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6
Process Costing
Page
3-1
study objectives
1. Understand who uses process cost systems.
2. Explain the similarities and differences between job
order cost and process cost systems.
3. Explain the flow of costs in a process cost system.
4. Make the journal entries to assign manufacturing costs in
a process cost system.
5. Compute equivalent units.
6. Explain the four steps necessary to prepare a production
cost report.
7. Prepare a production cost report.
Page
3-2
Page
3-3
Nature of Process Cost Systems
Page
3-4 SO 1 Understand who uses process cost systems.
Nature of Process Cost Systems
Page
3-5 SO 1 Understand who uses process cost systems.
Nature of Process Cost Systems
Review Question
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. The products produced are heterogeneous in nature.
Page Solution on
3-6 notes page SO 1 Understand who uses process cost systems.
Nature of Process Cost Systems
Page
3-7 SO 1 Understand who uses process cost systems.
Nature of Process Cost Systems
Similarities Differences
1. The manufacturing 1. The number of work in
cost elements. process accounts used.
Review Question
Indicate which of the following statements is not correct:
a. Both a job order and a process cost system track the same
three manufacturing cost elements – direct materials, direct
labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is
used, whereas in a process cost system, multiple work in
process accounts are used.
c. Manufacturing costs are accumulated the same way in a job
order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order
and in a process cost system.
Page Solution on SO 2 Explain the similarities and differences between
3-12 notes page job order cost and process cost systems.
Nature of Process Cost Systems
Page
3-14 SO 3 Explain the flow of costs in a process cost system.
Nature of Process Cost Systems
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
Transfer Costs
Monthly Entry to transfer goods to next department:
Review Question
In making the journal entry to assign raw materials
costs:
a. The debit is to Finished goods Inventory.
b. The debit is often to two or more work in
process accounts.
c. The credit is generally to two or more work
in process accounts.
d. The credit is to Finished Goods Inventory.
Student population:
Full-time students 900
Part-time students 1,000
Page
3-25 SO 5 Compute equivalents units.
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.
Illustration 3-8
Page
3-27 SO 5 Compute equivalents units.
Equivalent Units
Weighted-Average Method
Illustration: The output of K Christel Company’s
Packaging Department during the period consists of
10,000 units completed and transferred out, and 5,000
units in ending work in process which are 70% completed.
Page
3-28 SO 5 Compute equivalents units.
Equivalent Units
Page
3-29 SO 5 Compute equivalents units.
Equivalent Units
Page
3-30 SO 5 Compute equivalents units.
Equivalent Units
Page
3-31 SO 5 Compute equivalents units.
Equivalent Units
Page
3-32 SO 5 Compute equivalents units.
Equivalent Units
Review Question
The Mixing Department’s output during the period
consists of 20,000 units completed and transferred out,
and 5,000 units in ending work in process 60% complete
as to materials and conversions costs. Beginning
inventory is 1,000 units, 40% complete as to materials and
conversion costs. The equivalent units of production are:
a. 22,600 b. 23,000
c. 24,000 d. 25,000
Page Solution on
3-33 notes page SO 5 Compute equivalents units.
Equivalent Units
Page
3-34 SO 5 Compute equivalents units.
Equivalent Units
Page
3-37 SO 6 Explain the four steps necessary to prepare a production cost report.
Equivalent Units
Page
3-38 SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Costing
Page
3-39 SO 6
Comprehensive Example of Process Costing
Page
3-40 SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Costing
Illustration 3-14
Page
3-41 SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Costing
Page
3-42 SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Costing
Page
3-43 SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Costing
Page Solution on
3-44 notes page SO 6
Comprehensive Example of Process Costing
Page Solution on
3-45 notes page SO 6
Comprehensive Example of Process Costing
Page Solution on
3-46 notes page SO 6
Comprehensive Example of Process Costing
Page
3-47 SO 6 Explain the four steps necessary to prepare a production cost report.
