PROCESS COST ACCOUNTING

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2 Chapter 20 PROCESS COST ACCOUNTING PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright 2015 by McGraw-Hill Education (Asia). All rights reserved.

3 20-2 C 1 PROCESS 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.

4 20-3 A 1 COMPARING JOB ORDER AND PROCESS OPERATIONS 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

5 20-4 A 1 COMPARING JOB ORDER AND PROCESS OPERATIONS Direct Materials The goods in process account consists of individual jobs in a job order system. Direct Labor Jobs Finished Goods Factory Overhead Cost for each job

6 20-5 A 1 COMPARING JOB ORDER AND PROCESS OPERATIONS Direct Materials The goods in process account consists of specific processes in a process cost system. Direct Labor Processes Finished Goods Factory Overhead Cost per unit processed

7 20-6 A 1 COMPARING JOB ORDER AND PROCESS OPERATIONS Same objective: 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

8 20-7 A 1 COMPARING JOB ORDER AND PROCESS OPERATIONS Journal entries for both job order and process costing are identical The difference between job order and process costing lies in how the cost of goods transferred to finished goods is determined.

9 20-8 A 1 COMPARING JOB ORDER AND PROCESS OPERATIONS Job order costing The cost of goods transferred to finished goods is equal to the sum of all of the completed jobs for that period. Process costing The cost of goods transferred to finished goods equals the number of completed units times the cost per equivalent unit.

10 20-9 A 1 GENX COMPANY AN ILLUSTRATION GenX makes a product called Profen in a process cost system.

11 20-10 A 1 Materials PROCESS OPERATIONS AND COSTS GENX Direct Indirect Factory Overhead Applied Overhead Goods in Process Finished Goods Indirect Labor Direct Cost of Goods Sold

12 20-11 C 2 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 of equivalent units produced in the period.

13 C 2 EQUIVALENT UNITS OF PRODUCTION Equivalent units is a concept expressing a number of partially completed units as a smaller number of fully completed units. Two one-half full pitchers are equivalent to one full pitcher = So, 4,000 units that are 60 percent complete would total 2,400 equivalent units.

14 20-13 C 2 EQUIVALENT UNITS OF PRODUCTION 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? 10,000 units + (5,000 units.30) = 11,500 equivalent units

15 20-14 C 2 COST PER EQUIVALENT UNIT Cost per equivalent unit = Product costs for the period Equivalent units for the period If PencilCo incurred $27,600 in production costs during the period, what is the cost per equivalent unit for the period? $27,600 11,500 equivalent units = $2.40 per equivalent unit

16 20-15 C 2 EQUIVALENT UNITS 40% of Material Stage 1 25% of Labor and Overhead Equivalent units may be different for material, labor, and overhead, given that costs may be added at at different stages of of a process. At At completion of of Stage 1 of of the process, material is is 40% complete, but labor and overhead are only 25% complete.

17 20-16 C 2 EQUIVALENT UNITS 40% of Material + 60% of Material = 100% Stage 1 Stage 2 25% of Labor and Overhead + 25% of Labor and Overhead = 50%

18 20-17 C 2 EQUIVALENT UNITS 40% of Material 60% of Material Stage 1 Stage 2 Stage 3 25% of Labor and Overhead 25% of Labor and Overhead 50% of Labor and Overhead The process is now complete.

19 20-18 C 2 PROCESS COSTING ILLUSTRATION GenX uses a weighted average cost flow system with the following four steps: ❶ Determine physical flow of units. ❷ Compute equivalent units of production. ❸ Compute cost per equivalent unit. ❹ Assign and reconcile costs.

20 20-19 C 2 PROCESS OPERATIONS GENX GenX Production Data for April Beginning Inventory: Units of product 30,000 Percentage of completion - direct materials 100% Percentage of completion - direct labor 65% Units started in April 90,000 Units transferred from grinding to mixing 100,000 Ending Inventory: Units of product 20,000 Percentage of completion - direct materials 100% Percentage of completion - direct labor 25%

21 20-20 C 2 PROCESS OPERATIONS GENX GenX Production Data for April Beginning Inventory Costs: Direct materials costs $ 3,300 Direct labor costs 600 Factory overhead costs 720 $ 4,620 Current Period Costs Direct materials costs $ 9,900 Direct labor costs 5,700 Factory overhead costs 6,840 $ 22,440 Total Costs to Account for $ 27,060

22 20-21 C 2 ❶ DETERMINE PHYSICAL FLOW OF UNITS These two amounts are reconciled. GenX Physical Flow for April Units to account for: Beginning inventory 30,000 Units started during April 90,000 Total number of units 120,000 Units accounted for as: Units transferred from grinding to mixing 100,000 Ending inventory 20,000 Total number of units 120,000

23 C 2 ❷ COMPUTE EQUIVALENT UNITS OF PRODUCTION - MATERIALS GenX Direct Materials Equivalent Units of Production for April Units of Percentage Equivalent Product of Completion Units Equivalent units completed and transferred out 100, % 100,000 Ending goods in process 20, % 20,000 Total units 120, ,000

24 C 2 ❷ COMPUTE EQUIVALENT UNITS OF PRODUCTION DIRECT LABOR AND FACTORY OVERHEAD GenX Direct Labor and Factory Overhead Equivalent Units of Production for April Units of Percentage Equivalent Product of Completion Units Equivalent units completed and transferred out 100, % 100,000 Ending goods in process 20,000 25% 5,000 Total units 120, ,000

