14-1
Process Costing
and the Cost
Accounting Cycle
Prepared by
Douglas Cloud
Pepperdine University
14-2
Objectives
 Determine when process costing is
appropriate. After reading this
chapter, you should
 Explain the concept of equivalent unit
be able to:
production.
 Determine unit costs, inventories, and costs
transferred.
 Use the backflush costing method.
 Describe and apply the cost accounting cycle
for manufacturers.
14-3
Process Costing
The essence of process
costing is the
accumulation of costs
by process, or
department, for a
period of time.
14-4
Process Costing
Production costs
Unit cost =
Production
Basic process costing formula used
by a manufacturer of a single,
homogeneous product.
14-5
Equivalent Unit Production
and Unit Cost
Equivalent unit
production is the sum
of (1) the units
finished during the
period and (2) the
equivalent units in the
ending inventory of
work in process.
14-6
Equivalent Unit Production
and Unit Cost
Equivalent
Units
=
+
production
completed
Equivalent
= 50,000
production
Equivalent
production = 56,000
+
Units in Percentage
ending x complete
inventory
10,000 x
60%
14-7
Equivalent Unit Production
and Unit Cost
The weighted-average unit cost formula is:
Unit cost =
Cost of beginning
inventory
+ Current period cost
Weighted-average equivalent
unit production
14-8
Equivalent Unit Production
and Unit Cost
The weighted-average unit cost formula is:
Unit cost =
Cost of beginning
inventory
+ Current period cost
Weighted-average equivalent
unit production
Unit cost = $112,000 ÷ 56,000 = $2.00
14-9
Data for Kelco Company
May
Production costs
$112,000
Unit data:
WIP, beg. of month
0
Completed in month
50,000
WIP, end of month
10,000
WIP, percentage completed
60 %
June
$128,400
10,000
70,000
20,000
40 %
14-10
Ending Inventory and Transfers
Cost of units transferred +
Production to finished goods
Cost of
ending inventory
costs
= $100,000 + (10,000 units x 60% x $2)
accounted
for
Production
costs
= $112,000
accounted
for
14-11
Effects of Beginning Inventory
June Equivalent Units for Kelco
Units completed
Equivalent units in ending
inventory, 20,000 x 40%
Weighted-average equivalent unit
production
70,000
8,000
78,000
14-12
Effects of Beginning Inventory
Unit cost =
Unit cost =
Cost of beginning
inventory
+ Current period cost
Weighted-average equivalent
unit production
$12,000 + $128,400
78,000
= $1.80
14-13
Effects of Beginning Inventory
The disposition of the costs follows:
Ending inventory of work in
process, 20,000 x 40% x $1.80
To finished goods inventory,
70,000 x $1.80
Total
$ 14,400
126,000
$140,400
14-14
Materials and Conversion Costs
Ending inventory:
Material cost (15,000 units x 100% x $1.10)
Conversion cost (15,000 units x 40% x $0.90)
Total cost of ending WIP inventory
Transferred to finished goods:
Material cost (45,000 units x $1.10)
Conversion cost (45,000 units x $0.90)
Total cost transferred to finished goods
$16,500
5,400
$21,900
$49,500
40,500
$90,000
14-15
Materials and Conversion Costs
Total costs to be accounted for:
Costs in beginning inventory ($8,000 + $4,900)
Costs for current month ($58,000 + $41,000)
Total
Total costs accounted for as:
Cost of finished units transferred to finished
goods
Cost of ending inventory
Total
$ 12,900
99,000
$111,900
$ 90,000
21,900
$111,900
14-16
Multiple Processes
Unit Data:
Unit on hand at beginning of June
0
Transferred in from Cutting Department
45,000
Completed and transferred to finished goods 40,000
On hand at end of period (80% complete)
5,000
Cost Data:
Beginning inventory
$
0
Transferred in from Cutting Department
$ 90,000
Sanding Department conversion costs
for June
$132,000
14-17
Multiple Processes
Calculate the Equivalent Production
for the Sanding Process
Units completed
Equivalent units in ending inventory,
5,000 x 80%
Weighted –average equivalent unit
production
Unit cost =
$0 + $132,000
44,000
= $3.00
40,000
4,000
44,000
14-18
Multiple Processes
The cost of a unit transferred from Sanding to finished
goods is the $2.00 from the Cutting Department plus
$3.00 from the Sanding Department, a total of $5.00.