Comprehensive Example of Process Costing
Illustration 3-22
Page
3-48
Comprehensive Example of Process Costing
Prepare the
Illustration 3-23
Production
Cost Report
Page
3-49 SO 7
Comprehensive Example of Process Costing
Review Question
Largo Company has unit costs of $10 for materials
and $30 for conversion costs. If there are 2,500
units in ending work in process, 40% complete as to
conversion costs and fully complete as to materials
cost, the total cost assignable to the ending work
in process inventory is:
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000. Solution on
notes page
Page
3-50 SO 7 Prepare a production cost report.
Comprehensive Example of Process Costing
Page
3-52 SO 7 Prepare a production cost report.
Wal-Mart has 138 million weekly customers.
In 2006 Wal-Mart had annual sales of $312 billion and net
income of more than $11.2 billion.
There are about 5,300 Wal-Mart stores worldwide. During a
single recent year, it planned on adding 500 more stores,
and it believes that the U.S. has room for at least 4,000
more “supercenters.”
Page
3-53
During a recent year, 10,000 companies applied to be new
suppliers to Wal-Mart. Of those, some 200 (about 2%) were
accepted.
Wal-Mart doesn’t like to account for more than 30% of a
supplier’s total business for fear that changing an order can
destroy the supplier.
As shown in the “About the Numbers” section in the next
column, Wal-Mart’s “kingdom” spreads across many
different countries. Recently, however, it sold all of its
stores in Germany because they could not meet its desired
profitability goals.
Page
3-54
Wal-Mart continues to grow across the world, but its success
varies across countries.
The following chart
shows total store
count in various
countries.
Page
3-55
Suppose that you were Colin Roche, whose PenAgain pen was
recently offered a 30-day trial period at 500 Wal-Mart
stores. In order for the product to pass the trial, in one
month Wal-Mart needs to sell 85% of the 48,000 pens that
it ordered. If it does, it will then order pens for a much
wider distribution at many more of its stores. If it doesn’t,
the deal is off. The PenAgain company gets between $6.49
and $12 from other retailers for the PenAgain pen, but Wal-
Mart is willing to pay only $3.76. Last year total sales of
PenAgain were $2,000,000.
If you were Colin Roche, would you accept Wal-Mart’s offer?
Page
3-56
If you were Colin Roche, would you accept Wal-Mart’s offer?
NO: The risks are high on two counts. First, the company
has to dramatically increase its operations in order to meet
the production requirements. What will it do with this
excess capacity if the deal falls through? Second, the
company risks alienating the retailers that it currently
supplies with pens. It could lose both Wal-Mart and its
existing customers.
Page
3-57
FIFO Method
.
Equivalent Units Under FIFO
Equivalent units are the sum of the work performed to:
1. Finish the units of beginning work in process
inventory.
2. Complete the units started into production during
the period (referred to as the units started and
completed).
3. Start, but only partially complete, the units in
ending work in process inventory.
Page
3-58 SO8 Compute equivalent units using the FIFO method.
FIFO Method
.
Equivalent Units Under FIFO
Illustration 3A-1 shows the physical flow of units for
the Assembly Department of Shutters Inc.
Illustration 3A-1
Page
3-59 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Page
3-60 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Cost Data
– Mixing
Department
Page
3-61 SO8
FIFO Method
Unit Flow
- Mixing
Department
Page
3-62 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Unit Flow
(FIFO) -
Mixing
Department
The Mixing Department must account for 900,000 units. 700,000 units were
transferred to the Baking Department and 200,000 units were still in process.
Page
3-63 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Illustration 3A-6
Page
3-64 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Illustration 3A-7
Page
3-65 SO8
FIFO Method
Page
3-66 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Page Solution on
3-67 notes page SO8 Compute equivalent units using the FIFO method.
FIFO Method
Page
3-68 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Illustration 3A-11
Page
3-69 SO8
FIFO Method
Page
3-70 SO8 Compute equivalent units using the FIFO method.
FIFO Method
Prepare the
Production
Cost Report
Illustration 3A-12
Page
3-71 SO8
FIFO Method