Accounting Principles, 6e Weygandt, Kieso, & Kimmel John Wiley & Sons, Inc. Prepared by Marianne...

Accounting Principles, 6e Weygandt, Kieso, & Kimmel

Accounting Principles, 6e Weygandt, Kieso, & Kimmel

John Wiley & Sons, Inc.

Prepared byMarianne Bradford, Ph.D.

Bryant College

CHAPTER 22 PROCESS COST ACCOUNTING


After studying this chapter, you should be able to:

11 Understand who uses process cost systems.

22 Explain the similarities and differences between job order cost and process cost systems.

33 Explain the flow of costs in a process cost system.

44 Make the journal entries to assign manufacturing costs in a process cost system

55 Compute equivalent units.



After studying this chapter, you should be able to:

66 Explain the four steps necessary to prepare a production cost report.

77 Prepare a production cost report.

88 Explain just-in-time processing.

99 Explain activity-based-costing.

PREVIEW OF CHAPTER 22

PROCESS COST ACCOUNTING

Nature of ProcessCost Systems

EquivalentUnits

Comprehensive Example of

Process Costing

Weighted averagemethod

Refinements

Production cost report

Physical Units

Equivalent units of production

Unit Production costs

Cost reconciliation schedule

Production cost report

Uses

Similarities and differences

Process cost flow

Assignment of manufacturing costs

PREVIEW OF CHAPTER 22

PROCESS COST ACCOUNTING

ContemporaryIssues

Just-in-time processing

Activity-basedcosting

STUDY OBJECTIVE 1

Understand who uses process cost systems. Understand who uses process cost systems.

Process 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).

THE NATURE OF PROCESS COST SYSTEMS

ILLUSTRATION 22-1 MANUFACTURING PROCESSES

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 Work In 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, as illustrated below:

Manufacturing Processes

Soda

Blending Filling Packaging

STUDY OBJECTIVE 2

Explain the similarities and differences between job order cost and process cost systems.

Explain the similarities and differences between job order cost and process cost systems.

SIMILARITIES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS

Job order and process cost systems are similar in three ways:

1. The manufacturing cost elements.2. The accumulation of the costs of

materials, labor, and overhead.3. The flow of costs (although the methods

of assigning costs differ significantly).

Job order and process cost systems are different in three ways:

1. The number of work in process accounts used.

2. Documents used to track costs.

3. The point at which costs are totaled.

4. Unit cost computations

DIFFERENCES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS

ILLUSTRATION 22-4 JOB ORDER VERSUS PROCESS COST

ACCOUNTING

A feature of process costing is that costs charged to work in process are summarized in production cost reports. Unit costs are calculated by dividing total manufacturing costs for

the period by the units produced during the period. The major differences between job order cost accounting and

process cost accounting are summarized below:

Job Order ProcessFeature Cost Accounting Cost Accounting

Work in process accounts One for each job One for each process Summary of manufacturing costs Job cost sheets Production cost reports Determination of total manufacturing costs Each job Each period Unit cost computation Cost of each job ÷ Total manufacturing costs ÷

Units produced Units producedfor the job during the period

STUDY OBJECTIVE 3

Explain the flow of costs in a process cost system. Explain the flow of costs in a process cost system.

ILLUSTRATION 22-5 FLOW OF COSTS IN

PROCESS COST SYSTEMS

Manufacturing Costs

Raw Materials

Factory Labor

Manufacturing Overhead

Assigned to

Work in Process Machining

Department A

Costs transferred

to

Finished Goods Inventory

Cost of Goods Sold

Work in Process Assembly

Department B

Cost of completed

work

Cost of Goods Sold

PROCESS COST FLOW

Illustration 22-5 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.

