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14 - 12002 Prentice Hall Business Publishing,Introduction to Management Accounting12/e, Horngren/Sundem/Stratton

Chapter 14

Process-Costing Systems


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2002 Prentice Hall Business Publishing,Introduction to Management Accounting12/e, Horngren/Sundem/Stratton 14 - 2

Learning Objective 1

Explain the basic ideas

underlying process costing

and how they differ from

job costing.


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Introduction to Process Costing

What is a process-costing system?

It is a costing system in which the costof a product or service is obtained by

assigning costs to masses of like or

similar units and then computingunit costs on an average basis.


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Process Costing Compared With

Job Costing

FinishedGoods

Cost of GoodsSold

Direct MaterialsDirect Labor

Indirect Resource Cost

Job 101Job 100


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Process Costing Compared With

Job Costing

FinishedGoods

Cost of GoodsSold

Direct MaterialsDirect Labor

Indirect Resource Cost

Process BProcess A Assembly


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Compute output in terms

of equivalent units.


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Physical Units and Equivalent

Units

Track the physical flow in units.

Compute output in terms of equivalent units.

Step 1

Step 2


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Compute Output in Terms of

Equivalent Units

Flow ofPhysical Direct Conv.

Units Mtls. CostsStarted and completed 20,000 20,000 20,000

Ending WIP 5,000 5,000 1,250

Units to account for: 25,000Equivalent units 25,000 21,250

100% 25%

Step 2

Step 1


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Compute costs and prepare

journal entries for the

principal transactions

in a process-costing system.


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Calculation of Product Costs

Summarize total costs to account for.

Compute the cost per equivalent unit.

Step 3

Step 4

Assign costs to units completed and

to units in ending work in process.

Step 5


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Total Direct ConversionCosts Materials Costs

Costs to account for $112,500 $70,000 $42,500

Equivalent units 25,000 21,250= Cost per EU $ 4.80 $ 2.80 $ 2.00

Production Cost Report

Steps 3 and 4


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Production Cost Report

Units completed and transferred out:20,000 (2.80 + 2.00) $ 96,000

Units in ending inventory:

Materials: 5,000 2.80 14,000

Conversion: 1,250 2.00 2,500

Total costs $112,500

Step 5


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Journal Entries

Work in Process Forming 70,000

Direct-materials Inventory 70,000Materials added to production during the month


Accrued Payroll 10,625Direct labor during the month


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Journal Entries


Factory Overhead 31,875Factory overhead applied during the month

Work in Process Finishing96,000

Work in Process Forming 96,000Costs of goods completed and transferred

during the month from Forming to Assembly


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Forming Department

Work in Process FormingDirect materials $ 70,000 Transferred

Direct labor 10,625 out to

Factory overhead 31,875 finishing $96,000

Costs to account for 112,500Month-end balance $ 16,500


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Learning Objectives 4 and 5

Demonstrate how the presence

of beginning inventories affectsthe computation of unit costs

under the weighted-averagemethod and the FIFO method.


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Weighted-Average Method

Focus is on the total work done to date

regardless of whether that work was

done during the period preceding orduring the current period.


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First-In, First-Out Method

Beginning inventory is treated as if it were

separate and distinct from goods startedand completed during the current period.

Equivalent units computations are for only

work done during the current period.


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Example

Consider the Cooking Department of

Ricky Foods, a food-processing company.

