54
Just-In-Time Processing
A processing system that is dedicated to having the right
products or parts as they are needed.
Objective: To eliminate all manufacturing inventories to make
funds and space available for more productive purposes.
Elements of JIT: Dependable suppliers; Multi-skilled workforce;
Total quality control system.
Benefits of JIT: Reduced inventory; Enhanced product quality;
Reduced rework and storage costs; Savings from improved flow
of goods.
LO 8 Explain just-in-time (JIT) processing.
Contemporary Developments
21-55 LO 8 Explain just-in-time (JIT) processing.
Contemporary Developments
Illustration 21-24Just-in-time processing
21-56
Activity-Based Costing
An overhead cost allocation system that focuses on activities
performed in producing a product.
ABC System: More that one basis of allocating activity costs to
products is needed.
Assumptions of ABC: All overhead costs related to the activity
► must be driven by the cost driver used to assign costs to
products.
► should respond proportionally to changes in the activity level
of the cost driver.
Contemporary Developments
LO 9 Explain activity-based costing (ABC).
21-57
Activity-Based Costing
Contemporary Developments
LO 9 Explain activity-based costing (ABC).
Illustration 21-25Activities and cost drivers in ABC
21-58
21-59 LO 10 Apply activity-based costing to specific company data.
Production and Cost Data
Illustration: Atlas Company produces two abdominal-training
products, the Ab Bench and the Ab Coaster. The Ab Bench is a high-
volume item totaling 25,000 units annually. The Ab Coaster is a low-
volume item totaling only 5,000 units per year. Each product requires
one hour of direct labor for completion. Therefore, total annual direct
labor hours are 30,000 (25,000 + 5,000). Expected annual
manufacturing overhead costs are $900,000. The predetermined
overhead rate is $30 ($900,000 ÷ 30,000) per direct labor hour. The
direct materials cost per unit is $40 for the Ab Bench and $30 for the
Ab Coaster. The direct labor cost is $12 per unit for each product.
APPENDIX 21A Traditional Costing versus ABC
21-60 LO 10 Apply activity-based costing to specific company data.
Unit Costs Under Traditional Costing
APPENDIX 21A Traditional Costing versus ABC
Illustration 21A-1
21-61 LO 10 Apply activity-based costing to specific company data.
Unit Costs Under ABC
APPENDIX 21A Traditional Costing versus ABC
Illustration 21A-2
Determining Overhead Rates Under ABC
Atlas Company’s expected annual overhead costs of $900,000 relate
to three activities—machine setups, machining, and inspections.
21-62 LO 10 Apply activity-based costing to specific company data.
Unit Costs Under ABC
APPENDIX 21A Traditional Costing versus ABC
Illustration 21A-3
Assigning Overhead Cost to Products Under ABC
Because of its low volume, the Ab Coaster requires more setups
and inspections than the Ab Bench. The expected number of cost
drivers for each product is as follows.
21-63
Assignment of overhead costs to products follows.
Assigning Overhead Cost to Products Under ABC
APPENDIX 21A Traditional Costing versus ABC
Illustration 21A-3
Illustration 21A-4
21-64
APPENDIX 21A Traditional Costing versus ABC
The data shows that under ABC, overhead costs are shifted from
the high-volume product (Ab Bench) to the low-volume product
(Ab Coaster). This shift results in more accurate costing for two
reasons.
1.Low-volume products often require more special handling, such as
more machine setups and inspections, than high-volume products.
2.Assigning overhead using ABC will usually increase the cost per
unit for low-volume products as compared to a traditional overhead
allocation.
Assigning Overhead Cost to Products Under ABC
LO 10 Apply activity-based costing to specific company data.
21-65 LO 10 Apply activity-based costing to specific company data.
Comparing Unit Costs
APPENDIX 21A Traditional Costing versus ABC
Illustration 21A-5
The comparison shows that unit costs under traditional costing have
been significantly distorted.
21-66 LO 10 Apply activity-based costing to specific company data.
Benefits of ABC
APPENDIX 21A Traditional Costing versus ABC
The primary benefit of ABC is more accurate product costing.
Here’s why:
1.ABC leads to more cost pools being used to assign overhead costs
to products.
2.ABC leads to enhanced control over overhead costs.
3.ABC leads to better management decisions.
21-67 LO 10 Apply activity-based costing to specific company data.
Limitations of ABC
APPENDIX 21A Traditional Costing versus ABC
ABC systems often provide better product cost data than
traditional volume-based systems, there are limitations:
1.ABC can be expensive to use.
2.Some arbitrary allocations continue.
21-68
“Copyright © 2013 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.”
Copyright