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Process Costing
Chapter 20
20-1Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
1. Describe the flow of costs through a process costing system
2. Calculate equivalent units of production for direct materials and conversion costs
3. Prepare a production cost report using the weighted average method
20-2Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
4. Prepare journal entries for a process costing system
5. Use a production cost report to make decisions
6. Prepare a production cost report using the first-in, first-out method (Appendix 20A)
20-3Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objective 1
Describe the flow of Describe the flow of costs through a costs through a process costing process costing
systemsystem
20-4Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Job Order Costing vs.Process Costing
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-5
Process Costing Methods
• Weighted-average• First-in, first-out (FIFO—see Appendix 20A)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-6
Process Costing—Calculating Cost per Unit
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-7
Process Costing—Calculating Cost per Unit
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-8
$600 ÷ 10,000 crayons = $0.06 per crayon$600 ÷ 10,000 crayons = $0.06 per crayon
Cost per Unit ofEach Process Is Used to:
• Control costs• Set selling prices• Calculate account balances
– Work-in-Process Inventory– Finished Goods Inventory– Cost of Goods Sold
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-9
Comparison of Cost Flows: Job Order Costing and Process Costing
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-10
Direct Materials
Direct Labor
Manufacturing Overhead
Work-in-Process Inventory
Job 27
Job 28
Job 29
Finished Goods Inventory
Job 27
Job 28
Cost ofGoods Sold
Job 27
Exhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process CostingExhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process Costing
PANEL A: Job Order Costing (Smart Touch Learning)
Balance Sheet Income Statement
Comparison of Cost Flows: Job Order Costing and Process Costing
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-11
Direct Materials
Direct Labor
Manufacturing Overhead
Direct Materials
Direct Labor
Manufacturing Overhead
Work-in-Process Inventory
Job 27
Job 28
Job 29
Finished Goods Inventory
Job 27
Job 28
Cost ofGoods Sold
Job 27
FinishedGoods
Inventory
Work-in-Process InventoryMixing Work-in-Process
InventoryMolding
Work-in-Process Inventory
Packaging
Costof Goods
Sold
Exhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process CostingExhibit 20-2 Comparison of Cost Flows: Job Order Costing and Process Costing
PANEL A: Job Order Costing (Smart Touch Learning)
Balance Sheet Income Statement
PANEL B: Process Costing (Cheerful Colors) Balance Sheet
Income Statement
Match each costing system characteristic to job order costing, process costing, or both.
1.Used by companies that manufactures identical items through a series of uniform production steps or processes.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-12
Match each costing system characteristic to job order costing, process costing, or both.
1.Used by companies that manufactures identical items through a series of uniform production steps or processes.
Process costing
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-13
Match each costing system characteristic to job order costing, process costing, or both.
2.Transfers costs from Work-in-Process Inventory to Finished Goods Inventory to Cost of Goods Sold.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-14
Match each costing system characteristic to job order costing, process costing, or both.
2.Transfers costs from Work-in-Process Inventory to Finished Goods Inventory to Cost of Goods Sold.
Both
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-15
Match each costing system characteristic to job order costing, process costing, or both.
3.Used by companies that manufacture unique products or provide specialized services.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-16
Match each costing system characteristic to job order costing, process costing, or both.
3.Used by companies that manufacture unique products or provide specialized services.
Job order costing
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-17
Match each costing system characteristic to job order costing, process costing, or both.
4.Has multiple Work-in-Process Inventory accounts.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-18
Match each costing system characteristic to job order costing, process costing, or both.
4.Has multiple Work-in-Process Inventory accounts.
Process costing
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-19
Match each costing system characteristic to job order costing, process costing, or both.
5.Tracks direct materials, direct labor, and manufacturing overhead costs.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-20
Match each costing system characteristic to job order costing, process costing, or both.
5.Tracks direct materials, direct labor, and manufacturing overhead costs.
Both
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-21
Learning Objective 2
Calculate equivalent Calculate equivalent units of production for units of production for
direct materials and direct materials and conversion costsconversion costs
20-22Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
All Costs Must Be Accounted For
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-23
Total Costs Incurredduring Period inDepartment 1
Costs Transferred toDepartment 2
at End of Period
Costs Remaining inDepartment 1
at End of Period
=
Exhibit 20-3 Assignment of Department 1 Costs at the End of the PeriodExhibit 20-3 Assignment of Department 1 Costs at the End of the Period
Equivalent Unitsof Production (EUP)
Cheerful Colors’ production plant has 10,000 crayons in ending Work-in-Process Inventory—Packaging. The crayons are 40% complete for direct materials and 80% complete for conver-sion. What are the equivalent units of pro-duction for direct materials? For conversion costs?
