ACC 3200 Process Costing Learning Objectives Describe the

ACC 3200 Process Costing

Learning Objectives ¡Describe the key features of a process costing system. ¡Reconcile the number of physical units using the weighted average method ¡Calculate equivalent units using the weighted average method ¡Prepare a process costing production report using the weighted average method ¡Prepare Journal Entries for Process Costing

3 -3 Job Order versus Process Costing

3 -4 Flow of Costs in Process Costing

3 -5 Process Costing Production Report The foundation of a process costing system is the production report. In the report we provide information about: 1. The number of units produced. 2. The manufacturing costs transferred into Work in Process Inventory. 3. The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory. 4. The number of units remaining in process at the end of the period. 5. The cost of units remaining in process at the end of the period.

3 -6 Process Costing Production Report Section 1 of Example Production Report (Unit = 1 Barrel of Wine) The report tells managers about the total number of units worked on and where they are in the process. Equivalent units are used to convert partially complete units into the equivalent number of full units.

3 -7 Process Costing Production Report of Example The costs. Section are either 2 transferred out Production with the units completed, or kept in (Costs) the processing department. Report The second part of the production report shows the total manufacturing costs incurred during the period.

3 -8 Weighted Average vs. FIFO Process Costing

3 -9 Preparing the Production Report (Weighted Average Method)

3 -10 Step 1: Reconcile the Number of Physical Units

3 -11 Step 1: Reconcile the Number of Physical Units

3 -12 Diagram of the Crushing, Fermenting, and Aging Process

3 -13 Step 2: Translate Physical Units into Equivalent Units We need to calculate equivalent units because a process usually has some partially completed units in its beginning and ending inventory. + = 1

3 -14 Step 2: Translate Physical Units into Equivalent Units 1. Direct materials are added at the beginning of the process. So, once a unit is started, it will have 100% of the required direct materials. 2. Conversion costs are incurred uniformly in the process. 3. The 1, 600 units that were transferred to bottling during the period are 100% complete for material and conversion. 4. The 400 units in ending inventory are 60% complete as to conversion costs.

3 -15 Step 2: Translate Physical Units into Equivalent Units Exh. 20 -22

3 -16 Step 3: Calculate Cost per Equivalent Unit ÷ ÷

3 -17 Step 4: Reconcile the Total Cost of Work in Process

3 -18 Step 4: Reconcile the Total Cost of Work in Process

3 -19 Step 4: Reconcile the Total Cost of Work in Process

3 -20 Step 5: Prepare a Production Report Section 1 of the Production Report

3 -21 Step 5: Prepare a Production Report Section 2 of the Production Report

3 -22 Additional Factors in Processing Costing 1. We have not discussed process costing when the FIFO method is applied. This material in covered in the Supplement to this chapter. The only difference between the two methods is how we treat beginning inventory. 2. We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department.

3 -23 Journal Entries for Process Costing Purchase of Raw Materials Mondavi purchased $35, 000 of materials on account. Issue of Raw Material into Production Mondavi adds $20, 000 of grapes to production.

3 -24 Journal Entries for Process Costing Recording Actual Conversion Costs Mondavi incurred the following actual conversion costs:

3 -25 Journal Entries for Process Costing Recording Applied Conversion Costs Mondavi applies conversion costs to work in process based on a predetermined rate, using direct materials cost as the allocation base. The rate is 125% of direct materials cost.

3 -26 Summary of Recorded Transactions Raw Materials Beg. Bal. = 0 Work in Process (CFA) Beg. Bal. = 0 Pur. = 35, 000 Conversion Cost Actual 36, 250 Applied Work in Process Bottling

3 -27 Journal Entries for Process Costing Transfer of Cost from CFA to Bottling Mondavi transfers the entire balance, $45, 000, from the work in process (CFA) account to the Bottling work in process account.

3 -28 Journal Entries for Process Costing Issue of Raw Material into the Bottling Process Mondavi issues an $10, 000 worth of direct materials into Bottling Department.

3 -29 Journal Entries for Process Costing Recording Applied Conversion Costs Mondavi applies conversion costs to the Bottling Department using direct materials cost as the allocation base. The rate is 87. 5 percent of direct materials cost.

3 -30 Updated Summary of Recorded Transactions Raw Materials Beg. Bal. = 0 Work in Process CFA Beg. Bal. = 0 Pur. 35, 000 Trans. 45, 000 0 Conversion Cost Actual Applied Work in Process Bottling Beg. Bal. = 0 36, 250 2, 500 63, 750

3 -31 Journal Entries for Process Costing Transferring to Finished Good Inventory Mondavi transfers the entire balance from Bottling and Packaging to Finished Goods Inventory. Unit costs for the 1, 250 cases (15, 00 bottles) produced:

3 -32 Journal Entries for Process Costing Sales of Finished Goods. Mondavi sold 12, 000 bottles in the winery gift shop for $8. 00 per bottle. The entry to record the sale is: The entry to record the cost of goods sold is:

3 -33 Journal Entries for Process Costing Adjusting for Underapplied Conversion Cost Actual 36, 250 Applied 25, 000 8, 750 Underapplied 2, 500 Finished Goods Cost of Goods Sold Beg. Bal. = 0 Goods Comp. 63, 750 12, 750 Adjusted 53, 500

Supplement FIFO Method

3 -35 Step 1: Reconcile the Number of Physical Units Beginning Units in Process + Units Started and Completed + Ending Units in Process FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period.

3 -36 Step 1: Reconcile the Physical Units Started and Completed = 2, 000 ‒ 200 ‒ 400 = 1, 400 OR Units Started and Completed = Units Beginning ‒ Completed Units = 1, 600 – 200 = 1, 400 OR Units Started and Completed = Units Ending ‒ Started Units = 1, 800 – 400 = 1, 400

3 -37 Step 2: Translate Physical Units into Equivalent Units Beginning inventory is 100% complete as to materials and 70% complete as to conversion. Complete as to materials 200 units × 30% = 60 400 units × 60% = 240

3 -38 Step 3: Calculate Cost per Equivalent Unit

3 -39 Step 4: Reconcile the Total Cost of Work in Process

3 -40 Step 5: Prepare a Production Report Section 1 of the Production Report

3 -41 Step 5: Prepare a Production Report Section 2 of the Production Report

End of Topic 6