Chap 003 - 2e by Wild and Shaw

Managerial Accounting

Wild and Shaw

2010 Edition

Wild and Shaw

2010 Edition

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All

rights reserved.

Chapter 3

Process Costing and Analysis

3-3

Conceptual Learning Objectives

C1: Explain process operations and the way they differ from job order operations.

C2: Define equivalent units and explain their use in process cost accounting.

C3: Explain the four steps in accounting for production activity in a period.

C4: Define a process cost summary and describe its purposes.

C5: Appendix 3A: Explain and illustrate the four steps in accounting for production activity using FIFO.

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A1: Compare process cost accounting and job order cost accounting.

A2: Explain and illustrate a hybrid costing system.

Analytical Learning Objectives

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P1: Record the flow of direct materials costs in process cost accounting.

P2: Record the flow of direct labor costs in process cost accounting.

P3: Record the flow of factory overhead costs in process cost accounting.

P4: Compute equivalent units produced in a period.

P5: Prepare a process cost summary.P6: Record the transfer of completed goods to

Finished Goods Inventory and Cost of Goods Sold.

Procedural Learning Objectives

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Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.

Used for production of small, identical, low-cost items. Mass produced in automated continuous production process. Costs cannot be directly traced to each unit of product.

Process Manufacturing Operations

C1

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Job Order Systems

Custom orders

Heterogeneous products

Low production volume

High product flexibility

Low to medium standardization

Job Order Systems

Custom orders

Heterogeneous products

Low production volume

High product flexibility

Low to medium standardization

Process Systems

Repetitive operations

Homogeneous products

High production volume

Low product flexibility

High standardization

Process Systems

Repetitive operations

Homogeneous products

High production volume

Low product flexibility

High standardization

Comparing Job Order and Process Production

A1

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Same objective: to determine the cost of products

Same inventory accounts: raw materials, work in process, and finished goods

Same overhead assignment method:predetermined rate times actual activity

Job and Process Costing Similarities

A1

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Job and Process Costing Similarities and Differences

A1

Journal entries for both job order and process costing are the identical

The difference between job order and process costing lies in how the cost of goods transferred to finished goods is determined.

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A1 Job Order and Process Costing Differences

Job order costing

The cost of goods transferred to

finished goods is equal to the sum of all of the completed jobs for that period

Process costing

The cost of goods transferred to finished

goods equals the number of completed units times the cost per equivalent unit

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Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units.

Two one-half full pitchers are equivalent to one full pitcher.

+ =

Equivalent Units of ProductionC2

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Cost perequivalent

unit

= Product costs for the periodEquivalent units for the period

Cost Per Equivalent UnitC2

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Stage 3

50% ofLabor andOverhead

The process is now complete. The process is now complete.

Stage 2


60% ofMaterial

Stage 1

40% ofMaterial


Equivalent UnitsC2

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Labor

Materials

Ind

irec

tIn

dir

ect

FactoryOverhead

Direct

Direct

Deliveredto

Customers

Goods in Process

FinishedGoodsAllocated

Overhead

Process Manufacturing Operations GenX

C3

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GenX Production Data for April

Beginning Inventory:

Units of product 30,000

Percentage of completion - direct materials 100%

Percentage of completion - direct labor 40%

Units started in April 90,000

Unitscompleted and transferred out 100,000

Ending Inventory:




GenX Production Data for April

Beginning Inventory:




Units started in April 90,000

Unitscompleted and transferred out 100,000

Ending Inventory:




Accounting for GenXC3

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C4

Accounting for GenX

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GenX uses a weighted average cost flow system with the following four steps:

Determine physical flow of units. Compute equivalent units of production. Compute cost per equivalent unit. Assign and reconcile costs.

GenX uses a weighted average cost flow system with the following four steps:

Determine physical flow of units. Compute equivalent units of production. Compute cost per equivalent unit. Assign and reconcile costs.