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-24
Equivalent Unitsof Production (EUP)
Cheerful Colors’ production plant has 10,000 crayons in ending Work-in-Process Inventory—Packaging. The crayons are 40% complete for direct materials and 80% complete for conver-sion. What are the equivalent units of pro-duction for direct materials? For conversion costs?
Direct materials10,000 crayons × 40% = 4,000 EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-25
Equivalent Unitsof Production (EUP)
Cheerful Colors’ production plant has 10,000 crayons in ending Work-in-Process Inventory—Packaging. The crayons are 40% complete for direct materials and 80% complete for conver-sion. What are the equivalent units of pro-duction for direct materials? For conversion costs?
Direct materials10,000 crayons × 40% = 4,000 EUP
Conversion costs10,000 crayons × 80% = 8,000 EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-26
Direct Labor + Manufacturing OverheadDirect Labor + Manufacturing Overhead
6. The Cutting Department has 6,500 units in process at the end of September that are 100% complete for direct materials and 85% complete for conversion costs. Calculate the equivalent units of production for direct materials and conversion costs.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-27
6. The Cutting Department has 6,500 units in process at the end of September that are 100% complete for direct materials and 85% complete for conversion costs. Calculate the equivalent units of production for direct materials and conversion costs.
Direct materials
6,500 units × 100% = 6,500 EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-28
6. The Cutting Department has 6,500 units in process at the end of September that are 100% complete for direct materials and 85% complete for conversion costs. Calculate the equivalent units of production for direct materials and conversion costs.
Direct materials
6,500 units × 100% = 6,500 EUP
Conversion costs
6,500 units × 85% = 5,525 EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-29
Learning Objective 3
Prepare a production Prepare a production cost report using the cost report using the
weighted average weighted average methodmethod
20-30Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Flow of Costs in Producing Puzzles
AssemblyProcess
DirectMaterials Cardboard, picture, glue
DirectLabor
Workers operatingpressing machines
ManufacturingOverhead
Maintenance and depreciationon pressing machines
CuttingProcess
DirectMaterials Box
DirectLabor
Workers operatingcutting machines
ManufacturingOverhead
Maintenance and depreciationon cutting machines
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-31
Exhibit 20-4 Flow of Costs in Producing PuzzlesExhibit 20-4 Flow of Costs in Producing Puzzles
Partiallycompleted
puzzles
Completedpuzzles
Steps to Preparing aProduction Cost Report
1. Summarize the flow of physical units
2. Compute output in terms of equivalent units of production
3. Compute the cost per equivalent unit of production
4. Assign costs to units completed and units in process
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-32
Production Cost Report Terms
• To account for– Amount in process at the beginning of the period
+– Amount started or added during the period
• Accounted for– Still in process
or– Completed and transferred out
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-33
Production Cost Report – July Data for Puzzle Me
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-34
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount started
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-35
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount started
= 0 units + 50,000 units
= 50,000 units
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-36
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount started
= 0 units + 50,000 units
= 50,000 units
Accounted for = Transferred out + In process
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-37
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount started
= 0 units + 50,000 units
= 50,000 units
Accounted for = Transferred out + In process
50,000 units = 40,000 units + In process
50,000 units = 40,000 units + 10,000 units
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-38
Production Cost Report—Assembly Department—Whole Units
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-39
Step 1: Physical flow of units
Step 2: Compute Output in Terms of Equivalent Units of Production
Direct Materials
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-40
Step 2: Compute Output in Terms of Equivalent Units of Production
Direct Materials
Completed units 40,000 units × 100% = 40,000 EUP
In process units 10,000 units × 100% = 10,000 EUP
Total EUP for direct materials50,000 EUP
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-41
Step 2: Compute Output in Terms of Equivalent Units of Production
Direct Materials
Completed units 40,000 units × 100% = 40,000 EUP
In process units 10,000 units × 100% = 10,000 EUP
Total EUP for direct materials50,000 EUP
Conversion Costs
Completed units 40,000 units × 100% = 40,000 EUP
In process units 10,000 units × 25% =2,500 EUP
Total EUP for conversion costs42,500 EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-42
Production Cost Report—Assembly Department—EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-43
Step 2: EUP
Step 3: Compute the Cost—Cost per EUP for Direct Materials
Cost per EUP for Direct Materials
= Total direct materials costs
Equivalent units of production for direct materials