Ending work in process:
Cost from prior department, 5,000 x $2.00
Sanding Department conversion costs,
5,000 x 80% x $3.00
Ending work in process
$10,000
12,000
$22,000
14-19
Multiple Processes
Transferred to finished goods,
40,000 x $5.00
Ending inventory of work in process
(from Slide 14-18)
Total
$200,000
22,000
$222,000
14-20
The Cost Accounting Cycle
Bryan Company produces
a plywood countertop
backing. Bryan had no
beginning inventories of
work in process.
14-21
The Cost Accounting Cycle
Purchase of materials: Bryan bought 1,400,000 feet
of wood at $0.095 per foot.
1. Materials Inventory
Cash or Accounts Payable
$133,000
$133,000
14-22
The Cost Accounting Cycle
Bryan used 1,300,000 feet of wood.
2. Work in Process
Materials Inventory
$123,500
$123,500
14-23
The Cost Accounting Cycle
Direct laborers earned $344,400 for 41,000 hours of
work at $8.40 per hour.
3a. Direct Labor
Cash or Accrued Payroll
3b. Work in Process Inventory
Direct Labor
$344,400
$344,400
$344,400
$344,400
14-24
The Cost Accounting Cycle
Bryan incurred various overhead costs.
4. Variable Manufacturing Overhead $251,300
Fixed Manufacturing Overhead
461,000
Various, Cash, Accrued
Expenses, Accumulated
Depreciation
$712,300
14-25
The Cost Accounting Cycle
Bryan finished 40,000 square yards of plywood.
Another 3,000 square yards were still in process at
the end of 20X5.
5. Work in Process Inventory
Variable Mfg. Overhead
Work in Process Inventory
Fixed Mfg. Overhead
$251,300
$251,300
$461,000
$461,000
14-26
The Cost Accounting Cycle
Materials (Slide 14-23)
Direct labor (Slide 14-24)
Variable overhead (Slide 14-26)
Fixed overhead (Slide 14-26)
Total
Divided by equivalent production
Equals cost per unit
$ 123,500
344,400
251,300
461,000
$1,180,200
42,000
$
28.10
14-27
The Cost Accounting Cycle
The $28.10 cost per unit is used to transfer to
Finished Goods Inventory (40,000 units).
6. Finished Goods Inventory
$1,124,000
Work in Process Inventory
$1,124,000
14-28
The Cost Accounting Cycle
Bryan sold 35,000 square yards that cost
$28.10 at $40 each.
7a. Cash or Accounts
Receivable
$1,400,000
Sales
$1,400,000
7b. Cost of Goods Sold
$983,500
Finished Goods Inventory
$983,500
14-29
The Cost Accounting Cycle
The company incurred $340,000 in selling
and administrative expenses.
8. Selling and Administrative
Expenses
Cash, Accrued Expenses
$340,000
$340,000
14-30
The Cost Accounting Cycle
(2)
(3b)
(5)
(5)
Bal.
Work in Process Inventory
$ 123,500
344,400
251,300
$1,124,000 (6)
461,000
1,180,200
$1,124,000
$ 56,200
14-31
The Cost Accounting Cycle
Finished Goods Inventory
(6) $1,124,000
$983,500 (7b)
Bal. $ 140,500
(7b)
Cost of Goods Sold
$983,500
14-32
The Cost Accounting Cycle
Income Statement for Bryan Company, Actual Process Costing
Sales (Slide 14-28)
Cost of goods sold (Slide 14-28)
Gross profit
Selling and administrative expenses
(Slide 14-29)
Income
$1,400,000
983,500
$ 416,500
340,000
$ 76,500
14-33
Illustration of Job-Order Costing
Portland Mill Works makes industrial products in a
highly mechanized environment. The company uses
activity-based costing. The company has established
the following predetermined overhead rates:
Machine-Related
Total budgeted overhead
Divided by budgeted levels of activity
Equals predetermined overhead rates
Continued
$600,000
100,000 MH
$6 per MH
14-34
Illustration of Job-Order Costing
Setup-Related
Total budgeted overhead
Divided by budgeted levels of activity
Equals predetermined overhead rates
Total applied overhead ($660,000 +
$225,000)
Total actual overhead ($645,000 +
$235,000)
Total overapplied overhead
$250,000
10,000 SH
$25 per SH
$885,000
880,000
$ 5,000
14-35
Illustration of Job-Order Costing
Materials are purchased.
1. Materials Inventory
Cash, Accounts Payable
$720,000
$720,000
Materials are placed into production.
2. Work in Process Inventory
Materials Inventory
$650,000
$650,000
14-36
Illustration of Job-Order Costing
Direct labor is incurred.