Accounting for GenXC5

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GenX Physical Flow for April

Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000

Units accounted for as:Units completed and transferred out 100,000 Ending inventory 20,000 Total number of units 120,000

GenX Physical Flow for April

Units to account for:Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000

Units accounted for as:Units completed and transferred out 100,000 Ending inventory 20,000 Total number of units 120,000

Determine Physical Flow of Units

C5

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GenX Direct Materials Equivalent Units of Production for April

Units of Percentage EquivalentProduct of Completion Units

Equivalent units completed andtransferred out 100,000 100% 100,000

Ending goods in process 20,000 100% 20,000

Total units 120,000 120,000

Compute Equivalent Units of Production - Materials

C5

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GenX Direct Labor and FactoryOverhead Equivalent Units of Production for April

Units of Percentage EquivalentProduct of Completion Units

Equivalent units completed andtransferred out 100,000 100% 100,000

Ending goods in process 20,000 25% 5,000

Total units 120,000 105,000

Compute Equivalent Units of Production – Direct Labor and Factory Overhead

C5

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Equivalent Units of Production for April

Direct Direct FactoryMaterials Labor Overhead

Equivalent units completed andtramsferred out 100,000 100,000 100,000

Equivalent units for endingending good in process 20,000 5,000 5,000

Equivalent units of productionfor period 120,000 105,000 105,000

Compute Equivalent Units of Production

C5

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GenX Cost Per Equivalent Unit for April

Direct Direct FactoryMaterials Labor Overhead

Costs of beginning goodsin process inventory 3,300$ 600$ 720$

Costs incurred this period 9,900 5,700 6,840

Total costs 13,200$ 6,300$ 7,560$ ÷ Equivalent units of

production ÷ 120,000 ÷ 105,000 ÷ 105,000 Cost per equivalent unit

of production = 0.11$ = 0.06$ = 0.072$

Compute Cost Per Equivalent Unit

C5

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In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the:

A. 100,000 units transferred out.

B. 20,000 units remaining in ending inventory.

In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the:

A. 100,000 units transferred out.

B. 20,000 units remaining in ending inventory.

Cost ReconciliationC5

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C5

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ProcessCost

Summary

Process Cost Summary

Helps managerscontrol theirdepartments.

Provides costinformation for

financial statements.

Shows the flowof units and coststhrough work in

process.

Helps factorymanagers evaluate

department managerperformance.

C4

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Process Cost SummaryC4

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C4

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C4

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C4

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Hybrid costing systems contain featuresof both job order and process operations.

Hybrid costing systems contain featuresof both job order and process operations.

Job OrderCosting

ProcessCosting

Hybrid Costing

Material costs areaccounted for usinga job order system.

Material costs areaccounted for usinga job order system.

Conversion costs areaccounted for usinga process system.

Conversion costs areaccounted for usinga process system.

Hybrid Costing SystemsA2

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GENERAL JOURNAL Page 21

Date DescriptionPost. Ref. Debit Credit

Raw Materials Inventory XXXXX

Accounts Payable XXXXX

Acquired materials on credit for

use in the factory.

P1 Process CostingTypical Accounting Entries

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Goods in Process Inventory XXXXX


To assign costs of direct material

used in production


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Factory Overhead XXXXX


To record indirect materials used

in April.


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Factory Payroll XXXXX

Cash XXXXX

To record factory wages for April.


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To assign costs of direct labor

used in production


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To record indirect labor as

overhead.


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Prepaid Insurance XXXXX

Accrued Utilities Payable XXXXX

Cash XXXXX

Accumulated Depreciation XXXXX

To record factory overhead items

incurred during April.


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Allocated factory overhead costs to

production on the basis of direct

labor cost


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Finished Goods Inventory XXXXX


To record the transfer of completed

goods out of production.


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Cost of Goods Sold XXXXX

Finished Goods Inventory XXXXX

To record cost of goods sold

during April.


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End of Chapter 3

Chap 003 - 2e by Wild and Shaw

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