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-44
Step 3: Compute the Cost—Cost per EUP for Direct Materials
Cost per EUP for Direct Materials
= Total direct materials costs
Equivalent units of production for direct materials
= $140,00050,000 EUP
= $2.80 per EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-45
Step 3: Compute the Cost—Cost per EUP for Conversion Costs
Cost per EUP for Conversion Costs
= Total conversion costs
Equivalent units of production for conversion costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-46
Step 3: Compute the Cost—Cost per EUP for Conversion Costs
Cost per EUP for Conversion Costs
= Total conversion costs
Equivalent units of production for conversion costs
= $68,00042,500 EUP
= $1.60 per EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-47
Production Cost Report—Assembly Department—Costs to Account For
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-48
Step 3:Costs to
Account for
Step 4: Assign Costs to Units Completed and Units In Process
Direct Materials
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-49
Step 4: Assign Costs to Units Completed and Units In Process
Direct Materials
Completed 40,000 EUP × $2.80 per EUP = $ 112,000
In process 10,000 EUP × $2.80 per EUP = 28,000
Total $140,000
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-50
Step 4: Assign Costs to Units Completed and Units In Process
Direct Materials
Completed 40,000 EUP × $2.80 per EUP = $ 112,000
In process 10,000 EUP × $2.80 per EUP = 28,000
Total $140,000
Conversion Costs
Completed 40,000 EUP × $1.60 per EUP = $ 64,000
In process 2,500 EUP × $1.60 per EUP = 4,000
Total $68,000
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-51
Production Cost Report—Assembly Department—Costs Accounted For
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-52
Step 4: Costs Accounted
for
Production Cost Report— July Data for Puzzle Me
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-53
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-54
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
= 5,000 units + 40,000 units
= 45,000 units
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-55
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
= 5,000 units + 40,000 units
= 45,000 units
Accounted for = Transferred out + In process
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-56
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
= 5,000 units + 40,000 units
= 45,000 units
Accounted for = Transferred out + In process
45,000 units = 38,000 units + In process
45,000 units = 38,000 units + 7,000 units
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-57
Production Cost Report—Cutting Department—Whole Units
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-58
Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred In
Direct Materials
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-59
Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred InCompleted units 38,000 units × 100% = 38,000 EUPIn process units7,000 units × 100% = 7,000 EUPTotal EUP for transferred in 45,000 EUP
Direct Materials
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-60
Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred InCompleted units 38,000 units × 100% = 38,000 EUPIn process units7,000 units × 100% = 7,000 EUPTotal EUP for transferred in 45,000 EUP
Direct MaterialsCompleted units 38,000 units × 100% = 38,000 EUPIn process units 7,000 units × 0% = 0 EUPTotal EUP for direct materials 38,000 EUP
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-61
Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred InCompleted units 38,000 units × 100% = 38,000 EUPIn process units7,000 units × 100% = 7,000 EUPTotal EUP for transferred in 45,000 EUP
Direct MaterialsCompleted units 38,000 units × 100% = 38,000 EUPIn process units 7,000 units × 0% = 0 EUPTotal EUP for direct materials 38,000 EUP
Conversion CostsCompleted units 38,000 units × 100% = 38,000 EUPIn process units 7,000 units × 30% = 2,100 EUPTotal EUP for conversion costs 40,100 EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-62
Production Cost Report—Cutting Department—EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-63
Cutting Department:Costs to Account For
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-64
Step 3: Compute the Cost—Cost per EUP for Transferred In
Cost per EUP for Transferred In
= Total transferred in costs
Equivalent units of production for transferred in
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-65
Step 3: Compute the Cost—Cost per EUP for Transferred In
Cost per EUP for Transferred In
= Total transferred in costs
Equivalent units of production for transferred in
= $198,00045,000 EUP
= $4.40 per EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-66
Step 3: Compute the Cost—Cost per EUP for Direct Materials
Cost per EUP for Direct Materials
= Total direct materials costs
Equivalent units of production for direct materials
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-67
Step 3: Compute the Cost—Cost per EUP for Direct Materials
Cost per EUP for Direct Materials
= Total direct materials costs
Equivalent units of production for direct materials
= $19,00038,000 EUP
= $0.50 per EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-68
Step 3: Compute the Cost—Cost per EUP for Conversion Costs
Cost per EUP for Conversion Costs
= Total conversion costs
Equivalent units of production for conversion costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-69
Step 3: Compute the Cost—Cost per EUP for Conversion Costs
