Process Cost Accounting

Process Cost Accounting Chapter 20

Learning objectives • Process Operation • Process Cost Accounting • Equivalent Units of Production • Process Costing Illustration – GenX Company • Hybrid Costing System • Process Costing Typical Accounting Entries

1. Process Manufacturing Operations • Used for production of small, identical, low-cost items. • Mass produced in automated continuous production process. • Costs cannot be directly traced to each unit of product.

Job Order Systems Custom orders Heterogeneous products Low production volume High product flexibility Low to medium standardization Process Systems Repetitive operations Homogeneous products High production volume Low product flexibility High standardization Process Operation- Comparing Job Order & Process Production Exh. 20-2

The Goods in Process account consists of individualjobsin ajob ordersystem. 2. Process Cost Accounting- Comparing Job Order & Process Production DirectMaterials DirectLabor FinishedGoods Jobs FactoryOverhead Cost per unit for each job

2. Process Cost Accounting- Comparing Job Order & Process Production The Goods in Process account consists of specificprocessesin aprocess cost system. DirectMaterials DirectLabor FinishedGoods Processes FactoryOverhead Cost per unit processed

Sameobjective:to determine the cost of products Same inventory accounts:raw materials, work in process, and finished goods Same overhead assignment method:predetermined rate times actual activity 2. Process Cost Accounting- Job and Process Costing Similarities

3. Equivalent Units of Production Costs are accumulated for a period of time by process or department. Unit cost is computed by dividing the accumulated costs by the number ofequivalentunits produced in the period.

+ = Equivalent Units of Production Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Twoone-half full pitchers are equivalent to one full pitcher.

Question For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000

Question Question For the current period, PencilCo started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30 percent complete. How many equivalent units of production did PencilCo have for the period? a. 10,000 b. 11,500 c. 1,500 d. 15,000 10,000 units + (5,000 units × .30) = 11,500 equivalent units

Cost perequivalent unit Product costs for the periodEquivalent units for the period = Cost Per Equivalent Unit

Question Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90

Question Question Now assume that PencilCo incurred $27,600 in production costs. What was PencilCo’s cost per unit for the period? a. $1.84 b. $2.40 c. $2.76 d. $2.90 $27,600 ÷ 11,500 equivalent units = $2.40 per equivalent unit

Equivalent Units 40% ofMaterial Equivalent units may be different for material and labor and overhead at different stages of a process. Stage 1 25% ofLabor andOverhead At completion of Stage 1 of the process, materialis 40% complete, but labor and overhead are only25% complete.

Equivalent Units 40% ofMaterial 60% ofMaterial + = 100% Stage 1 Stage 2 25% ofLabor andOverhead 25% ofLabor andOverhead = + 50%

Equivalent Units 40% ofMaterial 60% ofMaterial Stage 1 Stage 2 Stage 3 25% ofLabor andOverhead 25% ofLabor andOverhead 50% ofLabor andOverhead The process is now complete.

GenX makes a product called Profen in two departments, Grinding (G) and Mixing (M). 4. Process Manufacturing Operations - GenX Example

FinishedGoods DeliveredtoCustomers Process Manufacturing Operations GenX Exh. 20-5 Direct Materials Goods in ProcessGrinding Indirect Goods in ProcessMixing FactoryOverhead AppliedOverhead Indirect Direct Labor

Let’s look at actual units processed and actual costs incurred for GenX. Accounting for GenX

Accounting for GenX Exh. 20-12

Accounting for GenX Exh. 21-5B Exh. 20-12

Accounting for GenX GenX uses a FIFO cost flow systemwith the following four steps: • Physical flow of units. • Computing equivalent units of production. • Computing cost per equivalent unit. • Cost reconciliation.

Physical Flow of Units Exh. 20-13

Computing Equivalent Units of Production Exh. 20-14

Computing Equivalent Units of Production Exh. 20-14 100,000 units transferredfrom grinding to mixing. } 100,000

Computing Equivalent Units of Production Exh. 20-14 Since materials are added at the beginning of the process in Grinding, no additional materials are necessary to complete the beginning inventory.

Computing Equivalent Units of Production Exh. 20-15 100,000Transferred }

Computing Equivalent Units of Production Exh. 20-15 Since labor and overhead were 331/3 percent complete in the beginning inventory, 662/3 percent of the work must be completed in April.

In the cost reconciliation, we willaccount for all costs incurredby assigning unit costs to the: • A. 100,000 units transferred from grinding to mixing. • B. 20,000 units remaining in ending inventory. Cost Reconciliation

Exh. 20-18

Shows the flowof units and coststhrough work inprocess. Provides costinformation forfinancial statements. ProcessCostSummary Helps factorymanagers evaluatedepartment managerperformance. Helps managerscontrol theirdepartments. Process Cost Summary

We will illustrate the process cost summary for the Grinding Department of GenX in three sections: • Costs charged to department. • Equivalent unit processing costs. • Assignment of costs to output of department. Process Cost Summary

Process Cost Summary Exh. 20-19

Exh. 20-19

Current periodunit costs Exh. 20-19

Total coststransferred to Mixing $6,350 + $15,050 = $21,400 Exh. 20-19

Total coststransferred to Mixing $6,350 + $15,050 = $21,400 $21,400 ÷ 100,000 units transferred = $0.214 Exh. 20-19

These unit costs differ because the$0.214 contains costs incurred in March that differed in amount from costs incurred in April. Exh. 20-19

Accounting for GenX Exh. 20-21

Material, labor andoverhead are addedat the same rate in Mixing. Accounting for GenX Exh. 20-21

Process Cost Accounting