FLOW OF COSTS IN PROCESS COST ACCOUNTING

8

Process Cost AccountingProcess Cost Accounting

W o r k i n P r o c e s sP r o d u c t i o n D e p a r t m e n t B

( 4 ) M a t e r i a l s ( 8 ) C o s t o fu s e d c o m p l e t e d

( 5 ) L a b o r w o r ku s e d

( 6 ) O v e r h e a da p p l i e d

( 7 ) T r a n s f e r r e di n c o s t s

F a c t o r y L a b o r( 2 ) F a c t o r y l a b o r ( 5 ) F a c t o r y

i n c u r r e d l a b o r u s e d

R a w M a t e r ia ls In v e n to r y( 1 ) P u r c h a s e s ( 4 ) M a t e r ia l s

u s e d

M a n u f a c t u r i n g O v e r h e a d( 3 ) O v e r h e a d ( 6 ) O v e r h e a d

i n c u r r e d a p p l i e d

W o r k i n P r o c e s sP r o d u c t i o n D e p a r t m e n t A

( 4 ) M a t e r i a l s ( 7 ) C o s t su s e d t r a n s f e r r e d

( 5 ) L a b o r o u tu s e d

( 6 ) O v e r h e a da p p l i e d

F i n i s h e d G o o d s I n v e n t o r y( 8 ) C o s t o f ( 9 ) C o s t o f g o o d s

c o m p l e t e d s o l dw o r k

C o s t o f G o o d s S o l d( 9 ) C o s t o f g o o d s

s o l d

4

5

6

7

9

A s s i g n m e n t4 . M a t e r i a l s a r e u s e d5 . L a b o r i s u s e d6 . O v e r h e a d i s a p p l i e d7 . C o s t s a r e t r a n s f e r r e d

o u t8 . G o o d s a r e c o m p l e t e d9 . G o o d s a r e s o l d

Key to Entries:Key to Entries:

A c c u m u l a t i o n1 . P u r c h a s e r a w m a t e r i a l s2 . I n c u r f a c t o r y l a b o r3 . I n c u r m a n u f a c u r i n g

o v e r h e a d

Key to Entries:Key to Entries:

8

PROCESS COST FLOW ACCUMULATION OF MANUFACTURING COSTS

The accumulation of materials and labor costs is the same in process costing as in job order costing.

1 All raw materials are debited to Raw Materials Inventory when the materials are purchased.

2 All factory labor is debited to Factory Labor when the labor costs are incurred.

STUDY OBJECTIVE 4

Make the journal entries to assign manufacturing costs in a process cost system.

Make the journal entries to assign manufacturing costs in a process cost system.

PROCESS COST FLOW ASSIGNMENT OF MATERIAL COSTS

Date Account Titles and Explanation Debit Credit June 30 Work in Process – Machining Work in Process – Assembly Raw Materials Inventory (To record materials used)

In a process cost system, fewer materials requisition slips are usually required than in a job order cost system, since materials are used for processes rather than for specific jobs.

At Tyler Manufacturing Company, materials are entered at the beginning of each process.

The entry to record the materials used is:

xxxxxxxx xxxx

PROCESS COST FLOW ASSIGNMENT OF FACTORY LABOR COSTS

Date Account Titles and Explanation Debit Credit June 30 Work in Process – Machining Work in Process – Assembly Factory Labor (To assign factory labor to production)

In process costing, as in job 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 or departmental payroll summaries.

The entry to assign these costs is:

xxxxxxxx xxxx

PROCESS COST FLOW ASSIGNMENT OF MANUFACTURING

OVERHEAD COSTS

Date Account Titles and Explanation Debit Credit June 30 Work in Process – Machining Work in Process – Assembly Manufacturing Overhead (To assign overhead to processes)

In 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 that “drives” or causes the costs.

A primary driver of overhead costs in continuous manufacturing operations is machine time used, not direct labor.

The entry to allocate overhead to the 2 processes is:

xxxxxxxx xxxx

PROCESS COST FLOW TRANSFER TO NEXT DEPARTMENT

Date Account Titles and Explanation Debit Credit June 30 Work in Process – Assembly Work in Process – Machining (To record transfer of units to the Assembly Department)

At 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:

xxxxxxxx

PROCESS COST FLOW TRANSFER TO FINISHED GOODS

Date Account Titles and Explanation Debit Credit June 30 Finished Goods Inventory Work in Process – Assembly (To record transfer of units to finished goods)

The units completed in the Assembly Department are transferred to the finished goods warehouse.

The entry for this transfer is as follows:

xxxxxxxx

PROCESS COST FLOW TRANSFER TO COST OF GOODS SOLD

Date Account Titles and Explanation Debit Credit June 30 Cost of Goods Sold Finished Goods Inventory (To record cost of units sold)

When finished goods are sold, the entry to record the cost of goods sold is as follows:

xxxxxxxx

END-OF-PERIOD PROCEDURES MACHINING DEPARTMENT

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

1 the units transferred out of each department and

2 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 accounting.