Cost per EUP for Conversion Costs
= Total conversion costs
Equivalent units of production for conversion costs
= $16,00040,100 EUP
= $0.40 per EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-70
Production Cost Report—Cutting Department—Costs to Account For
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-71
Step 4: Assign Costs to Units Completed and Units In Process
Transferred In
Direct Materials
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-72
Step 4: Assign Costs to Units Completed and Units In Process
Transferred InCompleted 38,000 EUP × $4.40 per EUP = $ 167,200In process 7,000 EUP × $4.40 per EUP = 30,800Total $ 198,000
Direct Materials
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-73
Step 4: Assign Costs to Units Completed and Units In Process
Transferred InCompleted 38,000 EUP × $4.40 per EUP = $ 167,200In process 7,000 EUP × $4.40 per EUP = 30,800Total $ 198,000
Direct MaterialsCompleted 38,000 EUP × $0.50 per EUP = $ 19,000In process 0 EUP × $0.50 per EUP = 0Total $ 19,000
Conversion Costs
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-74
Step 4: Assign Costs to Units Completed and Units In Process
Transferred InCompleted 38,000 EUP × $4.40 per EUP = $ 167,200In process 7,000 EUP × $4.40 per EUP = 30,800Total $ 198,000
Direct MaterialsCompleted 38,000 EUP × $0.50 per EUP = $ 19,000In process 0 EUP × $0.50 per EUP = 0Total $ 19,000
Conversion CostsCompleted 38,000 EUP × $0.40 per EUP = $ 15,200In process 2,100 EUP × $0.40 per EUP = 840Total $ 16,040
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-75
Production Cost Report—Cutting Department—Costs Accounted For
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-76
The Finishing Department started the month with 500 units in process, received 2,000 units from the Assembly Department, and transferred 2,100 units to the finished goods storage area. All materials are added at the beginning of the process. The units in process at the end of the month are 45% complete in respect to conversion costs. The Finishing Department incurred the following costs:
Beginning WIP Added this month Total
Transferred In $ 6,250 $ 25,000 $ 31,250
Direct Materials 500 2,000 2,500
Conversion Costs 1,250 5,590 6,840
Total $ 8,000 $ 32,590 $ 40,590
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-77
7. How many units are still in process at the end of the month?
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-78
7. How many units are still in process at the end of the month?
To account for = 500 units + 2,000 units= 2,500 units
Accounted for = 2,100 units + In Process2,500 units = 2,100 units + In Process
In Process = 400 units
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-79
8. Compute the equivalent units of production for the Finishing Department.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-80
8. Compute the equivalent units of production for the Finishing Department.
Transferred InCompleted units 2,100 units × 100% = 2,100 EUPIn process units 400 units × 100% = 400 EUPTotal EUP for transferred in 2,500 EUP
Direct MaterialsCompleted units 2,100 units × 100% = 2,100 EUPIn process units 400 units × 100% = 400 EUPTotal EUP for direct materials 2,500 EUP
Conversion CostsCompleted units 2,100 units × 100% = 2,100 EUPIn process units 400 units × 45% = 180 EUPTotal EUP for conversion costs 2,280 EUP
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-81
9. Determine the cost per equivalent unit for transferred in, direct materials, conversion costs, and total costs.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-82
9. Determine the cost per equivalent unit for transferred in, direct materials, conversion costs, and total costs.
Transferred In $31,250 = $ 12.50 per EUP2,500 EUP
Direct Materials $2,500 = $ 1.00 per EUP2,500 EUP
Conversion Costs $6,840 = $ 3.00 per EUP2,280 EUP
Total: = $ 16.50 per EUPCopyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-83
10. Determine the cost to be transferred to Finished Goods Inventory.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-84
10. Determine the cost to be transferred to Finished Goods Inventory.
$16.50 per EUP × 2,100 EUP = $34,650
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-85
Learning Objective 4
Prepare journal entries Prepare journal entries for a process costing for a process costing
systemsystem
20-86Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Raw Materials Purchased
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-87
Transaction 1—Raw Materials Purchased: During July, the company purchased materials on account for $175,000.
A
=
L + E
Raw Materials Purchased
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-88
Transaction 1—Raw Materials Purchased: During July, the company purchased materials on account for $175,000.
A ↑
=
L ↑ + E
RM ↑ A/P ↑
Raw Materials Used in Production
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-89
Transaction 2—Raw Materials Used in Production: During July, direct materials were assigned to the two production departments: $140,000 to the Assembly Department and $19,000 to the Cutting Department; $2,000 in indirect materials were accumulated in Manufacturing Overhead.
A
=
L + E
Raw Materials Used in Production
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-90
Transaction 2—Raw Materials Used in Production: During July, direct materials were assigned to the two production departments: $140,000 to the Assembly Department and $19,000 to the Cutting Department; $2,000 in indirect materials were accumulated in Manufacturing Overhead.
