Managerial Accounting
Weygandt • Kieso • Kimmel
3
Prepared by
Dan R. Ward
Suzanne P. Ward
University of Louisiana at Lafayette
John Wiley & Sons, Inc. © 2005

3

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.


Compute equivalent units.

Explain the four steps necessary to prepare a production cost report.

Prepare a production cost report
.

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

NATURE OF PROCESS COST SYSTEMS

Costs in a job order cost system are assigned to a specific job.

Examples include

Building a customized home

Making a motion picture

Making specialized machine

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

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

NATURE OF PROCESS COST SYSTEMS

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

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

NATURE OF PROCESS COST SYSTEMS

NATURE OF PROCESS COST SYSTEMS
Study Objective 4

Accumulation of materials and labor costs is the same as in job order costing.

Debit Raw Materials Inventory for all purchases of raw materials

Debit Factory Labor for all factory labor incurred

However, assignment of the three manufacturing cost elements to Work in Process is different.

NATURE OF PROCESS COST SYSTEMS
Materials Costs

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.

The entry to record the materials used:

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

NATURE OF PROCESS COST SYSTEMS
Manufacturing Overhead Costs

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

The entry to allocate overhead to the two processes:

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

Let’s Review
Which of the following items is not a characteristic of a process cost system?
a.
Once production begins, it continues until the finished product emerges. b.
The focus is on continually producing homogenous products.
c.
When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
d.
The products produced are heterogeneous in nature.

Let’s Review
Which of the following items is not a characteristic of a process cost system?
a.
Once production begins, it continues until the finished product emerges. b.
The focus is on continually producing homogenous products.
c.
When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
d.
The products produced are heterogeneous in nature.

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

EQUIVALENT UNITS
Compute the cost of instruction at XYZ College per full-time equivalent student based on the following information:

Total cost of instruction is $9,000,000

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
Equivalent Units
+ =
Students
Full-time
Equivalent
Students
900 + (60% x 1,000) = 1,500

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

EQUIVALENT UNITS

Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process

Most widely used method

Beginning work in process not part of computation of equivalent units
Units Completed and Transferred
Out
Equivalent Units
+ = 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
+
Equivalent Units of
Ending Work in Process-Materials
=
Equivalent Units of Production-
Materials
Units Completed and
Transferred Out-
Conversion Costs
+
Equivalent Units of
Ending Work in Process-
Conversion Costs
=
Equivalent Units of Production-
Conversion Costs

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

EQUIVALENT UNITS - Refinements
Example - Continued
 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.

Equivalent Units for Materials:
Units Transferred Out 700,000
Ending Work in Process 200,000
Total Equivalent Units
100% Complete
100% Complete
700,000
200,000
900,000

EQUIVALENT UNITS - Refinements
Example - Continued
 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

Equivalent Units for Conversion Costs:
Units Transferred Out 700,000 100% Complete
Ending Work in Process 200,000 60% Complete
Total Equivalent Units
700,000
120,000
820,000

PRODUCTION COST REPORT
Study Objective 6

Key document used to understand activities

Prepared for each department and shows:

Production quantity
 Cost data

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

Physical units actual units to be accounted for during a period, regardless of work performed.

Total units to be accounted for units started (or transferred) into production during period + units in production at beginning of period.

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
 Measure of a department’s productivity.

Two computations required: one for materials and one for conversion costs.

Beginning work in process is ignored .

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

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

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

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

THE COST OF PRODUCTION REPORT
Study Objective 7

THE COST OF PRODUCTION REPORT
Study Objective 7

An internal document for management

Shows production quantity and cost data for a department

Presents results of the four steps in system

Uses of Cost of Production Report:

Basis for evaluating productivity of each department

Helps assess reasonableness of unit costs and total costs
 Aids in judging whether planned objectives are met

Summary of Study Objectives

Understand who uses process cost systems.
Used by companies that mass-produce similar products in a continuous fashion

Explain the similarities and the differences between job order cost and process cost systems.
Similarities:
 Both systems track the same cost elements :
Direct Materials, Direct Labor, and Manufacturing Overhead

Costs are accumulated in the same accounts :
Raw Materials Inventory, Factory Labor, and Manufacturing Overhead
 Accumulated costs are assigned to the same accounts:
Work in Process, Finished Goods, and Cost of Goods Sold

Summary of Study Objectives

Continued Differences:
 Number of Work in Process Accounts
In a job order cost system – one account
In a process cost system – multiple accounts

Documents used to track costs
In a job order cost system – job cost sheets
In a process cost system – production cost report

Point at which costs are totaled
In a job order cost system – when job is completed
In a process cost system – at the end of a period of time

Unit cost computations
In a job order cost system – the total cost per job divided by the number of units produced in the job
In a process cost system – the total manufacturing costs for the period divided by the units produced during the period

Summary of Study Objectives

Explain the flow of costs in a process cost system.