END-OF-PERIOD PROCEDURES MACHINING DEPARTMENT

For each process, it is necessary to perform the following procedures at the end of the period:

1 Calculate the physical units.

2 Calculate equivalent units of production.

3 Calculate unit costs of production.

4 Assign costs to the units transferred and in process.

5 Prepare the production cost report.

STUDY OBJECTIVE 5STUDY OBJECTIVE 5

Compute equivalent units.Compute equivalent units.

EQUIVALENT UNITS

Equivalent 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:

1 Finish the units of beginning work in process inventory.

2 Complete the units started into production during the period.

3 Start, but only partially complete, the units in ending work in process inventory.

ILLUSTRATION 22-6 INFORMATION FOR FULL-TIME

STUDENT EXAMPLE Suppose you were asked to compute the cost of instruction at your college per full-time equivalent student. You

are provided with the following information.

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:

ILLUSTRATION 22-7 FULL-TIME EQUIVALENT UNIT

COMPUTATION

÷ =Full-timeStudents

Full-timeEquivalent Students

Equivalent Units of Part-time

Students

900 ÷ (60% x 1,000) = 1,500

The cost of instruction per full-time equivalent student is thereforethe total cost of instruction ($900,000) divided by the number of full-time equivalent students (1,500), which is $600 ($900,000 / 1,500).

ILLUSTRATION 22-8 EQUIVALENT UNITS

OF PRODUCTION FORMULA

÷ =Units Completed and Transferred

Out

Equivalent Unitsof production

Equivalent Units of Ending Work

in Process

The formula to compute equivalent units of production is shown above. This method of computing equivalent units is referred to as the weightedaverage method. It considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process. It is the method most widely used in practice.


Explain the four steps necessary to prepare a production cost report. Explain the four steps necessary to prepare a production cost report.

ILLUSTRATION 22-12FLOW OF COSTS IN MAKING

EGGO WAFFLES

Raw MaterialsFactory LaborManufacturing Overhead

Mixing Department

ProductionCost Report

BakingDepartment



FinishedGoods

Freezing and Packaging

Department

Mixing DepartmentPercentage Complete

Physical Units Materials Conversion CostsWork In process, June 1 100,000 100% 70%Started into production 800,000Total Units 900,000Units transferred out 700,000Work in process, June 30 200,000 100% 60%Total Units 900,000

ILLUSTRATION 22-9INFORMATION FOR

MIXING DEPARTMENT

Illustration 22-9 indicates that the beginning work in process is 100 percentcomplete as to materials cost and 70 percent complete as to conversion costs.

Equivalent Units

Materials Conversion CostsUnits transferred out 700,000 700,000Work in progress, June 30200,000 X 100% 200,000200,000 X 60% 120,000

900,000 820,000

ILLUSTRATION 22-10COMPUTATION OF EQUIVALENT UNITS

MIXING DEPARTMENT

In computing equivalent units, the beginning work in process is not part of the equivalent units of production formula. The units transferred out to the Baking Department are fully complete as to both materials and conversion costs. The ending work in process is fully complete as to materials, but only 60 percent complete as to conversion costs.Two equivalent unit computations are therefore necessary.

ILLUSTRATION 22-11REFINED EQUIVALENT UNITSOF PRODUCTION FORMULA

÷Units Completed and

Transferred Out-Materials

Equivalent Unitsof Production-

Materials


in Process-Materials

The earlier formula used to compute equivalent units of production canbe refined to show the computations for materials and for conversioncosts as shown above.

=

÷Units Completed and

Transferred Out-Conversion Costs

Equivalent Unitsof Production-

Conversion Costs


in Process-Materials-Conversion Costs

=

Comprehensive Example ofProcess Costing

Data for the Mixing Department at Kellogg Company for the month of June are shown on the next slide. The data will be used to complete a production cost report for the Mixing Department.

