14-1 Process Costing and the Cost Accounting Cycle Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University 14.

14-1

Process Costing Process Costing and the Cost and the Cost

Accounting CycleAccounting Cycle

Prepared by Douglas Cloud

Pepperdine University

Prepared by Douglas Cloud

Pepperdine University

1144

14-2

Determine when process costing is appropriate. Explain the concept of equivalent unit

production. Determine unit costs, inventories, and costs

transferred. Use the backflush costing method. Describe and apply the cost accounting cycle

for manufacturers.

ObjectivesObjectivesObjectivesObjectives

After reading this After reading this chapter, you should chapter, you should

be able to:be able to:

After reading this After reading this chapter, you should chapter, you should

be able to:be able to:

14-3

Process CostingProcess CostingProcess CostingProcess Costing

The essence of process costing is the

accumulation of costs by process, or

department, for a period of time.

14-4

Process CostingProcess CostingProcess CostingProcess Costing

Unit cost = Production costs Production

Basic process costing formula used by a manufacturer of a single,

homogeneous product.

14-5

Equivalent unit production is the sum of (1) the units finished during the period and (2) the equivalent units in the ending inventory of work in process.

Equivalent Unit Production Equivalent Unit Production and Unit Costand Unit Cost


14-6



Equivalent production

=Units

completed+

Units in ending

inventoryx

Percentage complete

Equivalent production

= 50,000 + 10,000 x 60%

Equivalent production = 56,000

14-7



The weighted-average unit cost formula is:

Unit cost =

Cost of beginning inventory + Current period cost

Weighted-average equivalent unit production

14-8



The weighted-average unit cost formula is:

Unit cost =



$112,000 ÷ 56,000 = $2.00Unit cost =

14-9

Data for Kelco CompanyData for Kelco CompanyData for Kelco CompanyData for Kelco Company

Production costs $112,000 $128,400

Unit data:

WIP, beg. of month 0 10,000

Completed in month 50,000 70,000

WIP, end of month 10,000 20,000

WIP, percentage completed 60 % 40 %

May June

14-10

Ending Inventory and TransfersEnding Inventory and TransfersEnding Inventory and TransfersEnding Inventory and Transfers

Production costs

accounted for

= $100,000 + (10,000 units x 60% x $2)

Production costs

accounted for

= $112,000

Cost of units transferred + Cost of to finished goods ending inventory

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Effects of Beginning InventoryEffects of Beginning InventoryEffects of Beginning InventoryEffects of Beginning Inventory

June Equivalent Units for Kelco

Units completed 70,000

Equivalent units in ending inventory, 20,000 x 40% 8,000

Weighted-average equivalent unitproduction 78,000

14-12


Unit cost =



$12,000 + $128,400

78,000Unit cost = = $1.80

14-13


The disposition of the costs follows:

Ending inventory of work inprocess, 20,000 x 40% x $1.80 $ 14,400

To finished goods inventory,70,000 x $1.80 126,000

Total $140,400

14-14

Materials and Conversion CostsMaterials and Conversion CostsMaterials and Conversion CostsMaterials and Conversion Costs

Ending inventory:Material cost (15,000 units x 100% x $1.10) $16,500Conversion cost (15,000 units x 40% x $0.90) 5,400Total cost of ending WIP inventory $21,900

Transferred to finished goods:Material cost (45,000 units x $1.10) $49,500Conversion cost (45,000 units x $0.90) 40,500Total cost transferred to finished goods $90,000

14-15

Materials and Conversion CostsMaterials and Conversion CostsMaterials and Conversion CostsMaterials and Conversion Costs

Total costs to be accounted for:Costs in beginning inventory ($8,000 + $4,900) $ 12,900Costs for current month ($58,000 + $41,000) 99,000 Total $111,900

Total costs accounted for as:Cost of finished units transferred to finished

goods $ 90,000Cost of ending inventory 21,900 Total $111,900

14-16

Multiple ProcessesMultiple ProcessesMultiple ProcessesMultiple ProcessesUnit Data:

Unit on hand at beginning of June 0Transferred in from Cutting Department 45,000Completed and transferred to finished goods 40,000On hand at end of period (80% complete) 5,000

Cost Data:Beginning inventory $ 0Transferred in from Cutting Department $ 90,000Sanding Department conversion costs

for June $132,000

14-17

Multiple ProcessesMultiple ProcessesMultiple ProcessesMultiple Processes

Calculate the Equivalent Production for the Sanding Process

Units completed 40,000Equivalent units in ending inventory,

5,000 x 80% 4,000Weighted –average equivalent unit

production 44,000

$0 + $132,000

44,000Unit cost = = $3.00

14-18


The cost of a unit transferred from Sanding to finished goods is the $2.00 from the Cutting Department plus $3.00 from the Sanding Department, a total of $5.00.