3a. Direct Labor
Cash or Accrued Payroll
$800,000
3b. Work in Process Inventory
Direct Labor
$800,000
$800,000
$800,000
14-37
Illustration of Job-Order Costing
Overhead was incurred and applied.
4a. Factory Overhead-machine—
related
$645,000
Factory Overhead—setuprelated
235,000
Various Credits, Cash,
Accrued Expenses,
Accumulated Depreciation
$880,000
14-38
Illustration of Job-Order Costing
Overhead was incurred and applied (continued).
4b. Work in Process Inventory
$885,000
Factory Overhead—
machine-related
$660,000
Factory Overhead—setuprelated
225,000
14-39
Illustration of Job-Order Costing
Completed jobs are transferred to finished goods.
5. Finished Goods Inventory
$2,262,000
Work in Process Inventory
$2,262,000
The cost of goods sold is recorded.
6. Cost of Goods Sold
$2,100,000
Finished Goods Inventory
$2,100,000
14-40
Illustration of Job-Order Costing
Factory Overhead—machine-related
(4a)
$645,000
$660,000 (4b)
Bal.
$ 15,000
Factory Overhead—setup-related
(4a)
$235,000
$225,000 (4b)
Bal.
$ 10,000
14-41
Illustration of Job-Order Costing
(2)
(3b)
(4b)
Bal.
Work in Process Inventory
$ 650,000
800,000
885,000
$2,262,000 (5)
2,335,000
$2,262,000
$ 73,000
14-42
Illustration of Job-Order Costing
(6)
Cost of Goods Sold
$2,100,000
Finished Goods Inventory
(5) $2,262,000
$2,100,000 (6)
Bal. $ 162,000
14-43
Illustration of Standard Costing
Materials are purchased.
1. Materials Inventory
Material Price Variance
Cash or Accounts Payable
$100,000
4,000
$104,000
20,000xx$5
18,000
Materials are placed into production. $5.00
2. Work in Process Inventory
Materials Use Variance
Materials Inventory
$90,000
17,800 x $5
1,000
$89,000
14-44
Illustration of Standard Costing
Direct labor is incurred.
3a. Direct Labor
Cash or Accrued Payroll
Direct Labor Rate Variance
$75,200
4,700 x
$16
$72,850
2,350
3b. Work in Process Inventory
$72,000
Direct Labor Efficiency Variance 3,200
Direct Labor
4,500 x $75,200
$16
14-45
Illustration of Standard Costing
Variable overhead was incurred and applied.
4a. Variable Manufacturing
Overhead
Variable Overhead Spending
Variance
Various Credits, Cash,
Accrued Expenses
$56,400
2,600
4,700
x
$12
$59,000
14-46
Illustration of Standard Costing
Overhead was incurred and applied (continued).
4b. Work in Process Inventory
Variable Overhead Efficiency
Variance
Variable Manufacturing
Overhead
$54,000
2,400
4,500
x
$12
$56,400
14-47
Illustration of Standard Costing
5a. Fixed Manufacturing
Overhead
Fixed Overhead Budget
Variance
Various Credits, Cash,
Accrued Expenses
$100,000
$ 2,000
98,000
14-48
Illustration of Standard Costing
Overhead was incurred and applied (continued).
5b. Work in Process Inventory
$90,000
Factory Overhead Volume
Variance
10,000
9,000 x
Factory Manufacturing Overhead $10 $100,000
14-49
Illustration of Standard Costing
Completed jobs are transferred to finished goods.
6. Finished Goods Inventory
Work in Process Inventory
$306,000
$306,000
9,000 x
The cost of goods sold is recorded. $34
7. Cost of Goods Sold
Finished Goods Inventory
$272,000
$272,000
8,000 x
$34
14-50
Illustration of Standard Costing
(2)
(3b)
(4b)
(5b)
(1)
Bal.
Work in Process Inventory
$ 90,000
72,000
54,000
90,000
$306,000 (6)
$306,000
$306,000
Materials Inventory
$100,000
$89,000 (2)
$ 11,000
14-51
Illustration of Standard Costing
Finished Goods Inventory
3-1 Bal $ 34,000
(6)
306,000
$272,000 (7)
340,000
272,000
3-31 Bal. $ 68,000
(7)
Cost of Goods Sold
$272,000
14-52
Backflushing
Backflushing
concentrates on
completed units, rather
than on the units making
their way through work in
process. Backflushing
therefore requires
relatively few entries.
14-53
Chapter 14
The End
14-54