CHAPTER 3 PROCESS COST ACCOUNTING Study Objectives Understand

CHAPTER 3 PROCESS COST ACCOUNTING Study Objectives Understand who uses process cost systems. Explain the similarities and differences between job order and process cost systems. Explain the flow of costs in a process cost system. Make the journal entries to assign manufacturing costs in a process cost system.

Study Objectives: Continued Compute equivalent units. Explain the four steps necessary to prepare a production cost report. Prepare a production cost report.

NATURE OF PROCESS COST SYSTEMS USES OF PROCESS COST SYSTEMS Study Objective 1 Ø Used to apply costs to similar products that are mass produced in a continuous fashion. Ø Examples include the production of cereal, paint, and soft drinks.

NATURE OF PROCESS COST SYSTEMS USES OF PROCESS COST SYSTEMS Comparison of Process Cost and Job Order Cost

NATURE OF PROCESS COST SYSTEMS SIMILARITIES AND DIFFERENCES Study Objective 2 In job order cost systems: In process cost systems: Ø Costs are assigned to each job. Ø Costs are tracked through a series of connected manufacturing processes or departments. Ø The products have unique characteristics. Ø The products are uniform or relatively homogeneous and produced in a large volume.

NATURE OF PROCESS COST SYSTEMS SIMILARITIES AND DIFFERENES

NATURE OF PROCESS COST SYSTEMS SIMILARITIES BETWEEN SYSTEMS Job order and process cost systems are similar in 3 ways: Same manufacturing cost elements Direct Materials, Direct Labor, and Manufacturing Overhead. Similar accumulation of costs Debit raw materials costs to Raw Material Inventory Debit factory labor costs to Factory Labor Debit manufacturing overhead costs Manufacturing Overhead. Same accounts for flow of costs Work in Process, Finished Goods Inventory, and Cost of Goods Sold; however, the methods of assigning the costs differ significantly.

NATURE OF PROCESS COST SYSTEMS DIFFERENCES BETWEEN SYSTEMS Job order and process cost systems differ in 4 ways:

NATURE OF PROCESS COST SYSTEMS PROCESS COST FLOW Study Objective 3 Example – Tyler Company Ø Manufacturing of automatic can openers consists of two processes: § Machining – raw materials are shaped, honed, drilled § Assembly – parts assembled and packaged Ø Materials, labor, and manufacturing overhead added in both departments.

NATURE OF PROCESS COST SYSTEMS PROCESS COST FLOW

NATURE OF PROCESS COST SYSTEMS ASSIGNMENT OF MANUFACTURING COSTS Materials Costs Ø A process cost system requires fewer materials requisitions than a job order cost system. § Materials are used for processes not specific jobs. § Requisitions are for larger quantities of materials. Ø The entry to record the materials used:

NATURE OF PROCESS COST SYSTEMS ASSIGNMENT OF MANUFACTURING COSTS Factory Labor Costs Ø Time tickets used in both systems. Ø All labor costs incurred within a production department are a cost of processing. Ø The entry to assign these costs:

NATURE OF PROCESS COST SYSTEMS ASSIGNMENT OF MANUFACTURING COSTS Manufacturing Overhead Costs Ø Objective of assigning overhead - allocate overhead to departments on an objective and equitable basis. § Use the activity that “drives” or causes the costs § Machine time used - primary driver in continuous manufacturing operations - widely used Ø The entry to allocate overhead to the two processes:

NATURE OF PROCESS COST SYSTEMS ASSIGNMENT OF MANUFACTURING COSTS Entries to Transfer Costs Through System Ø Monthly entry to transfer goods to next department: Ø Entry to transfer completed goods to Finished Goods: Ø Entry to record Cost of Goods Sold at the time of sale:

EQUIVALENT UNITS Study Objective 5 Ø A measure of the work done during the period, expressed in fully completed units Ø Used to determine the cost per unit of the completed product

EQUIVALENT UNITS Example Compute the cost of instruction at XYZ College per full-time equivalent student based on the following information: § Total cost of instruction is $9, 000 § Student population consists of 900 full-time and 1, 000 part-time students § Part-time students take 60% of the classes of a fulltime student Full-time Students + 900 + Equivalent Units of Part-time Students = (60% x 1, 000) = Full-time Equivalent Students 1, 500

EQUIVALENT UNITS Example - Continued Cost of instruction per full-time equivalent student equals total cost of instruction divided by number of full-time equivalent students $9, 000 / 1, 500 = $6, 000

EQUIVALENT UNITS WEIGHTED-AVERAGE METHOD Ø Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process Ø Most widely used method Ø Beginning work in process not part of computation of equivalent units Units Completed and Transferred Out + Equivalent Units of+ Ending Work in Process = Equivalent Units = of production