25 20-24 C 2 ❷ COMPUTE EQUIVALENT UNITS OF PRODUCTION GenX Equivalent Units of Production for April Direct Direct Factory Materials Labor Overhead Equivalent units completed and tramsferred out 100, , ,000 Equivalent units for ending goods in process 20,000 5,000 5,000 Equivalent units of production for period 120, , ,000

26 20-25 C 2 ❸ COMPUTE THE COST PER EQUIVALENT UNIT GenX Cost Per Equivalent Unit for April Direct Direct Factory Materials Labor Overhead Costs of beginning goods in process inventory $ 3,300 $ 600 $ 720 Costs incurred this period 9,900 5,700 6,840 Total costs $ 13,200 $ 6,300 $ 7,560 Equivalent units of production 120, , ,000 = Cost per equivalent unit of production = $ 0.11 = $ 0.06 = $ 0.072

27 20-26 C 2 ❹ ASSIGN AND RECONCILE COSTS In the cost reconciliation, we will account for all costs incurred by assigning unit costs to the: A. 100,000 units transferred out. B. 20,000 units remaining in ending inventory.

28 20-27 C 2 GenX Cost Reconciliation for April Costs to Account for: From Beginning Inventory $ 4,620 Incurred in April (Direct materials, direct labor and factory overhead) 22,440 Total costs to account for $ 27,060 Costs transferred out (cost of goods manufactured) Direct materials (100,000 EUP x $0.11/EUP) 11,000 Direct labor (100,000 EUP x $0.06/EUP) 6,000 Factory overhead (100,000 EUP x $0.072/EUP) 7,200 Total cost of goods tranferred out 24,200 Costs of ending goods in process Direct materials (20,000 EUP x $0.11/EUP) $ 2,200 Direct labor (5,000 EUP x $0.06/EUP) 300 Factory overhead (5,000 EUP x $0.072/EUP) 360 Total cost of goods in ending goods in process 2,860 Total costs accounted for $ 27,060

29 20-28 C 3 PROCESS COST SUMMARY Shows the flow of units and costs through work in process. Provides cost information for financial statements. Process Cost Summary Helps factory managers evaluate department manager performance. Helps managers control their departments.

30 20-29 C 3 PROCESS COST SUMMARY We will illustrate the process cost summary for GenX in three sections: Costs charged to production. Equivalent units of production and cost per equivalent unit. Cost assignment and reconciliation

31 20-30 C 3 PROCESS COST SUMMARY COSTS CHARGED TO PRODUCTION Costs of beginning goods in process Direct materials $ 3,300 Direct labor 600 Factory overhead 720 $ 4,620 Costs incurred this period Direct materials $ 9,900 Direct labor 5,700 Factory overhead 6,840 $ 22,440 Total Costs to Account for $ 27,060

32 C 3 PROCESS COST SUMMARY GenX Company Process Cost Summary For the Month Ended April 30 EQUIVALENT UNITS OF PRODUCTION Equivalent Units Direct Labor and Materials Overhead Units processed Units completed and transferred out 100, ,000 Units of ending goods in process 20,000 5,000 (Direct materials, 100%; Direct labor and overhead, 25%) Total 120, ,000 Direct Direct Factory Materials Labor Overhead Beginning goods in process $ 3,300 $ 600 $ 720 Costs incurred this period 9,900 5,700 6,840 Total costs $ 13,200 $ 6,300 $ 7,560 Equivalent units of production 120, , ,000 = Cost per equivalent unit of production $ 0.11 $ 0.06 $ 0.072

33 C 3 PROCESS COST SUMMARY GenX Company Process Cost Summary For the Month Ended April 30 COST ASSIGNMENT AND RECONCILIATION Costs transferred out (cost of goods manufactured) Direct materials (100,000 EUP x $0.11/EUP) $ 11,000 Direct labor (100,000 EUP x $0.06/EUP) 6,000 Factory overhead (100,000 EUP x $0.072/EUP) 7,200 $ 24,200 Costs of ending goods in process Direct materials (20,000 EUP x $0.11/EUP) $ 2,200 Direct labor (5,000 EUP x $0.06/EUP) 300 Factory overhead (5,000 EUP x $0.072/EUP) 360 2,860 Total costs accounted for $ 27,060

34 20-33 C 3 TRENDS IN PROCESS OPERATIONS Process design Just-in in-time production Customer orientation Automation Services

35 20-34 C 3 Process: Example Singapore Post, like all other postal organizations, is primarily in the business of providing delivery services. There are various categories of delivery services based on factors such as time to destination and weight of contents. Postal organizations brand delivery services. Irrespective of the brand or type of delivery service, postal services involve bulk processing. The process for SmartPac can be viewed at this link:

36 20-35 Business Process Reengineering BPR involves redesign of core business processes to achieve improvements in productivity, cycle time and quality. According to a survey by Bain and company in 2014, a leading global management consulting company, BPR is one of the top 10 management tools used by companies globally. BPR s use is more pronounced in regions such as North America where companies are more focused on cost cutting for competitiveness than in countries like China and India where the focus is more on growth.

37 20-36 A 2 HYBRID COSTING SYSTEMS Hybrid costing systems contain features of both job order and process operations. Job Order Costing Hybrid Costing Process Costing Material costs are accounted for using a job order system. Conversion costs are accounted for using a process system.

38 20-37 PROCESS COSTING JOURNAL ENTRIES Let s look at the accounting journal entries for the process cost system at GenX.

39 20-38 P 1 PROCESS COSTING JOURNAL ENTRIES

40 20-39 P 2 PROCESS COSTING JOURNAL ENTRIES

41 20-40 P 3 PROCESS COSTING JOURNAL ENTRIES

42 20-41 P 4 PROCESS COSTING JOURNAL ENTRIES