Ending work in process:Cost from prior department, 5,000 x $2.00 $10,000Sanding Department conversion costs,

5,000 x 80% x $3.00 12,000Ending work in process $22,000

14-19


Transferred to finished goods, 40,000 x $5.00 $200,000

Ending inventory of work in process(from Slide 14-18) 22,000

Total $222,000

14-20

The Cost Accounting CycleThe Cost Accounting CycleThe Cost Accounting CycleThe Cost Accounting Cycle

Bryan Company produces a plywood countertop

backing. Bryan had no beginning inventories of

work in process.

14-21


Purchase of materials: Bryan bought 1,400,000 feet of wood at $0.095 per foot.

1. Materials Inventory $133,000

Cash or Accounts Payable$133,000

14-22


Bryan used 1,300,000 feet of wood.

2. Work in Process $123,500

Materials Inventory$123,500

14-23


Direct laborers earned $344,400 for 41,000 hours of work at $8.40 per hour.

3a. Direct Labor $344,400

Cash or Accrued Payroll$344,400

3b. Work in Process Inventory $344,400

Direct Labor$344,400

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Bryan incurred various overhead costs.

4. Variable Manufacturing Overhead $251,300

Fixed Manufacturing Overhead 461,000

Various, Cash, Accrued

Expenses, Accumulated

Depreciation$712,300

14-25


Bryan finished 40,000 square yards of plywood. Another 3,000 square yards were still in process at the end of 20X5.

5. Work in Process Inventory $251,300

Variable Mfg. Overhead$251,300

Work in Process Inventory $461,000

Fixed Mfg. Overhead$461,000

14-26


Materials (Slide 14-23) $ 123,500Direct labor (Slide 14-24) 344,400Variable overhead (Slide 14-26) 251,300Fixed overhead (Slide 14-26) 461,000Total $1,180,200Divided by equivalent production 42,000Equals cost per unit $ 28.10

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The $28.10 cost per unit is used to transfer to Finished Goods Inventory (40,000 units).

6. Finished Goods Inventory $1,124,000

Work in Process Inventory$1,124,000

14-28


Bryan sold 35,000 square yards that cost $28.10 at $40 each.

7a. Cash or Accounts Receivable $1,400,000

Sales $1,400,000

7b. Cost of Goods Sold $983,500

Finished Goods Inventory $983,500

14-29


The company incurred $340,000 in selling and administrative expenses.

8. Selling and Administrative Expenses

$340,000

Cash, Accrued Expenses$340,000

14-30


Work in Process Inventory

(2) $ 123,500(3b) 344,400(5) 251,300 $1,124,000 (6)(5) 461,000

1,180,200 $1,124,000Bal. $ 56,200

14-31


Finished Goods Inventory

(6) $1,124,000$983,500 (7b)

Bal. $ 140,500

Cost of Goods Sold

(7b) $983,500

14-32


Income Statement for Bryan Company, Actual Process Costing

Sales (Slide 14-28) $1,400,000

Cost of goods sold (Slide 14-28) 983,500

Gross profit $ 416,500

Selling and administrative expenses(Slide 14-29) 340,000

Income $ 76,500

14-33

Illustration of Job-Order CostingIllustration of Job-Order CostingIllustration of Job-Order CostingIllustration of Job-Order Costing

Portland Mill Works makes industrial products in a highly mechanized environment. The company uses activity-based costing. The company has established

the following predetermined overhead rates:

Machine-Related

Total budgeted overhead $600,000Divided by budgeted levels of activity 100,000 MHEquals predetermined overhead rates $6 per MH

ContinuedContinued

14-34


Setup-Related

Total budgeted overhead $250,000Divided by budgeted levels of activity 10,000 SHEquals predetermined overhead rates $25 per SH

Total applied overhead ($660,000 +$225,000) $885,000

Total actual overhead ($645,000 +$235,000) 880,000

Total overapplied overhead $ 5,000

14-35


Materials are purchased.