A ↓
=
L + E ↓
RM ↓WIP - Assembly ↑
WIP - Cutting ↑
MOH ↑
Labor Costs Incurred
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-91
Transaction 3—Labor Costs Incurred: During the month, Puzzle Me incurred $20,000 in direct labor costs in the Assembly Department; $3,840 in direct labor costs in the Cutting Department; and $1,500 in indirect labor costs which were accumulated in Manufacturing Overhead.
A
=
L + E
Labor Costs Incurred
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-92
Transaction 3—Labor Costs Incurred: During the month, Puzzle Me incurred $20,000 in direct labor costs in the Assembly Department; $3,840 in direct labor costs in the Cutting Department; and $1,500 in indirect labor costs which were accumulated in Manufacturing Overhead.
A ↑
=
L ↑ + E ↓
WIP - Assembly ↑WIP - Cutting ↑
WagesPayable ↑
MOH ↑
Additional ManufacturingCosts Incurred
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-93
Transaction 4—Additional Manufacturing Costs Incurred: In addition to the indirect materials and indirect labor costs, Puzzle Me incurred $35,000 in machinery depreciation and $20,000 in indirect costs that were paid in cash, which included rent and utilities.
A
=
L + E
Additional ManufacturingCosts Incurred
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-94
Transaction 4—Additional Manufacturing Costs Incurred: In addition to the indirect materials and indirect labor costs, Puzzle Me incurred $35,000 in machinery depreciation and $20,000 in indirect costs that were paid in cash, which included rent and utilities.
A ↓
=
L + E ↓
AccumulatedDepreciation ↑
Cash ↓
MOH ↑
Allocation ofManufacturing Overhead
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-95
Transaction 5—Allocation of Manufacturing Overhead: Puzzle Me used a predetermined overhead allocation rate to allocate indirect costs to the departments: $48,000 to the Assembly Department and $11,000 to the Cutting Department.
A
=
L + E
Allocation ofManufacturing Overhead
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-96
Transaction 5—Allocation of Manufacturing Overhead: Puzzle Me used a predetermined overhead allocation rate to allocate indirect costs to the departments: $48,000 to the Assembly Department and $11,000 to the Cutting Department.
A ↑
=
L + E ↑
WIP - Assembly ↑WIP - Cutting ↑
MOH ↓
Transfer from the Assembly Department to the Cutting Department
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-97
Transaction 6—Transfer from the Assembly Department to the Cutting Department: At the end of July, when the production cost report for the Assembly Department was prepared, Puzzle Me assigned $176,000 to the 40,000 units transferred from the Assembly Department to the Cutting Department.
A
=
L + E
Transfer from the Assembly Department to the Cutting Department
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-98
Transaction 6—Transfer from the Assembly Department to the Cutting Department: At the end of July, when the production cost report for the Assembly Department was prepared, Puzzle Me assigned $176,000 to the 40,000 units transferred from the Assembly Department to the Cutting Department.
A ↑ ↓
=
L + E
WIP - Assembly ↓WIP - Cutting ↑
Transfer from Cutting Departmentto Finished Goods Inventory
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-99
Transaction 7—Transfer from Cutting Department to Finished Goods Inventory: At the end of July, when the production cost report for the Cutting Department was prepared, Puzzle Me assigned $201,400 to the 38,000 units transferred from the Cutting Department to Finished Goods Inventory. This is the cost of goods manufactured.
A
=
L + E
Transfer from Cutting Departmentto Finished Goods Inventory
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-100
Transaction 7—Transfer from Cutting Department to Finished Goods Inventory: At the end of July, when the production cost report for the Cutting Department was prepared, Puzzle Me assigned $201,400 to the 38,000 units transferred from the Cutting Department to Finished Goods Inventory. This is the cost of goods manufactured.
A ↑ ↓
=
L + E
FG ↑WIP - Cutting ↓
Puzzles Sold
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-101
Transaction 8—Puzzles Sold: During July, Puzzle Me sold 35,000 puzzles. We have already determined from the production cost report for the Cutting Department that the cost of goods manufactured is $5.30 per puzzle. Therefore, the cost of 35,000 puzzles is $185,500 (35,000 puzzles × $5.30). The puzzles were sold on account for $8.00 each, which is a total of $280,000 (35,000 puzzles × $8.00).
A
=
L + E
Puzzles Sold
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-102
Transaction 8—Puzzles Sold: During July, Puzzle Me sold 35,000 puzzles. We have already determined from the production cost report for the Cutting Department that the cost of goods manufactured is $5.30 per puzzle. Therefore, the cost of 35,000 puzzles is $185,500 (35,000 puzzles × $5.30). The puzzles were sold on account for $8.00 each, which is a total of $280,000 (35,000 puzzles × $8.00).
