21a - 1 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix 21A: Process Costing

21a - 1Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education AustraliaHorngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia

Appendix 21A: 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.


Distinguish between the

flow of costs in process

costing and job costing.

Objective 1


Direct materials, Direct labour, Overhead

Job 100 Job 101 Job 102

FinishedGoods

Cost ofGoods Sold

Job Costing


WIP ChoppingDepartment

WIP Mixing & BottlingDepartment

FinishedGoods

Cost ofGoods Sold

Process Costing

Direct materials, Direct labour, Overhead


Record processcosting

transactions.

Objective 2


Recording Costs Example

Assume that Pace Foods transfers $4,000 of partially completed items from the Chopping Department to the Mixing & Bottling Department.

What is the journal entry?


Recording Costs

Work in Process Inventory –Mixing & Bottling 4,000

Work in ProcessInventory – Chopping 4,000

To transfer costs from the Chopping Departmentto the Mixing & Bottling Department


Work-in-Process Inventory –Mixing & Bottling 3,000

Materials Inventory 3,000

To requisition materials

Recording Costs

Assume that additional materials costing $3,000 were added in the Mixing & Bottling Department.


Recording Costs

Manufacturing wages amounted to $6,000 and manufacturing overhead was $12,000 in the Mixing & Bottling Department.

What are the journal entries?


Recording Costs


Manufacturing Wages 6,000


Manufacturing Overhead 12,000

To record the additional labour and overheadcost of the Mixing & Bottling Department


Finished Goods Inventory 19,000Work in Process Inventory –Mixing and Bottling 19,000

To transfer the cost of goods completed

Recording Costs

$19,000 worth of finished items were transferred to Finished Goods Inventory.


Recording Costs

Assume $1,000 beginning Work in Process Inventory in the Mixing & Bottling Department.

What is the ending Work in Process Inventory?


Recording Costs

Work in Process

Beg. Balance 1,000

Transferred In 4,000 Transferred Out

Materials 3,000 19,000

Labour 6,000

Overhead 12,000

End. Balance 7,000


Tracking the Flow of Costs

In process costing, the accounting task is to track the flow of costs through the production process.

1 Account for the goods completed and transferred out.

2 Account for the cost of incomplete units that remain as a department’s ending work in process inventory.


Tracking the Flow of Costs Example

SeaView manufactures swimming masks. The Shaping Department shapes the

masks. Direct materials are added at the beginning

of the process. Conversion costs are incurred evenly

throughout the shaping process. The partially completed masks then move

to the Finishing Department.


Direct materials $ 140,000Conversion costs:Direct labour $21,250Mfg. overhead 46,750 68,000Costs to account for $208,000


Assume that during October, the Shaping Department incurs these costs in processing 50,000 masks:



Assume the shaping process is complete for all 50,000 masks.

What is the cost transferred to the Finishing Department?

$208,000 What is the unit cost? $208,000 ÷ 50,000 = $4.16/mask


Objective 3

Calculate equivalent units.


Equivalent Units Example

Assume that on October 31, the SeaView’s Shaping Department still had 5,000 masks that were 80% of the way through the shaping process.

What are the conversion equivalent units in ending work in process inventory?

5,000 × .80 = 4,000 masks


Steps in Process Cost Accounting

1 Summarise the flow of physical units.2 Calculate output in terms of equivalent

units.3 Summarise total costs to account for.4 Calculate the cost per equivalent unit.5 Assign costs to units completed and to

units in ending work in process.


Physical UnitsBeginning inventory -0-+ Started in production 50,000= Total to account for 50,000

Completed and transferred 40,000+ Work in process 10,000= Total accounted for 50,000

Summarise the Flow of Physical Units


Calculate Output in Terms of Equivalent Units

Flow ofPhysical Direct Conv.Units Mtls. Costs

Units to account for: 50,000Started and completed 40,000 40,000 40,000Ending WIP 10,000 10,000 2,500Equivalent units 50,000 42,500

100% 25%


Summarise Total Coststo Account for

Department 1 – ShapingFor the Month Ended October 31, 2005

Physical Units DollarsBeginning Inventory -0- -0-Production Started 50,000Direct Materials $ 140,000Conversion Costs 68,000Total 50,000 $ 208,000



Direct Conversion Materials Costs

Costs added this month $140,000 $68,000÷ Equivalent Units 50,000 42,500= Cost per EU $ 2.80 $ 1.60

Calculate the Cost perEquivalent Unit


Assign costs to units completed

and to units in endingwork-in-process inventory.

Objective 4


Assign Costs to Units


Units completed and transferred out:40,000 × ($2.80 + $1.60) $ 176,000Units in ending inventory:Materials: 10,000 × $2.80 28,000Conversion: 2,500 × $1.60 4,000Total costs $208,000


Work in Process Inventory – Shaping

Balance, Sept. 30 -0- Transferred to

Direct Materials 140,000 Finishing 176,000

Direct labour* 21,250

Overhead* 46,750

Balance Oct.31 32,000

*Conversion costs: $21,250 + $46,750 = $68,000

Assign Costs to Units


End of Chapter 21A

Documents

21a - 1 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Appendix 21A: Process Costing