Beginning WIP:

5,000 units

100% materials

40% conversion costs

Started: 28,000 units

Ending WIP:

2,000 units

100% materials

50% conversion costs


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Example

Physical

UnitsBeginning WIP 5,000

Started 28,000

Units to account for: 33,000

Ending WIP 2,000

Completed 31,000

Step 1


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Example

Direct Conversion

Materials CostsCompleted 31,000 31,000

+ Ending WIP 2,000 1,000

= Equivalent units 33,000 32,000

Step 2


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Beginning WIP $ 9,360 $ 8,060 $ 1,300

Costs added 56,140 41,440 14,700

Costs to account for $65,500 $49,500 $16,000 Equivalent units 33,000 32,000

= Cost per EU $ 2.00 $ 1.50 $ .50


Example

Steps 3 and 4

Total Direct ConversionCosts Materials Costs


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Example

Units completed and transferred out:

31,000 (1.50 + .50) $62,000


Materials: 2,000 1.50 3,000Conversion: 1,000 .50 500

Total costs $65,500

Step 5


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FIFO Method Example

Physical

UnitsBeginning WIP 5,000

Started 28,000

Units to account for: 33,000

Ending WIP 2,000

Completed 31,000

Step 1


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FIFO Method Example

Step 2Direct Conversion

Materials CostsCompleted 31,000 31,000

+ Ending WIP 2,000 1,000

Beginning WIP 5,000 2,000

= Equivalent units 28,000 30,000


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FIFO Method Example

Current direct materials cost $41,440Current conversion costs 14,700

Total current costs $56,140

+ Beginning work in process $9,360

= Total costs $65,500

Step 3


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FIFO Method Example

Direct materials cost: $41,440 28,000 = $1.48

Conversion costs: $14,700 30,000 = $ .49

Step 4 Cost per equivalent unit


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FIFO Method Example


Materials: 2,000 1.48 $ 2,960

Conversion: 1,000 .49 490

Total $ 3,450Transferred out: ($65,500 $3,450) $62,050

Step 5


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Differences Between FIFO and

Weighted-Average Methods

The key difference is how equivalent units

are computed.

Another difference is the definition of cost.


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Transferred-in Costs in

Process Costing...

treat transfers from a previous department

similar to direct material added at the

beginning of processing.


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Use backflush costing with a

JIT production system.


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Process Costing in a JIT System

JIT is a philosophy about when to do something.

The when is

as needed.

The something is a

production, purchasing,

or delivery activity.


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Industry Characteristics

Sequential arrangement of production

activities

Reduction of set-up times

Scheduling of production as needed, by use

of a demand-pull system

Cross-training of employees


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Process Costing in a JIT System

In just-in-time production systems,

inventory of work in process is typically

small compared to the costs of goodsproduced and sold.

The cost of tracking work in process

exceeds the benefits for many companies.


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Backflush Costing

What is backflush

costing?

It is an accountingsystem that applies

costs to products

only when theproduction is

complete.


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Principles of Backflush Costing

Backflush costing has only two categories of costs:

Materials Conversion

There is no work in process account.


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Backflush Costing Example

Speaker Technology, Inc., recently

introduced backflush costing and JIT.

Model AX27 Standard material cost: $14Standard conversion cost: $21

Actual production for the month: 400 units

Actual materials purchased: $5,600

Actual conversion costs: $8,400


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The backflush costing system has only three

accounts related to production:

1 Materials and parts inventory

2 Conversion costs

3 Finished goods inventory


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What are the journal entries?

Materials Inventory 5,600Accounts Payable or Cash 5,600

To record material purchases

Conversion Costs 8,400Accrued Wages 8,400

To record conversion costs incurred


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Finished Goods Inventory 14,000

Material Inventory 5,600

Conversion Costs 8,400

To record costs of completed production

Cost of Goods Sold 14,000Finished Goods Inventory 14,000

To record costs of 400 units sold


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Cost of Goods Sold 14,000

Material Inventory 5,600

Conversion Costs 8,400


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How Process-Costing Systems

Track Costs to Products

A process-costing system tracks costs

to products using broad averages.

These averages represent equivalent

unit costs incurred in each of

several departments or processes.


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How Process-Costing Systems

Track Costs to Products

Unit costs from one department or process

becomes the transferred-in material for

downstream departments or processes

until the product is finished.


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14 452002 Prentice Hall Business Publishing Introduction to Management Accounting12/e Horngren/Sundem/Stratton

End of Chapter 14

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