EQUIVALENT UNITS WEIGHTED-AVERAGE METHOD - REFINEMENTS Generally, two equivalent unit computations are required: One for materials One for conversion costs Units Completed and Transferred Out. Materials Units Completed and Transferred Out. Conversion Costs + Equivalent Units of Ending Work in Process-Materials + Equivalent Units of Ending Work in Process. Conversion Costs = Equivalent Units of Production. Materials = Equivalent Units of Production. Conversion Costs

EQUIVALENT UNITS - Refinements WEIGHTED-AVERAGE METHOD - Example Ø The Kellogg Company uses 3 departments (Mixing, Baking, and Freezing/Packaging) to produce waffles. § Physical units for Mixing Department: • Beginning work in process • Started into production during period 100, 000 800, 000 • Transferred out to Baking Department • Ending work in process 700, 000 200, 000

EQUIVALENT UNITS - Refinements WEIGHTED-AVERAGE METHOD Example - Continued Ø Mixing Department Raw Materials Information § All ingredients (materials) are added at the beginning of the mixing process. § All units, regardless of degree of completion, are 100% complete as to materials. Ø Equivalent Units for Materials: Units Transferred Out 700, 000 100% Complete 700, 000 Ending Work in Process 200, 000 100% Complete 200, 000 Total Equivalent Units 900, 000

EQUIVALENT UNITS - Refinements WEIGHTED-AVERAGE METHOD Example - Continued Ø Mixing Department Conversion Cost Information § Conversion costs - sum of labor costs and overhead costs § Incurred uniformly throughout the mixing process. • Beginning work in process - 70% complete as to conversion costs. • Ending work in process - 60% complete as to conversion costs Ø Equivalent Units for Conversion Costs: Units Transferred Out 700, 000 100% Complete 700, 000 Ending Work in Process 200, 000 60% Complete 120, 000 Total Equivalent Units 820, 000

PRODUCTION COST REPORT Study Objective 6 Ø Key document used to understand activities Ø Prepared for each department and shows: § Production quantity § Cost data Ø Four preparation steps Compute physical unit flow Compute equivalent units of production Compute unit production costs Prepare a cost reconciliation schedule

FLOW OF COSTS IN PROCESS SYSTEM Example – Production of Waffles

COMPREHENSIVE EXAMPLE OF PROCESS COSTING Basic Information

COMPREHENSIVE EXAMPLE Continued Step 1: Compute Physical Unit Flow Ø Physical units actual units to be accounted for during a period, regardless of work performed. Ø Total units to be accounted for units started (or transferred) into production during period + units in production at beginning of period. Ø Total units accounted for units transferred out during period + units in production at end of period.

COMPREHENSIVE EXAMPLE Continued Step 1: Compute Physical Unit Flow - Continued

COMPREHENSIVE EXAMPLE Continued Step 2: Compute Equivalent Units of Production Ø Measure of a department’s productivity. Ø Two computations required: one for materials and one for conversion costs. Ø Beginning work in process is ignored.

COMPREHENSIVE EXAMPLE Continued Step 3: Compute Unit Production Costs Ø Costs expressed in terms of equivalent units of production Ø When equivalent units of production are different for materials and for conversion costs, three unit costs are computed: § materials § conversion § total manufacturing

COMPREHENSIVE EXAMPLE Continued Step 3: Compute Unit Production Costs - Continued Ø Materials Direct Materials Cost in Beginning Work in Process Direct Materials Added to Production during Month Total Materials Cost The computation of unit materials cost: $ 50, 000 400, 000 $450, 000

COMPREHENSIVE EXAMPLE Continued Step 3: Compute Unit Production Costs - Continued Ø Conversion Costs in Beginning Work in Process $ 35, 000 Conversion Costs Added to Production during Month 170, 000 Total Conversion Costs $205, 000 The computation of unit conversion cost:

COMPREHENSIVE EXAMPLE Continued Step 3: Compute Unit Production Costs - Continued Ø Total Manufacturing Cost Per Unit The computation of unit total manufacturing cost:

COMPREHENSIVE EXAMPLE Continued Step 4: Prepare a Cost Reconciliation Schedule Ø Determines cost of goods transferred to the next department Ø Assigns total costs to units transferred out and to ending work in process Ø Shows that total costs accounted for equal total costs to be accounted for

COMPREHENSIVE EXAMPLE Continued Step 4: Prepare a Cost Reconciliation Schedule Continued Ø Costs charged to Mixing Department Cost of beginning Work in Process Costs started into production during period Total costs to be accounted for $ 85, 000 570, 000 $655, 000

THE COST OF PRODUCTION REPORT Study Objective 7