Mixing DepartmentUnits : Work in process, June 1 100,000Direct materials: 100% completeConversion costs: 70% completeUnits started into production in June 800,000Units completed and transferred out to Baking Department 700,000Work in process, June 30 200,000Direct materials 100% completeConversion costs 60% complete

Costs : Work in process, June 1Direct materials: 100% complete 50,000Conversion Costs: 70% complete 35,000Cost of work in process, June 1 85,000

Costs incurred during production in JuneDirect Materials 400,000Conversion Costs 170,000Costs incurred in June 570,000

ILLUSTRATION 22-13UNIT & COST DATA

MIXING DEPARTMENT

Mixing DepartmentPhysical Units

Units to be accounted forWork in process, June 1 100,000Started ( transferred) into production 800,000Total Units 900,000

Units accounted forCompleted and transfered out 700,000Work in process, June 30 200,000Total Units 900,000

ILLUSTRATION 22-14PHYSICAL UNIT FLOW-

MIXING DEPARTMENT –STEP 1Physical units are the actual units to be accounted for duringa period, irrespective of any work performed. To keep trackof these units, it is necessary to add the units started (or transferred) into production during the period to the units inprocess at the beginning of the period. This amount is referred to as the total units to be accounted for. In the Mixing Department, 900,000 units must be accounted for.

Equivalent UnitsMaterials Conversion Costs

Units transferred out 700,000 700,000Work in process, June 30200,000 X 100% 200,000200,000 X 60% 120,000Total equivalent Units 900,000 820,000

ILLUSTRATION 22-15COMPUTATION OF EQUIVALENT UNITS

MIXING DEPARTMENT-STEP 2

Once the physical flow of the units is established, it is necessaryto measure the Mixing Department’s productivity in terms of equivalent units of production. The equivalent unit computationis as follows:

Work in process, June 1 50,000Direct materials costCosts added to production during JuneDirect materials cost 400,000Total materials cost $450, 000

ILLUSTRATION 22-16MATERIALS COST COMPUTATION

-STEP 3

Unit production costs are costs expressed in terms of equivalentunits of production. When equivalent units of production aredifferent for materials and conversion costs, three unit costs arecomputed: (1) materials, (2) conversion, and (3) total manufacturing.The computation for Eggo Waffles is as follows:

Work in process, June 1 Conversion costs $35,000Costs added to production during JuneConversion costs 170,000Total conversion costs $205,000

ILLUSTRATION 22-18CONVERSION COSTS COMPUTATION

The computation of total conversion costs is as follows:

Costs to be accounted for Work in process, June 1 85,000Started into production 570,000Total costs 655,000

ILLUSTRATION 22-21COSTS CHARGED TO MIXING

DEPARTMENT – STEP 4

The total costs that were charged to the Mixing Departmentin June are as follows:

Mixing Department Cost Reconciliation Schedule

Costs accounted forTransferred out ( 700,000 X $0.75) $525, 000Work in process, June 30Materials ( 200,000 X $0.50) $100,000Conversion Costs ( 120,000 X $0.25) 30,000 130,000Total costs $655,000

ILLUSTRATION 22-22COST RECONCILIATION SCHEDULE

MIXING DEPARTMENT

The total costs charged to the Mixing Department in June aretherefore $655,000. A cost reconciliation schedule is then prepared to assign the costs to (1) units transferred out to the Baking Department and (2) ending work in process.


Prepare a production cost report. Prepare a production cost report.

Mixing DepartmentProduction Cost ReportFor the Month Ended June 30, 2002

Equivalent UnitsPhysical Units Materials Conversion Costs

Quantities Step 1 Step 2 Units to be accounted forWork in process, June1 100,000Started into production 800,000Total Units 900,000

Units accounted for Transferred out 700,000 700,000 700,000Work in process, June 30 200,000 200,000 120,000 ( 200,000 X 60%)Total units 900,000 900,000 820,000

ILLUSTRATION 22-23PRODUCTION COST REPORT


Equivalent UnitsCosts Materials Conversion Costs TotalUnit costs Step 3Costs in June (a) $450,000 $205,000 $655,000Equivalent Units (b) 900,000 820,000

Unit costs [ (a) /(b)] $0.50 $0.25 $0.75

Costs to be accounted forWork in process, June 1 $85,000Started into production 570,000Total costs $655,000



Equivalent UnitsConversion Costs Total

Cost Reconciliation Schedule, Step 4Costs accounted forTransferred out ( 700,000 X$0.75) $525,000Work in process, June 30Materials ( 200,000 X $0.50) $100,000Conversion Costs ( 120,000 X $0.25) 30,000 130,000Total costs $655,000



Explain just-in-time (JIT) processing.Explain just-in-time (JIT) processing.

