ACC 3200

Process Costing

Learning ObjectivesDescribe the key features of a process costing system.

Reconcile the number of physical units using the weighted average method

Calculate equivalent units using the weighted average method.

Calculate equivalent units using the weighted average method

Prepare a process costing production report using the weighted average method

Prepare Journal Entries for Process Costing

Job Order versus Process Costing

Description Job Order Costing Process CostingType of product

Unique products and services, such as a custom-built ship.

Homogeneous products and services, such as cans of soda

Manufacturing approach

Customized to the needs of the customer or client

Mass-production of products in series of standardized processes

Cost accumulation

Costs accumulated by job or customer

Costs accumulated by process

Major cost report

Job cost sheet for each unique unit, customer, or job

Production report for each major production process

Job Order Costing versus Process Costing

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Flow of Costs in Process Costing

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Process Costing Production Report

The foundation of a process costing system is the production report. In the report we provide information about:1.The number of units produced.2.The manufacturing costs transferred into Work in Process Inventory.3.The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory.4.The number of units remaining in process at the end of the period.5.The cost of units remaining in process at the end of the period.

The foundation of a process costing system is the production report. In the report we provide information about:1.The number of units produced.2.The manufacturing costs transferred into Work in Process Inventory.3.The manufacturing costs transferred out of Work in Process Inventory to Finished Goods Inventory.4.The number of units remaining in process at the end of the period.5.The cost of units remaining in process at the end of the period.

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Process Costing Production Report

Section 1 of Example Production Report(Unit = 1 Barrel of Wine)

PhysicalUnits

Beginning Inventory 200 Started this Period 1,800 Total 2,000

Direct Materials Conversion

Completed 1,600 1,600 1,600 Ending Inventory 400 400 240 Total 2,000 2,000 1,840

Units:

Equivalent Units

CK MondaviProcess Costing Production Report

Crushing, Fermenting and Aging (CFA) Process The report tells managers about the total number of

units worked on and where they are in the process.

Equivalent units are used to convert partially

complete units into the equivalent number of full

units.

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Process Costing Production Report

Section 2 of Example Production Report(Costs)

Costs: DirectMaterials Conversion Total

Beginning Inventory 84,000$ 81,120$ 165,120$ Current Period Costs 810,000 918,000 1,728,000 Total Cost 894,000 999,120 1,893,120$ Equivalent Units ÷ 2,000 ÷ 1,840 Cost Per Equivalent Unit 447$ 543$

Cost of Units Completed 715,200$ 868,800$ 1,584,000$ Ending Inventory 178,800 130,320 309,120 Total 894,000$ 999,120$ 1,893,120$

CK MondaviProcess Costing Production Report

Crushing, Fermenting and Aging (CFA) Process

The second part of the production

report shows the total manufacturing

costs incurred during the period.

The costs are either transferred out with the units

completed, or kept in the processing department.

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Weighted Average vs. FIFOProcess Costing

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Preparing the Production Report(Weighted Average Method)

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Step 1: Reconcile the Number of Physical Units

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Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed ?Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed ?Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed 1,600 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started 1,800 Total Barrels to Account For 2,000

Barrels Completed 1,600 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Step 1: Reconcile the Number of Physical Units

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Diagram of the Crushing, Fermenting, and Aging Process

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We need to calculate equivalent units because a process usually has some partially completed units

in its beginning and ending inventory.

Step 2: Translate Physical Units into Equivalent Units

+ = 1

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Step 2: Translate Physical Units into Equivalent Units

1. Direct materials are added at the beginning of the process. So, once a unit is started, it will have 100% of the required direct materials.

2. Conversion costs are incurred uniformly in the process. 3. The 1,600 units that were transferred to bottling during the period are

100% complete for material and conversion. 4. The 400 units in ending inventory are 60% complete as to conversion

costs.

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Exh. 20-22

Step 2: Translate Physical Units into Equivalent Units

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Step 3: Calculate Cost per Equivalent Unit

÷ ÷

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Step 4: Reconcile the Total Cost of Work in Process

Beginning costs: Cost of goods completed ? Direct materials 84,000 Conversion costs 81,120 Current period costs: Direct materials 810,000 Conversion costs 918,000 Total cost 1,893,120

Ending Balance ?

