PROCESS COST ACCOUNTING

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CHAPTER 21

• PROCESS COST ACCOUNTING

Accounting Principles, Eighth Edition
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Process Cost Accounting
Nature of Process Cost Systems
Equivalent Units
Contemporary Developments
Comprehensive Example of Process Costing

• Uses
• Similarities and Differences
• Process Cost Flow
• Assignment of Manufacturing Costs

• Weighted-Average Method
• Refinements
• Production Cost Report

• Just-in-Time Processing
• Activity-Based Costing

• Physical Units
• Equivalent Units of Production
• Unit Production Costs
• Cost Reconciliation Schedule
• Production Cost Report
• Costing Systems Final Comment

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Nature of Process Cost Systems
Use to apply costs to similar products that
are massed produced in a continuous
fashion Examples include the production
of Cereal, Paint, and Soft Drinks
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Job Order Cost and Process Cost Flow

• Job Order Cost Systems
• Costs are assigned to each job.
• Products have unique characteristics.

• Process Cost Systems
• Costs are tracked through a series of connected
  manufacturing processes or departments.
• Products are uniform or relatively homogeneous
  and produced in a large volume.

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Job Order Cost vs Process Cost Flow
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Similarities and Differences in Cost Systems

• Similarities
• The accumulation of costs is the same in both
  systems.
• Both costing systems track the three
  manufacturing
• cost elements direct materials, direct
  labor, and
• manufacturing overhead.
• Costs are assigned to the same general ledger
  accounts in both
• costing systems.
• However, the methods of assigning the
  costs
• differ significantly.

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Similarities and Differences in Cost Systems

• Differences
• The number of work in process accounts
• Job Order - one work in process account
• Process - multiple work in process accounts
• Documents used to track costs
• Job Order - job cost sheets
• Process - production cost reports

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Similarities and Differences in Cost Systems

• Differences
• The point at which costs are totaled
• Job Order when job is completed
• Process - 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 period

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Major Differences Between Job Order and Process
Cost Systems
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Process Cost Flows Illustrated

• Example Tyler Company
• Maker of automatic can openers
• Manufacturing consists of two processes
• Machining raw materials are shaped, honed,
  and drilled
• Assembly parts assembled and packaged
• Materials, labor, and manufacturing overhead
  added in both departments

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Process Cost Flows Illustrated
Example Tyler Company
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Assignment of Manufacturing Costs

• Accumulation of materials, labor, and overhead
  costs is same as in job order costing
• Debit Raw Materials Inventory for purchases
  of raw materials
• Debit Factory Labor for factory labor
  incurred
• Debit Manufacturing Overhead for overhead
  cost incurred
• However, assignment of the three manufacturing
  cost elements to Work in Process is different

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Assignment of Manufacturing Costs

• Materials
• A process cost system requires fewer material
  requisition slips than a job order cost system
• Materials are used for processes and not
  specific jobs
• Requisitions are for larger quantities of
  materials
• The journal entry to record materials used

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Assignment of Manufacturing Costs

• Factory Labor Costs
• Time tickets are used in both systems
• All labor costs incurred within
• a production department are
• a cost of processing.
• The journal entry to record factory labor costs

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Assignment of Manufacturing Costs

• 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

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Assignment of Manufacturing Costs
Manufacturing Overhead Costs The entry to
allocate overhead to the two processes is
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Assignment of Manufacturing Costs
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
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FLOW OF COSTS IN PROCESS COST SYSTEMS
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EQUIVALENT UNITS

• Equivalent units of production
• the work done during the period on the physical
  units of output, expressed in terms of fully
  completed units.
• are determined by applying the percentage of work
  done to the physical units of output.
• Equivalent units are the sum of the work
  performed to
• Finish the units of beginning work in process
  inventory.
• Complete the units started into production
  during the period.
• Start, but only partially complete, the units in
  ending work in process inventory.

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Equivalent Units Weighted Average Method

• 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

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Equivalent Units RefinementsWeighted Average
Method
Example The Kellogg Company uses 3 departments
(Mixing, Baking, and Freezing/Packaging) to
produce waffles. Information for the Mixing
Department is
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Equivalent Units RefinementsWeighted Average
Method
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 Mixing Department Conversion Cost
information Conversion costs refers to the sum
of labor costs and overhead costs. The units
are 70 complete with respect to conversion costs.
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Equivalent Units RefinementsWeighted Average
Method
Example - Continued Computation of Mixing
Departments Equivalent Units
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Equivalent Units
Refined Equivalent Units of Production Formula
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Production Cost Report

• Key document used to understand activities.
• Prepared for each department and shows
• Production Quantity
• Cost data
• Four steps in preparation
• Step 1 Compute physical unit flow
• Step 2 Compute equivalent units of production
• Step 3 Compute unit production costs
• Step 4 Prepare a cost reconciliation schedule

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Flow of Costs in Making Eggo Waffles
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Comprehensive Example of Process Costing
Basic Information
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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 the period units in
  production at beginning of period
• Total units accounted for
• units transferred out during period units in
  production at end of period

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Comprehensive Example Continued
Step 1 Compute Physical Unit Flow -continued
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Comprehensive Example Continued

• Step 2 Compute Equivalent Units of Production
• Measure of a departments productivity
• Two computations required
• one for materials and one for conversion costs
• Beginning work in process ignored

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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

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Comprehensive Example Continued

• Step 3 Compute Unit Production Cost - continued
• Total Materials Cost Computation
• Direct Materials Cost in Beginning Work in
  Process 50,000
• Conversion Costs Added to Production During
  Month 400,000
• Total Materials Costs 450,000
• The Computation of Unit Materials Costs

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Comprehensive Example Continued

• Step 3 Compute Unit Production Cost - continued
• Conversion Cost Computation
• 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 Costs

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Comprehensive Example Continued

• Step 3 Compute Unit Production Cost continued
• Total Manufacturing Cost Per Unit
• The computation of unit total manufacturing
  cost

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Comprehensive Example Continued

• Step 4 Prepare Cost Reconciliation Schedule
• 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

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Production Cost Report - Mixing Department
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Contemporary Developments

• Just-in-Time (JIT) Processing
• A processing system that is dedicated to having
  the right products or parts as they are needed
• Objective To eliminate all manufacturing
  inventories to make funds and space available for
  more productive purposes
• Elements of JIT Dependable suppliers
  Multi-skilled workforce Total quality control
  system
• Benefits of JIT Reduced inventory Enhanced
  product quality Reduced rework and storage
  costs Savings from improved flow of goods

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Contemporary Developments

• Activity-Based Costing (ABC)
• An overhead cost allocation system that focuses
  on activities performed in producing a product.
• Traditional Costing System allocates overhead to
  products using predetermined unit-based output
  rate
• ABC System allocates overhead to multiple
  activity cost pools and assigns cost pools to
  products using cost drivers that represent
  activities used
• Assumptions of ABC All overhead costs for an
  activity must have the same cost driver and
  should respond proportionally to changes in the
  activity of the cost driver.

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Contemporary Developments

• Activity-Based Costing (ABC) - continued
• May be used with either a job order or a process
  costing system.
• Primary Benefit More accurate and meaningful
  product costing
• Secondary Benefit Improved cost data regarding
  an activity may lead to reduced costs for that
  activity
• ABC makes managers realize that activities not
  products ultimately determine company
  profitability