CONTEMPORARY DEVELOPMENTS

JUST-IN-TIME PROCESSING



Continuous process manufacturing has traditionally been based on a just-in-case philosophy – inventories

of raw materials are maintained just in case some items are of poor quality or a key supplier is shut down by a strike.

Subassembly parts are manufactured and stored just in case they are needed later in the manufacturing process.

Finished goods are completed and stored just in case unexpected and rush customer orders are received.

This philosophy often results in a push approach in which raw materials and subassembly parts are pushed through each process.


JUST-IN-TIME PROCESSING Mostly in response to foreign competition, many U.S. firms

have switched to just-in-time (JIT) processing. JIT manufacturing is dedicated to producing the right

products or parts at the right time as they are needed. Under JIT processing,

1 raw materials are received just in time for use in production,

2 subassembly parts are completed just in time for use in finished goods, and

3 finished goods are completed just in time to be sold. Illustration 22-24 shows the sequence of activities in JIT

processing.

ILLUSTRATION 22-24 JUST-IN-TIME

PROCESSING

ILLUSTRATION 22-24 JUST-IN-TIME

PROCESSING

Goods Manufactured Goods Shipped to Customer

Susan’s

SoccerSneakers

Sales Order Received

100 pairs of sneakers...

got it!

Send rubber and shoe laces directly

to the factory.


JUST-IN-TIME PROCESSING A primary objective of JIT is to eliminate all manufacturing

inventories since inventories are considered to have an adverse effect on net income because of their high storage and

maintenance costs. JIT strives to eliminate inventories by using a pull approach in

manufacturing. There are 3 important elements in JIT processing:

1 A company must have dependable suppliers who are willing to deliver on short notice exact quantities of raw materials

according to precise quality specifications.

2 A multiskilled work force must be developed.

3 A total quality control system must be established throughout the manufacturing operations.




JUST-IN-TIME PROCESSINGThe major benefits of JIT processing are:

1 Manufacturing inventories are significantly reduced or eliminated.

2 Product quality is enhanced.

3 Rework costs and inventory storage costs are reduced or eliminated.

4 Production cost savings are realized from the improved flow of goods through the processes.


Explain activity-based costing (ABC).Explain activity-based costing (ABC).

ILLUSTRATION 22-25 ACTIVITIES AND COST DRIVERS

IN ABC

ILLUSTRATION 22-25 ACTIVITIES AND COST DRIVERS

IN ABCActivity-based costing (ABC) is a development in product costing that has received much attention in recent years, and it focuses on the activities performed in producing a product. In ABC, the cost of a product is equal to the sum of the costs of all activities performed to manufacture it. ABC recognizes more than a single basis of allocating activity costs to products is needed in order for cost data to be meaningful and accurate. In selecting the appropriate basis, ABC seeks to identify the cost drivers that measure the activities performed on the product. Examples of activities and possible cost drivers are shown below.

Activity Cost DriverOrdering raw materials Ordering hours; number of ordersReceiving raw materials Receiving hours; number of shipmentsMaterials handling Number of requisitions; weight of materials;

handling hoursProduction scheduling Number of ordersMachine setups Setup hours; number of setupsMachining (fabricating, assembling, etc.) Machine hoursQuality control inspections Number of inspectionsFactory supervision Number of employees


ACTIVITY-BASED COSTING


ACTIVITY-BASED COSTING2 important assumptions must be met in order to obtain

accurate product costs under ABC:

1 All overhead costs related to the activity must be driven by the cost driver used to assign costs to products.

2 All overhead costs related to the activity should respond proportionally to changes in the activity level of the cost

driver.


ACTIVITY-BASED COSTING


ACTIVITY-BASED COSTINGCosts of all Costs of all

manufacturing manufacturing overhead activitiesoverhead activities

COPYRIGHTCOPYRIGHT

Copyright © 2002 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 consent 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 © 2002 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 consent 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.

Accounting Principles, 6e Weygandt, Kieso, & Kimmel John Wiley & Sons, Inc. Prepared by Marianne...

Documents

Transcript of Accounting Principles, 6e Weygandt, Kieso, & Kimmel John Wiley & Sons, Inc. Prepared by Marianne...