A ↑ ↓
=
L + E ↑ ↓
A/R ↑FG ↓
Sales Revenue ↑COGS ↑
Adjust Manufacturing Overhead
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Transaction 9—Adjust Manufacturing Overhead: The actual manufacturing overhead costs incurred were $58,500, which includes the indirect materials in Transaction 2, the indirect labor in Transaction 3, and the accumulated depreciation and other indirect costs in Transaction 4. The amount of manufacturing overhead allocated to the two departments was $59,000, as shown in Transaction 5.
A
=
L + E Manufacturing Overhead
Trans. 2 2,000 Trans. 5 59,000
Trans. 3 1,500
Trans. 4 35,000
Trans. 4 20,000
Bal 500
Adjust Manufacturing Overhead
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Transaction 9—Adjust Manufacturing Overhead: The actual manufacturing overhead costs incurred were $58,500, which includes the indirect materials in Transaction 2, the indirect labor in Transaction 3, and the accumulated depreciation and other indirect costs in Transaction 4. The amount of manufacturing overhead allocated to the two departments was $59,000, as shown in Transaction 5.
A
=
L + E ↑ ↓
MOH ↑COGS ↓
Manufacturing Overhead
Trans. 2 2,000 Trans. 5 59,000
Trans. 3 1,500
Trans. 4 35,000
Trans. 4 20,000
Bal 500
Key Accounts After Posting
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Work-in-Process Inventory—Assembly
Balance, June 30 0 Trans. 6 176,000
Trans. 2 140,000
Trans. 3 20,000
Trans. 5 48,000
Balance, July 31 32,000
Work-in-Process Inventory—Cutting
Balance, June 30 23,200 Trans. 7 201,400
Trans. 2 19,000
Trans. 3 3,840
Trans. 5 11,000
Trans. 6 176,000
Balance, July 31 31,640
Finished Goods Inventory
Balance, June 30 0 Trans. 8 185,500
Trans. 7 201,400
Balance, July 31 15,900
Cost of Goods Sold
Trans. 8 185,500 Trans. 9 500
Balance, July 31 185,000
11. Castillo Company has three departments: Mixing, Bottling, and Packaging. At the end of the month, the production cost reports for the departments show the costs of the products completed and transferred were $75,000 from Mixing to Bottling, $50,000 from Bottling to Packaging, and $65,000 from Packaging to Finished Goods Inven-tory. Prepare the journal entries for the transfer of the costs.
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Transfer from Mixing to Bottling
Work-in-Process Inventory—Bottling 75,000
Work-in-Process Inventory—Mixing 75,000
Transfer from Bottling to Packaging
Work-in-Process Inventory—Packaging 50,000
Work-in-Process Inventory—Bottling 50,000
Transfer from Packaging to Finished Goods Inventory
Finished Goods Inventory 65,000
Work-in-Process Inventory—Packaging 65,000
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Learning Objective 5
Use a production cost Use a production cost report to make report to make
decisionsdecisions
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How Managers Use ProductionCost Reports to Make Decisions
• Controlling costs• Evaluating performance• Pricing products• Identifying the most profitable products• Preparing the financial statements
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12. Describe some ways managers use production cost reports to make business decisions.
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12. Describe some ways managers use production cost reports to make business decisions.