Work in Process Inventory (CFA)

Work in Process Inventory (Bottling)

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Step 4: Reconcile the Total Cost of Work in Process

Units

Cost per Unit

Direct Material

Cost Units

Cost per Unit

Conversion Cost Total Cost

Completed 1,600 × 447$ = 715,200$ 1,600 × 543$ = 868,800$ 1,584,000$ Ending Inventory 400 × 447 = 178,800 240 × 543 = 130,320 309,120

894,000$ 999,120$ 1,893,120$

Cost Assigned to Units Completed and Ending InventoryConversionDirect Materials

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Step 4: Reconcile the Total Cost of Work in Process

Beginning costs: Cost of goods completed 1,584,000 Direct materials 84,000 Conversion costs 81,120 Current period costs: Direct materials 810,000 Conversion costs 918,000 Total cost 1,893,120

Ending Balance 309,120

Work in Process Inventory (CFA)

1,584,000 Work in Process Inventory (Bottling)

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Step 5: Prepare a Production ReportSection 1 of the Production Report

Step 1Physical

UnitsUnits to be accounted for:Beginning inventory 200 Started this period 1,800 Total 2,000

Direct Units accounted for: Materials ConversionCompleted 1,600 1,600 1,600 Ending inventory 400 400 240 Total 2,000 2,000 1,840

Units:

Equivalent Units

CK MondaviProcess Costing Production Report (Weighted Average)

Crushing, Fermenting and Aging (CFA) ProcessFor the Quarter Ended March 31, 2009

Step 2

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Step 5: Prepare a Production ReportSection 2 of the Production Report

Costs: DirectCosts to be accounted for: Materials Conversion TotalBeginning inventory 84,000$ 81,120$ 165,120$ Current period costs 810,000 918,000 1,728,000 Total cost 894,000 999,120 1,893,120$ Equivalent units ÷ 2,000 ÷ 1,840 Cost per equivalent unit 447$ 543$ 990$ Cost accounted for: Step 4: Reconcile the total costCost of units completed 715,200$ 868,800$ 1,584,000$ Ending inventory 178,800 130,320 309,120 Total 894,000$ 999,120$ 1,893,120$

CK MondaviProcess Costing Production Report (Weighted Average Method)

Crushing, Fermenting and Aging (CFA) Process

Step 3: Cost per equivalent unitFor the Quarter Ended March 31, 2009

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Additional Factors in Processing Costing

1. We have not discussed process costing when the FIFO method is applied. This material in covered in the Supplement to this chapter. The only difference between the two methods is how we treat beginning inventory.

2. We have not considered how to account for subsequent departments in process costing. We did not look at extending our example to cover the Bottling Department.

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Mondavi purchased $35,000 of materials on account.

Purchase of Raw Materials

Mondavi adds $20,000 of grapes to production.

Issue of Raw Material into Production

Journal Entries for Process Costing

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Description Debit Credit

Conversion Cost (Actual) 36,250

Cash 16,000

Utilities Payable 5,000

Accumulated Depreciation 15,250

Mondavi incurred the following actual conversion costs:

Recording Actual Conversion Costs

Journal Entries for Process Costing

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Recording Applied Conversion Costs

Mondavi applies conversion costs to work in process based on a predetermined rate, using direct materials

cost as the allocation base. The rate is 125% ofdirect materials cost.

Journal Entries for Process Costing

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Work in Process Bottling

Work in Process (CFA)

Conversion Cost

AppliedActual

Raw Materials

Beg. Bal. = 0

36,250

Pur. = 35,000

Beg. Bal. = 0

Summary of Recorded Transactions

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Transfer of Cost from CFA to Bottling

Mondavi transfers the entire balance, $45,000, from the work in process (CFA) account to the Bottling

work in process account.

Journal Entries for Process Costing

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Mondavi issues an $10,000 worth of directmaterials into Bottling Department.

Issue of Raw Material into the Bottling Process

Journal Entries for Process Costing

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Recording Applied Conversion Costs

Mondavi applies conversion costs to the BottlingDepartment using direct materials cost as the

allocation base. The rate is 87.5 percent ofdirect materials cost.

Journal Entries for Process Costing

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Work in Process Bottling

Work in Process CFA

Conversion Cost

AppliedActual

Raw Materials

Beg. Bal. = 0

36,250

Pur. 35,000

Beg. Bal. = 0

Updated Summary of Recorded Transactions

Trans. 45,000

Beg. Bal. = 0

5,000

63,750

0

2,500

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Transferring to Finished Good Inventory

Description Debit Credit

Finished Goods Inventory 63,750

Work-in-Process Inventory (Bottling) 63,750

Mondavi transfers the entire balance from Bottlingand Packaging to Finished Goods Inventory.

