Accounting principles, 13th edition ch21
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Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 21
Process Costing
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter Outline
Learning Objectives
LO 1
Discuss the uses of a process cost system and how it compares to a job order system.
LO 2
Explain the flow of costs in a process cost system and the journal entries to assign
manufacturing costs.
LO 3
Compute equivalent units.
LO 4
Complete the four steps to prepare a production cost report.
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Overview of Process Cost System
Uses of Process Cost Systems
To apply costs to similar products that are mass-produced in a continuous fashion
Examples include the production of cereal, paint, manufacturing steel, oil refining and soft
drinks
ILLUSTRATION 21.1
Manufacturing processes
LO 1
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Uses of Process Cost Systems
ILLUSTRATION 21.2
Process cost and job order cost companies and products
LO 1
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Uses of Process Cost Systems
Which 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.
d.
LO 1
The products produced are heterogeneous in nature.
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Process Cost for Service Companies
Service companies that provide individualized, nonroutine services will probably benefit
from using a job order cost system.
Those that perform routine, repetitive services will probably be better off with a process cost
system.
LO 1
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Similarities and Differences Between Job Order Cost and Process Cost
Systems
Job Order Cost
•
Costs assigned to each job
•
Products have unique characteristics
Process Cost
•
Costs tracked through a series of
manufacturing processes or departments
•
Products are uniform or relatively
homogeneous and produced in a large
volume
LO 1
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Job Order Cost and Process Cost Flow
Job Order Cost Flow
Work in Process
Direct Materials
Inventory
Direct Labor
Job No. 101
Manufacturing
Job No. 102
Overhead
Finished Goods
Cost of Goods
Inventory
Sold
Job No. 103
Process Cost Flow
Direct Materials
Work in
Work in
Direct Labor
Process
Process
Manufacturing Overhead
Department A
Department B
Finished Goods
Cost of Goods
Inventory
Sold
ILLUSTRATION 21.3
Job order cost and process cost flow
LO 1
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Job Order Cost and Process Cost Flow
Similarities
Differences
1.
Manufacturing cost elements.
2.
Accumulation of the costs of materials,
3.
LO 1
1.
Number of work in process accounts
used.
labor, and overhead.
2.
Documents used to track costs.
Flow of costs.
3.
Point at which costs are totaled.
4.
Unit cost computations.
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Job Order Cost and Process Cost Flow
Feature
Job Order Cost System
Process Cost System
Work in process
One work in process
Multiple work in process
accounts
account
accounts
Documents used
Job cost sheets
Production cost reports
Each job
Each period
Determination of total
manufacturing costs
Unit-cost
computations
Total manufacturing costs ÷
Cost of each job ÷ Units produced for the job
Equivalent units produced
during the period
ILLUSTRATION 21.4
Job order versus process cost systems
LO 1
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DO IT! 1 Job Order and Process Cost
Indicate whether the following are true or false.
False
True
1.
A law firm is likely to use process costing for major lawsuits.
2.
A manufacturer of paintballs is likely to use process costing.
3.
Both job order and process costing determine product costs at the end of a period
of time, rather than when a product is completed.
False
4.
Process costing does not keep track of manufacturing overhead.
False
LO 1
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Process Cost Flow and Assigning Costs
Process Cost Flow
Tyler Company manufactures roller blade and skateboard wheels that it sells to manufacturers and
retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining
Department shapes, hones, and drills the raw materials. The Assembly Department assembles and
packages the wheels.
LO 1
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Process Cost Flow
LO 2
ILLUSTRATION 21.5
Flow of costs in process cost system
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Assigning Manufacturing Costs
Accumulation of cost of materials, labor, and overhead 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
Assignment of manufacturing costs to WIP in process cost is different than job order cost
LO 2
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Assigning Manufacturing Costs
Material Costs
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
LO 2
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Assigning Manufacturing Costs
Material Costs
Illustration: Tyler Company adds materials at the beginning of each process. Suppose Tyler adds $50,000 of
direct materials to the machining process and $20,000 of direct materials to the assembly process. Tyler
makes the following entry to record the materials used.
Work in Process—Machining
50,000
Work in Process—Assembly 20,000
Raw Materials Inventory
LO 2
70,000
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Assigning Manufacturing Costs
Factory Labor Costs
Time tickets may be used in both systems
All labor costs incurred within a production department are a cost of processing
LO 2
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Assigning Manufacturing Costs
Factory Labor Costs
Illustration: Suppose that Tyler Company incurs factory labor charges of $20,000 in the machining process
and $13,000 in the assembly process. The entry to assign labor costs to machining and assembly for Tyler is:
Work in Process—Machining
20,000
Work in Process—Assembly 13,000
Factory Labor
LO 2
33,000
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Assigning Manufacturing Costs
Manufacturing Overhead Costs
Objective of assigning overhead is to allocate overhead to production departments on
objective and equitable basis
Use activity that “drives” or causes costs
Machine time used - primary driver
LO 2
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Assigning Manufacturing Costs
Manufacturing Overhead Costs
Illustration: Assume that based on machine hours that Tyler Company allocates overhead of $45,000 to the
machining process and $17,000 to the assembly process. Tyler’s entry to allocate overhead to the two
processes is:
Work in Process—Machining
45,000
Work in Process—Assembly 17,000
Manufacturing Overhead
LO 2
62,000
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Assigning Manufacturing Costs
Transfers to Next Department
Suppose Tyler transferred goods with a recorded cost of $87,000 from machining to assembly. Tyler makes
the following entry.
Work in Process—Assembly 87,000
Work in Process—Machining
LO 2
87,000
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Transfers to Next Department
Assembly Department completes unit with a recorded cost of $114,000 and then transfers them to the
finished goods warehouse. The entry for this transfer is as follows.
Finished Goods Inventory
114,000
Work in Process—Assembly
114,000
Tyler Company sells finished good with a recorded cost of $27,000. It records the cost of goods sold as
follows.
Cost of Goods Sold
27,000
Finished Goods Inventory
LO 2
27,000
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Assigning Manufacturing Costs
In making journal entries to assign raw materials costs, a company using process costing:
LO 2
a.
debits Finished Goods Inventory.
b.
often debits two or more work in process accounts.
c.
generally credits two or more work in process accounts.
d.
credits Finished Goods Inventory.
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DO IT! 2 Process Costing
Ruth Company manufactures ZEBO through two processes: blending and bottling. In June, raw materials
used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling
$5,000. Manufacturing overhead costs assigned were Blending $6,000 and Bottling $2,500. The company
transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The
Bottling Department transfers units completed at a cost of $11,000 to Finished Goods.
Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.
LO 2
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DO IT! 2 Process Costing (1 of 3)
Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.
To Record Material Used:
Work in Process—Blending 18,000
Work in Process—Bottling
4,000
Raw Materials Inventory
LO 2
22,000
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