Managers use production cost reports to:• Control costs• Evaluate performance• Price products• Identify profitability of different products• Prepare financial statements
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Learning Objective 6
Prepare a production Prepare a production cost report using the cost report using the
first-in, first-out first-in, first-out methodmethod
(Appendix 20A)(Appendix 20A)
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Production Cost Report— July Data for Puzzle Me
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Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
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Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
= 5,000 units + 40,000 units
= 45,000 units
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July Units Accounted For
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BeginningInventory
5,000 units
Started andCompleted
in July33,000 units
Completed in July—38,000 units
Exhibit 20A-1 July Units Accounted ForExhibit 20A-1 July Units Accounted For
July Units Accounted For
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BeginningInventory
5,000 units
Started andCompleted
in July33,000 units
EndingInventory
7,000 units
Started in July—40,000 units
Completed in July—38,000 units
Units Accounted For—45,000 units
Exhibit 20A-1 July Units Accounted ForExhibit 20A-1 July Units Accounted For
Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
= 5,000 units + 40,000 units
= 45,000 units
Accounted for = Beginning balance + Started and completed + In process
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Step 1: Summarize theFlow of Physical Units
To account for = Beginning balance + Amount transferred in
= 5,000 units + 40,000 units
= 45,000 units
Accounted for = Beginning balance + Started and completed + In process
45,000 units = 5,000 units + Started and completed + 7,000 units
45,000 units = 5,000 units + 33,000 units + 7,000 units
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Production Cost Report—Cutting Department—FIFO Method—Whole Units
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Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred In
Direct Materials
Conversion Costs
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Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred InBeginning WIP units 5,000 units × 0% = 0 EUPStarted and completed units 33,000 units × 100% = 33,000 EUPIn process units 7,000 units × 100% = 7,000 EUPTotal EUP for transferred in 40,000 EUP
Direct Materials
Conversion Costs
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Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred InBeginning WIP units 5,000 units × 0% = 0 EUPStarted and completed units 33,000 units × 100% = 33,000 EUPIn process units 7,000 units × 100% = 7,000 EUPTotal EUP for transferred in 40,000 EUP
Direct MaterialsBeginning WIP units 5,000 units × 100% = 5,000 EUPStarted and completed units 33,000 units × 100% = 33,000 EUPIn process units 7,000 units × 0% = 0 EUPTotal EUP for direct materials 38,000 EUP
Conversion Costs
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Step 2: Compute Output in Terms of Equivalent Units of Production
Transferred InBeginning WIP units 5,000 units × 0% = 0 EUPStarted and completed units 33,000 units × 100% = 33,000 EUPIn process units 7,000 units × 100% = 7,000 EUPTotal EUP for transferred in 40,000 EUP
Direct MaterialsBeginning WIP units 5,000 units × 100% = 5,000 EUPStarted and completed units 33,000 units × 100% = 33,000 EUPIn process units 7,000 units × 0% = 0 EUPTotal EUP for direct materials 38,000 EUP
Conversion CostsBeginning WIP units 5,000 units × 40% = 2,000 EUPStarted and completed units 33,000 units × 100% = 33,000 EUPIn process units 7,000 units × 30% = 2,100 EUPTotal EUP for conversion costs 37,100 EUP
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Timing of Conversion Costs
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Exhibit 20A-3 Timing of Conversion CostsExhibit 20A-3 Timing of Conversion Costs
Beginning Inventory 60% 40%
Started and Completed 100%
Ending Inventory 30% 70%
June July August
Production Cost Report—Cutting Department—FIFO Method—EUP
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Cutting Department:Costs to Account For
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Step 3: Compute the Cost—Cost per EUP for Transferred In
Cost per EUP for Transferred In
= Total transferred in costs
Equivalent units of production for transferred in
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Step 3: Compute the Cost—Cost per EUP for Transferred In
Cost per EUP for Transferred In
= Total transferred in costs
Equivalent units of production for transferred in
= $176,00040,000 EUP
= $4.40 per EUP
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Step 3: Compute the Cost—Cost per EUP for Direct Materials
Cost per EUP for Direct Materials
= Total direct materials costs
Equivalent units of production for direct materials
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Step 3: Compute the Cost—Cost per EUP for Direct Materials
Cost per EUP for Direct Materials
= Total direct materials costs
Equivalent units of production for direct materials
= $19,00038,000 EUP
= $0.50 per EUP
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Step 3: Compute the Cost—Cost per EUP for Conversion Costs
Cost per EUP for Conversion Costs
= Total conversion costs
Equivalent units of production for conversion costs
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Step 3: Compute the Cost—Cost per EUP for Conversion Costs
Cost per EUP for Conversion Costs
= Total conversion costs
Equivalent units of production for conversion costs
= $14,84037,100 EUP
= $0.40 per EUP