1. Materials Inventory $720,000Cash, Accounts Payable $720,000

Materials are placed into production.

2. Work in Process Inventory $650,000Materials Inventory $650,000

14-36


Direct labor is incurred.

3a. Direct Labor $800,000Cash or Accrued Payroll $800,000

3b. Work in Process Inventory $800,000Direct Labor $800,000

14-37


Overhead was incurred and applied.

4a. Factory Overhead-machine—related $645,000

Factory Overhead—setup-related 235,000

Various Credits, Cash, Accrued Expenses, Accumulated Depreciation $880,000

14-38


Overhead was incurred and applied (continued).

4b. Work in Process Inventory $885,000Factory Overhead—

machine-related $660,000Factory Overhead—setup-

related 225,000

14-39


Completed jobs are transferred to finished goods.

5. Finished Goods Inventory $2,262,000Work in Process Inventory $2,262,000

The cost of goods sold is recorded.

6. Cost of Goods Sold $2,100,000Finished Goods Inventory $2,100,000

14-40

Factory Overhead—setup-related

(4a) $235,000 $225,000 (4b)Bal. $ 10,000


Factory Overhead—machine-related

(4a) $645,000 $660,000 (4b)Bal. $ 15,000

14-41



(2) $ 650,000(3b) 800,000(4b) 885,000 $2,262,000 (5)

2,335,000 $2,262,000Bal. $ 73,000

14-42



(5) $2,262,000 $2,100,000 (6)Bal. $ 162,000

Cost of Goods Sold

(6) $2,100,000

14-43

Illustration of Standard CostingIllustration of Standard CostingIllustration of Standard CostingIllustration of Standard Costing

Materials are purchased.

1. Materials Inventory $100,000Material Price Variance 4,000

Cash or Accounts Payable$104,000

Materials are placed into production.

2. Work in Process Inventory $90,000Materials Use Variance 1,000Materials Inventory $89,000

20,000 x 20,000 x $5.00$5.00

18,000 x $518,000 x $5

17,800 x $517,800 x $5

14-44


Direct labor is incurred.

3a. Direct Labor $75,200Cash or Accrued Payroll $72,850Direct Labor Rate Variance 2,350

3b. Work in Process Inventory $72,000 Direct Labor Efficiency Variance 3,200

Direct Labor $75,200

4,700 x 4,700 x $16$16

4,500 x 4,500 x $16$16

14-45


Variable overhead was incurred and applied.

4a. Variable Manufacturing Overhead $56,400Variable Overhead Spending

Variance 2,600Various Credits, Cash, Accrued Expenses $59,000

4,700 x 4,700 x $12$12

14-46



4b. Work in Process Inventory $54,000Variable Overhead Efficiency Variance 2,400

Variable Manufacturing Overhead $56,400

4,500 x 4,500 x $12$12

14-47


5a. Fixed Manufacturing Overhead $100,000

Fixed Overhead Budget Variance $ 2,000Various Credits, Cash, Accrued Expenses 98,000

14-48



5b. Work in Process Inventory $90,000Factory Overhead Volume Variance 10,000Factory Manufacturing Overhead $100,000

9,000 x 9,000 x $10$10

14-49


Completed jobs are transferred to finished goods.

6. Finished Goods Inventory $306,000Work in Process Inventory $306,000

The cost of goods sold is recorded.

7. Cost of Goods Sold $272,000Finished Goods Inventory $272,000

9,000 x 9,000 x $34$34

8,000 x 8,000 x $34$34

14-50



(2) $ 90,000(3b) 72,000(4b) 54,000(5b) 90,000 $306,000 (6)

$306,000 $306,000

Materials Inventory

(1) $100,000 $89,000 (2)Bal. $ 11,000

14-51



3-1 Bal $ 34,000(6) 306,000 $272,000 (7)

340,000 272,0003-31 Bal. $ 68,000

Cost of Goods Sold

(7) $272,000

14-52

BackflushingBackflushing

Backflushing concentrates on

completed units, rather than on the units making their way through work

in process. Backflushing therefore requires

relatively few entries.

14-53

The EndThe End

Chapter 14Chapter 14

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14-1 Process Costing and the Cost Accounting Cycle Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University 14.

Documents

unit cost slide

cost of units

unit costs

process costing unit

material cost

equivalent units

units x

unit data