Journal Entries for Process Costing

Unit costs for the 1,250 cases (15,00 bottles) produced:

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Sales of Finished Goods.

Description Debit Credit

Cash (12,000 × $8.00) 96,000

Sales Revenue 96,000

Mondavi sold 12,000 bottles in the winery gift shop forfor $8.00 per bottle. The entry to record the sale is:

Journal Entries for Process Costing

The entry to record the cost of goods sold is:

Description Debit Credit

Cost of Goods Sold (12,000 × $4.25 ) 51,000

Finished Goods Inventory 51,000

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Description Debit Credit

Cost of Goods Sold 2,500

Conversion Cost 2,500

Journal Entries for Process CostingAdjusting for Underapplied Conversion Cost

Adjusted 53,500

Finished GoodsBeg. Bal. = 0

Goods Comp. 63,750

12,750

Conversion Cost AppliedActual

36,250 25,0008,750

Underapplied 2,500

Cost of Goods Sold

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Supplement FIFO Method

Step 1: Reconcile the Number of Physical Units

PhysicalUnits

Beginning Units in Process

Units Started and Completed

+Ending Units in Process

+

FIFO assumes that the units in beginning inventory were completed first. So, not all units that were completed during the current period were started in the current period.

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Units Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400OR

Units Startedand Completed

=Units

CompletedBeginning

Units‒ = 1,600 – 200 = 1,400

OR

Units Startedand Completed

=Units

StartedEndingUnits

‒ = 1,800 – 400 = 1,400

Step 1: Reconcile the Physical Units

Beginning Barrels in Process 200 Barrels Started and Completed 1,400 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

Beginning Barrels in Process 200 Barrels Started and Completed 1,400 Ending Barrels in Process 400 Total Barrels Accounted For 2,000

Mondavi CFA Process Physical Flow

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Step 2: Translate Physical Units into Equivalent Units

400 units × 60% = 240

Beginning inventory is 100% complete as to materials and 70% complete as to conversion.

Complete as to materials

200 units × 30% = 60

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Step 3: Calculate Cost per Equivalent Unit

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Step 4: Reconcile the Total Cost of Work in Process

Beginning costs: Direct materials 84,000 84,000 Conversion costs 81,120 81,120 Current period costs: 60 × 540 32,400 Direct materials 810,000 1,400 × 450 630,000 Conversion costs 918,000 1,400 × 540 756,000 Total cost 1,893,120 1,583,520

Ending Balance 309,600

Work in Process Inventory (CFA)

1,583,520 Work in Process Inventory (Bottling)

Materials Conversion TotalEquivalent units in Ending Inventory 400 240 Cost per Equivalent Unit × 450$ × 540$ Cost of Ending Inventory 180,000$ + 129,600$ = 309,600$

Mondavi CFA ProcessCost of Ending Inventory

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Step 5: Prepare a Production ReportSection 1 of the Production Report

Step 1Physical

UnitsUnits to be accounted for:Beginning inventory 200 Started this period 1,800 Total 2,000

Direct Units accounted for: Materials ConversionBeginning work in process 200 - 60 Completed 1,400 1,400 1,400 Ending inventory 400 400 240 Total 2,000 1,800 1,700

Units:

Equivalent Units

CK MondaviProcess Costing Production Report (FIFO Method)

Crushing, Fermenting and Aging (CFA) ProcessFor the Quarter Ended March 31, 2009

Step 2

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Step 5: Prepare a Production ReportSection 2 of the Production Report

Step 3: Cost per equivalent unitCosts: Direct

Materials Conversion TotalCurrent period costs 810,000 918,000 1,728,000$ Equivalent units ÷ 1,800 ÷ 1,700 Cost per equivalent unit 450$ 540$ 990$

Cost to be accounted for: Step 4: Reconcile the total costBeginning work in process 84,000$ 81,120$ 165,120$ Current period costs 810,000 918,000 1,728,000 Total costs 894,000$ 999,120$ 1,893,120$

Cost accounted for:Beginning inventory balance 84,000$ 81,120$ 165,120$ Cost to complete beginning inv. - 32,400 32,400 Started and completed 630,000 756,000 1,386,000 Ending inventory 180,000 129,600 309,600 Total costs 894,000$ 999,120$ 1,893,120$

CK MondaviProcess Costing Production Report (FIFO Method)

Crushing, Fermenting and Aging (CFA) ProcessFor the Quarter Ended March 31, 2009

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End of Topic 6