Costs for materials, labor, and overhead are assigned to work in process accounts for various departments

Costs of completed units are transferred from one department to another as units move through the manufacturing process

Costs of completed work is transferred to Finished
Goods Inventory
 When inventory is sold, costs are transferred to Cost of
Goods Sold

Summary of Study Objectives

Make the journal entries to assign manufacturing costs in a process cost system.

Debit Work in Process for each processing department
Credit Raw Materials Inventory, Factory Labor, and
Manufacturing Overhead

Debit Work in Process for receiving department
Credit Work in Process for department whose work is finished

Debit Finished Goods Inventory
Credit Work in Process for department which completed work on units

Debit Cost of Goods Sold when units are sold
Credit Finished Goods Inventory

Summary of Study Objectives

Compute equivalent units.
Measure work done during a period expressed in fully completed units
Sum of units completed and transferred out plus equivalent units of ending work in process

Explain the four steps necessary to prepare a production cost report.

Compute physical flow (units to be accounted for)

Compute equivalent units of production

Compute unit production costs (in terms of equivalent units)

Prepare a cost reconciliation schedule (total cost accounted for equals total cost to be accounted for)

Summary of Study Objectives

Prepare a production cost report.

Contains both quantity and cost data

Four sections in the report:
• number of physical units
• equivalent unit computations
• unit costs
• cost reconciliation schedule

Let’s Review
In the RYZ Company, there are zero units in beginning work in process, 7,000 units started into production, and 500 units in ending work in process 20% completed. The physical units to be accounted for are: a. 7,000 b. 7,360 c. 7,600 d. 7,340

Let’s Review
In the RYZ Company, there are zero units in beginning work in process, 7,000 units started into production, and 500 units in ending work in process 20% completed. The physical units to be accounted for are: a. 7,000 b. 7,360 c. 7,600 d. 7,340

APPENDIX: EQUIVALENT UNITS
Study Objective 8

Computes equivalent units on a first-in, first-out basis.

Corresponds to actual physical flow of goods.

Assumes that beginning work in process is completed before new work is started.

Sum of work performed to:

Finish beginning work in process

Complete units started during the period, called units started and completed

Start, but only partially complete, ending work in process

APPENDIX: EQUIVALENT UNITS
Assembly Department of Shutters Inc.
 Units to be accounted for consist of 8,100 units completed and transferred out and 400 units in ending work in process

APPENDIX: EQUIVALENT UNITS
The Assembly Department of Shutters Inc.

The 7,600 units started and completed during the month are the units transferred out minus the units in beginning work in process (8,100 – 500)

COMPREHENSIVE EXAMPLE -
Basic Information

COMPREHENSIVE EXAMPLE -
Step 1: Compute Physical Unit Flow

Expanded to include transferred out units

Reports beginning work in process and units started and completed

COMPREHENSIVE EXAMPLE -
Step 2: Compute Equivalent Units of Production

Materials:
Added at beginning of process
No additional materials cost to complete beginning work in process
100% of material costs incurred on ending work in process

COMPREHENSIVE EXAMPLE -
Step 2: Compute Equivalent Units of Production -
Continued

Conversion Costs:

COMPREHENSIVE EXAMPLE -
Step 3: Compute Unit Production Costs

Costs expressed in terms of equivalent units of production

Based entirely on production costs incurred during the period.

Costs in beginning work in process are ignored

When equivalent units of production are different for materials and for conversion costs, three unit costs computed: materials, conversion, and total manufacturing

COMPREHENSIVE EXAMPLE -
Step 3: Compute Unit Production Costs - Continued

Production costs incurred during current period:
Direct Materials
Conversion Costs
Total Costs
$400,000
170,000
$570,000

Computation of unit costs:

COMPREHENSIVE EXAMPLE -
Step 4: Prepare a Cost Reconciliation Schedule

Assigns total costs to units transferred out and to ending work in process

First goods to be completed are units in beginning work in process

Cost of the beginning work in process is always assigned to the goods transferred to the next department (or to finished goods)
 Ending work in process includes only production costs incurred in the current period

COMPREHENSIVE EXAMPLE -

Shows that total costs accounted for equal total costs to be accounted for
 Costs charged to Mixing Department
Cost of beginning Work in Process $ 85,000
Costs started into production during period 570,000
Total costs to be accounted for $655,000

The cost reconciliation assigns the $655,000 to

Units transferred out to the Baking Department, and

Units in ending Work in Process

COMPREHENSIVE EXAMPLE -

FIFO AND WEIGHTED AVERAGE

The weighted-average method has one major advantage:
Simple to understand and to apply

When prices do not fluctuate significantly, the weightedaverage method is very similar to the FIFO method.

Conceptually, the FIFO method is superior because
Current performance is measured using only costs incurred in the current period and
The FIFO method provides current cost information which leads to more accurate pricing strategies

Summary of Study Objective
For Appendix

Compute equivalent units using the FIFO method
 Sum of the work performed to
( 1) Finish the units of beginning work in process inventory
(2) Complete units started into production during the period, and
(3) Start, but only partially complete, units in ending work in process inventory

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