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Production Cost Report—Cutting Department—FIFO Method—Costs to Account For
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Step 4: Assign Costs to Units Completed and Units In Process
Transferred In
Direct Materials
Conversion Costs
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Step 4: Assign Costs to Units Completed and Units In Process
Transferred In
Beginning WIP $ 22,000
To complete beginning WIP 0 EUP × $4.40 per EUP = 0
Started and Completed 33,000 EUP × $4.40 per EUP = 145,200
Transferred to FG 167,200
In process: 7,000 EUP × $4.40 per EUP = 30,800
Total $ 198,000
Direct Materials
Conversion Costs
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Step 4: Assign Costs to Units Completed and Units In Process
Transferred In
Beginning WIP $ 22,000
To complete beginning WIP 0 EUP × $4.40 per EUP = 0
Started and Completed 33,000 EUP × $4.40 per EUP = 145,200
Transferred to FG 167,200
In process: 7,000 EUP × $4.40 per EUP = 30,800
Total $ 198,000
Direct Materials
Beginning WIP $ 0
To complete beginning WIP 5,000 EUP × $0.50 per EUP = 2,500
Started and Completed 33,000 EUP × $0.50 per EUP = 16,500
Transferred to FG 19,000
In process: 0 EUP × $0.50 per EUP = 0
Total $ 19,000
Conversion Costs
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Step 4: Assign Costs to Units Completed and Units In Process
Transferred In
Beginning WIP $ 22,000
To complete beginning WIP 0 EUP × $4.40 per EUP = 0
Started and Completed 33,000 EUP × $4.40 per EUP = 145,200
Transferred to FG 167,200
In process: 7,000 EUP × $4.40 per EUP = 30,800
Total $ 198,000
Direct Materials
Beginning WIP $ 0
To complete beginning WIP 5,000 EUP × $0.50 per EUP = 2,500
Started and Completed 33,000 EUP × $0.50 per EUP = 16,500
Transferred to FG 19,000
In process: 0 EUP × $0.50 per EUP = 0
Total $ 19,000
Conversion Costs
Beginning WIP $ 700
To complete beginning WIP 2,000 EUP × $0.40 per EUP = 800
Started and Completed 33,000 EUP × $0.40 per EUP = 13,200
Transferred to FG 14,700
In process: 2,100 EUP × $0.40 per EUP = 840
Total $ 15,540
*Adjusted for $1 to correct rounding error
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Production Cost Report—Cutting Department—FIFO Method—Costs Accounted For
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Production Cost Report—Cutting Department—Costs Accounted For
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Bishop Company uses the FIFO method in its process costing system. The Finishing Department started the month with 500 units in process that were 20% complete, received 2,000 units from the Assembly Department, and transferred 2,100 units to the finished goods storage area. All materials are added at the beginning of the process. The units in process at the end of the month are 45% complete with respect to conversion costs. The department incurred the following costs:
Beginning WIP Added this month Total
Transferred In $ 6,250 $ 25,000 $ 31,250
Direct Materials 500 2,000 2,500
Conversion Costs 1,250 5,450 6,700
Total $ 8,000 $ 32,450 $ 40,450
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13. How many units are still in process at the end of the month?
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13. How many units are still in process at the end of the month?
To account for = Beginning balance + Amount transferred in
= 500 units + 2,000 units
= 2,500 units
Accounted for = Beginning balance + Started and completed + In process
2,500 units = 500 units + 1,600 units + In process
2,500 units = 2,100 units + In process
400 units = In process
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14. Compute the equivalent units of production for the Finishing Department for the current month.
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14. Compute the equivalent units of production for the Finishing Department for the current month.
Transferred InBeginning WIP units 500 units × 0% = 0 EUPStarted and completed units 1,600 units × 100% = 1,600 EUPIn process units 400 units × 100% = 400 EUPTotal EUP for transferred in 2,000 EUP
Direct MaterialsBeginning WIP units 500 units × 0% = 0 EUPStarted and completed units 1,600 units × 100% = 1,600 EUPIn process units 400 units × 100% = 400 EUPTotal EUP for direct materials 2,000 EUP
Conversion CostsBeginning WIP units 500 units × 80% = 400 EUPStarted and completed units 1,600 units × 100% = 1,600 EUPIn process units 400 units × 45% = 180 EUPTotal EUP for conversion costs 2,180 EUP
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15. Determine the cost per equivalent unit for the current period for transferred in, direct materials, and conversion costs.
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15. Determine the cost per equivalent unit for the current period for transferred in, direct materials, and conversion costs.
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Transferred In:$25,000
2,000 EUP = $12.50 per EUP
Direct Materials:$2,000
2,000 EUP = $1.00 per EUP
Conversion Costs:$5,450
2,180 EUP = $2.50 per EUP
16. Determine the cost to be transferred to Finished Goods Inventory.
Transferred InBeginning WIP $ 6,250To complete beginning WIP 0 EUP × $12.50 per EUP = 0Started and Completed 1,600 EUP × $12.50 per EUP =
20,000Transferred to FG $ 26,250
Direct MaterialsBeginning WIP $ 500To complete beginning WIP 0 EUP × $1.00 per EUP = 0Started and Completed 1,600 EUP × $1.00 per EUP =
1,600Transferred to FG 2,100
Conversion CostsBeginning WIP $ 1,250To complete beginning WIP 400 EUP × $2.50 per EUP = 1,000Started and Completed 1,600 EUP × $2.50 per EUP =
4,000Transferred to FG 6,250
Total $ 34,600Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 20-148
End of Chapter 20
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