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Process Costing

Chapter 16-1

Accounting, Third Edition

Study Objectives1. Understand who uses process cost systems.

2. Explain the similarities and differences between job order and process cost systems.3. Explain the flow of costs in a process cost system. 4. Make the journal entries to assign manufacturing costs in a process cost system.

Chapter 16-2

Study Objectives5. Compute equivalent units.

6. Explain the four steps necessary to prepare a production cost report. 7. Prepare a production cost report.

Chapter 16-3

Preview of ChapterProcess cost accounting focuses on the processes involved in mass-producing products that are identical

or very similar in nature.

In contrast, job order cost accounting focuses on the individual job.

Chapter 16-4

Process Costing

Nature of Process Cost Systems

Equivalent Units

Comprehensive Example of Process CostingPhysical units

Uses

Similarities and differences Process cost flowAssigning manufacturing costs

Weighted-average method Refinements

Equivalent units of production Unit production costsCost reconciliation schedule Production cost report Costing systems Final comments

Production cost report

Chapter 16-5

Nature of Process Cost SystemsUse to apply costs to similar products that are mass produced in a continuous fashion

Examples include the production of Ice Cream, Cereal, Paint, and Soft DrinksOnce started, production continues until product is completed; processing is the same for the entire run Illustration 16-1

Chapter 16-6

SO 1: Understand who uses process cost systems.

Comparison of Products Produced Under Process and Job Order Cost SystemsIllustration 16-2

Chapter 16-7

SO 1: Understand who uses process cost systems.

Nature of Process Cost Systems

Review QuestionWhich 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.SO 1: Understand who uses process cost systems.

d. The products produced are heterogeneous in nature.Chapter 16-8

Job Order Cost and Process Cost FlowJob Order Cost SystemsCosts are assigned to each

Process Cost SystemsCosts are tracked through a

job.

series of connected manufacturing processes or departments.Products are uniform or Illustration 16-1 relatively homogeneous and produced in a large volume.

Products have unique characteristics.

Chapter 16-9

SO 2: Explain the similarities and differences between job order cost and process cost systems.

Job Order Cost vs Process Cost FlowIllustration 16-3

Chapter 16-10

SO 2: Explain the similarities and differences between job order cost and process cost systems.

Similarities and Differences in Cost SystemsSimilaritiesBoth costing systems track the three manufacturing cost elements: direct materials, direct labor, and manufacturing overhead. The accumulation of costs is the same in both systems.

Flow of costs are assigned to the same general ledgeraccounts in both costing systems.

However, the methods of assigning the costs differ significantly.

Chapter 16-11

SO 2: Explain the similarities and differences between job order cost and process cost systems.

Similarities and Differences in Cost SystemsDifferencesThe number of work in process accounts

Job Order uses only one work in process account Process - uses multiple work in process accounts

Documents used to track costs

Job Order - charges to individual jobs and summarizes on job cost sheets Process summarizes in production cost reports for each departmentSO 2: Explain the similarities and differences between job order and process cost systems.

Chapter 16-12

Similarities and Differences in Cost SystemsDifferencesThe point at which costs are totaled

Job Order totaled when job is completed Process - totaled at end of period of time

Unit cost computation

Job Order total cost per job divided by units in job Process total manufacturing costs for the period divided by units produced during the periodSO 2: Explain the similarities and differences between job order and process cost systems.

Chapter 16-13

Major Differences Between Job Order and Process Cost SystemsIllustration 16-4

Chapter 16-14

SO 2: Explain the similarities and differences between job order and process cost systems.

Nature of Process Cost Systems

Review QuestionWhich 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.SO 1: Understand who uses process cost systems.

d. The products produced are heterogeneous in nature.Chapter 16-15

Process Cost Flows IllustratedExample Tyler CompanyMaker of automatic can openers Manufacturing consists of two processes:

Machining raw materials are shaped, honed,and drilled Assembly parts assembled and packagedMaterials, labor, and manufacturing overhead added in both departmentsChapter 16-16

SO 3: Explain the flow of costs in a process cost system.

Process Cost Flows IllustratedExample Tyler CompanyIllustration 16-5

Chapter 16-17

SO 3: Explain the flow of costs in a process cost system.

Assignment of Manufacturing CostsAccumulation of materials, labor, and overhead costs is the same as in job order costing Debit Raw Materials Inventory for purchases of raw materials Debit Factory Labor for factory labor cost as incurred

Debit Manufacturing Overhead for overhead costs as incurredHowever, assignment of the three manufacturing cost elements to Work in Process is differentChapter 16-18

SO 3: Explain the flow of costs in a process cost system.

Assignment of Manufacturing Costs

MaterialsA process cost system requires fewer material requisition slips than a job order cost systemMaterials are used for processes and not specific jobsRequisitions are for larger quantities of materials

The journal entry to record materials used:

Chapter 16-19

SO 4: Make the journal entries to assign manufacturing costs in a process cost system.

Assignment of Manufacturing Costs

Factory Labor CostsTime tickets can be used in both systems

The labor cost chargeable to a process can also be obtained from the payroll register or departmental payroll summaries.The journal entry to record factory labor costs:

Chapter 16-20

SO 4: Make the journal entries to assign manufacturing costs in a process cost system.

Assignment of Manufacturing Costs

Manufacturing Overhead CostsObjective 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 operationsSO 4: Make the journal entries to assign manufacturing costs in a process cost system.

Chapter 16-21

Assignment of Manufacturing CostsManufacturing Overhead Costs The entry to allocate overhead to the two processes is:

Chapter 16-22

SO 4: Make the journal entries to assign manufacturing costs in a process cost system.

Assignment of Manufacturing CostsEntries to Transfer Costs Through SystemMonthly 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:

Chapter 16-23

SO 4: Make the journal entries to assign manufacturing costs in a process cost system.

Equivalent UnitsExample XYZ CollegeCompute 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.There are 900 full-time students and 1,000 part-time students. Part-time students take 60% of the classes of a regular student. Illustration 16-7

Chapter 16-24

SO 5: Compute equivalents units.

Equivalent Units Example - ContinuedCost of instructionper full-time equivalent student

equalsTotal cost of instruction

divided byNumber of full-time equivalent (FTE) students

$9,000,000 / 1,500 FTE students = $6,000

Chapter 16-25

SO 5: Compute equivalent units.

Equivalent Units of Production

Measures the work done during a period, expressed in fully completed units Used to determine the cost per unit of the completed product

Chapter 16-26

SO 5: Compute equivalent units.

Equivalent Units Weighted Average MethodConsiders the degree of completion (weighting) of units completed and transferred out and units in ending work in processMost widely used method Beginning work in process not part of computation of equivalent unitsIllustration 16-8

Chapter 16-27

SO 5: Compute equivalent units.

Equivalent Units Refinements Weighted Average MethodExampleThe Kellogg Company uses 3 departments (Mixing, Baking, and Freezing/Packaging) to produce waffles.

Information for the Mixing Department is:Illustration 16-9

Chapter 16-28

SO 5: Compute equivalent units.

Equivalent Units Refinements Weighted Average MethodExample - Continu