Appendix 21 A Process Costing Objectives 1 Distinguish

Appendix 21 A: Process Costing Objectives 1. Distinguish between the flow of costs in process costing and job costs 2. Record process costing transactions 3. Calculate equivalent units 4. Assign costs to units completed and to units in ending work in process inventory. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 1

Objective 1 Distinguish between the flow of costs in process costing and job costing. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 2

Job Costing Direct materials, Direct labour, Overhead Job 100 Finished Goods Job 101 Job 102 Cost of Goods Sold Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 3

Process Costing Direct materials, Direct labour, Overhead WIP Chopping Department Finished Goods WIP Mixing & Bottling Department Cost of Goods Sold Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 4

Objective 2 Record process costing transactions. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦

Recording Costs Example Assume that Pace Foods transfers $4, 000 of partially completed items from the Chopping Department to the Mixing & Bottling Department. l What is the journal entry? l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 6

Recording Costs Work in Process Inventory – Mixing & Bottling Work in Process Inventory – Chopping 4, 000 To transfer costs from the Chopping Department to the Mixing & Bottling Department Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 7

Recording Costs l Assume that additional materials costing $3, 000 were added in the Mixing & Bottling Department. Work-in-Process Inventory – Mixing & Bottling 3, 000 Materials Inventory 3, 000 To requisition materials Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 8

Recording Costs Manufacturing wages amounted to $6, 000 and manufacturing overhead was $12, 000 in the Mixing & Bottling Department. l What are the journal entries? l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 9

Recording Costs Work in Process Inventory – Mixing & Bottling Manufacturing Wages 6, 000 Work in Process Inventory – Mixing & Bottling 12, 000 Manufacturing Overhead 12, 000 To record the additional labour and overhead cost of the Mixing & Bottling Department Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 10

Recording Costs l $19, 000 worth of finished items were transferred to Finished Goods Inventory 19, 000 Work in Process Inventory – Mixing and Bottling 19, 000 To transfer the cost of goods completed Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 11

Recording Costs Assume $1, 000 beginning Work in Process Inventory in the Mixing & Bottling Department. l What is the ending Work in Process Inventory? l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 12

Recording Costs Work in Process Beg. Balance 1, 000 Transferred In 4, 000 Transferred Out Materials 3, 000 19, 000 Labour 6, 000 Overhead End. Balance 12, 000 7, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 13

Tracking the Flow of Costs l 1 2 In process costing, the accounting task is to track the flow of costs through the production process. Account for the goods completed and transferred out. Account for the cost of incomplete units that remain as a department’s ending work in process inventory. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 14

Tracking the Flow of Costs Example Sea. View manufactures swimming masks. l The Shaping Department shapes the masks. l Direct materials are added at the beginning of the process. l Conversion costs are incurred evenly throughout the shaping process. l The partially completed masks then move to the Finishing Department. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 15

Tracking the Flow of Costs Example l Assume that during October, the Shaping Department incurs these costs in processing 50, 000 masks: Direct materials Conversion costs: Direct labour $21, 250 Mfg. overhead 46, 750 Costs to account for $ 140, 000 68, 000 $208, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 16

Tracking the Flow of Costs Example Assume the shaping process is complete for all 50, 000 masks. l What is the cost transferred to the Finishing Department? l $208, 000 l What is the unit cost? l $208, 000 ÷ 50, 000 = $4. 16/mask l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 17

Objective 3 Calculate equivalent units. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser

Equivalent Units Example Assume that on October 31, the Sea. View’s Shaping Department still had 5, 000 masks that were 80% of the way through the shaping process. l What are the conversion equivalent units in ending work in process inventory? l 5, 000 ×. 80 = 4, 000 masks l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 19

Steps in Process Cost Accounting 1 2 3 4 5 Summarise the flow of physical units. Calculate output in terms of equivalent units. Summarise total costs to account for. Calculate the cost per equivalent unit. Assign costs to units completed and to units in ending work in process. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 20

Summarise the Flow of Physical Units Beginning inventory + Started in production = Total to account for Completed and transferred + Work in process = Total accounted for Physical Units -050, 000 40, 000 10, 000 50, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 21

Calculate Output in Terms of Equivalent Units to account for: Started and completed Ending WIP Equivalent units Flow of Physical Direct Units Mtls. 50, 000 40, 000 10, 000 50, 000 100% Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia Conv. Costs 40, 000 2, 500 42, 500 25% 21 a - 22

Summarise Total Costs to Account for Department 1 – Shaping For the Month Ended October 31, 2005 Physical Units Dollars Beginning Inventory -0 -0 Production Started 50, 000 Direct Materials $ 140, 000 Conversion Costs 68, 000 Total 50, 000 $ 208, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 23

Calculate the Cost per Equivalent Unit Department 1 – Shaping For the Month Ended October 31, 2005 Direct Materials Costs added this month $140, 000 ÷ Equivalent Units 50, 000 = Cost per EU $ 2. 80 Conversion Costs $68, 000 42, 500 $ 1. 60 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 24

Objective 4 Assign costs to units completed and to units in ending work-in-process inventory. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 25

Assign Costs to Units Department 1 – Shaping For the Month Ended October 31, 2005 Units completed and transferred out: 40, 000 × ($2. 80 + $1. 60) Units in ending inventory: Materials: 10, 000 × $2. 80 Conversion: 2, 500 × $1. 60 Total costs $ 176, 000 28, 000 4, 000 $208, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 26

Assign Costs to Units Work in Process Inventory – Shaping Balance, Sept. 30 Direct Materials -0140, 000 Direct labour* 21, 250 Overhead* 46, 750 Balance Oct. 31 32, 000 Transferred to Finishing 176, 000 *Conversion costs: $21, 250 + $46, 750 = $68, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 21 a - 27