202 Ch 4 S08 S

202 Ch 4 S08 S - ACC 202 Intro to Management Accounting...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ACC 202 Intro to Management Accounting Chapter 4: System Design: Process Costing obj 1 Learning Objectives Process Costing Use the weighted average method to compute: Equivalent Units (EU) of production Cost per equivalent unit Process Costing Used by companies that produce homogeneous products Costs are accumulated by each processing department Processing department is where the work is performed (where materials, labor or overhead is added) Unit costs are computed by dept. Quick Check Process costing is used for products that are: a. Different and produced continuously. b. Similar and produced continuously. c. Individual units produced to customer specifications. d. Purchased from vendors. A Processing Department Is: Any location in an organization where materials, labor or overhead are added to the product. The activities performed in a processing department are performed uniformly on all units of production. Furthermore, the output of a processing department must be homogeneous. Sequential vs. Parallel Processing Sequential processing means that units flow in a sequence from one department to another. Parallel processing is used when after a point, some units go through different processing departments than others. For example, a petroleum refinery separates crude oil into products like gasoline, jet fuel, and heating oil. Comparing Job-Order and Process Costing Direct Materials Direct Labor Work in Process Finished Goods Manufacturing Overhead Cost of Goods Sold Comparing Job-Order and Process Costing Direct Materials Direct Labor Costs are traced and applied to individual jobs in a job-order cost system. Jobs Finished Goods Manufacturing Overhead Cost of Goods Sold Comparing Job-Order and Process Costing Direct Materials Direct Labor Costs are traced and applied to departments in a process cost system. Processing Department Finished Goods Manufacturing Overhead Cost of Goods Sold Process Cost Flows EXAMPLE: Two processing departments: Department A Department B Cost flow T-accounts and journal entries in a process-costing system Process Cost Flows Raw Materials Direct Materials Work in Process Department A Direct Materials Work in Process Department B Direct Materials Process Cost Flows GENERAL JOURNAL Date Description Work in Process - Department A Work in Process - Department B Raw Materials To record the use of direct material. Post. Ref. Debit XXXXX XXXXX XXXXX Page 4 Credit Process Cost Flows Wages Payable Direct Labor Work in Process Department A Direct Materials Direct Labor Work in Process Department B Direct Materials Direct Labor Process Cost Flows GENERAL JOURNAL Date Description Work in Process - Department A Work in Process - Department B Salaries and Wages Payable To record direct labor costs. Post. Ref. Debit XXXXX XXXXX XXXXX Page 4 Credit Process Cost Flows Work in Process Department A Manufacturing Overhead Actual Overhead Overhead Applied to Work in Process Direct Materials Direct Labor Applied Overhead Work in Process Department B Direct Materials Direct Labor Applied Overhead Process Cost Flows GENERAL JOURNAL Date Description Work in Process - Department A Work in Process - Department B Manufacturing Overhead To apply overhead to departments. Post. Ref. Debit XXXXX XXXXX XXXXX Page 4 Credit Process Cost Flows Work in Process Department A Direct Transferred Materials to Dept. B Direct Labor Applied Overhead Work in Process Department B Direct Materials Direct Labor Applied Overhead Transferred from Dept. A Process Cost Flows GENERAL JOURNAL Date Description Work in Process - Department B Work in Process - Department A To record the transfer of goods from Department A to Department B. Post. Ref. Debit XXXXX XXXXX Page 4 Credit Process Cost Flows Work in Process Department B Direct Cost of Materials Goods Direct Manufactured Labor Applied Overhead Transferred from Dept. A Finished Goods Cost of Goods Manufactured Process Cost Flows GENERAL JOURNAL Date Description Finished Goods Work in Process - Department B To record the completion of goods and their transfer from Department B to finished goods inventory. Post. Ref. Debit XXXXX XXXXX Page 4 Credit Process Cost Flows Work in Process Department B Finished Goods Direct Cost of Cost of Cost of Materials Goods Goods Goods Direct Manufactured Manufactured Sold Labor Applied Overhead Transferred Cost of Goods Sold from Dept. A Cost of Goods Sold Process Cost Flows GENERAL JOURNAL Date Sales To record sales on account. Cost of Goods Sold Finished Goods To record cost of goods sold. XXXXX XXXXX Description Accounts Receivable Post. Ref. Debit XXXXX XXXXX Page 4 Credit Equivalent Units of Production Equivalent units = (the number of partially completed units) X (the percentage completion of those units) We need to calculate equivalent units because a department usually has some partially completed units in its beginning and ending inventory. inventory Equivalent Units: The Basic Idea Two half completed products are equivalent to one completed product. + = 1 So, 10,000 units 70% complete are equivalent to 7,000 complete units (10,000 x 70% = 7,000). Calculating Equivalent Units Equivalent units can be calculated two ways: The First-In, First-Out Method FIFO is covered in the appendix to this chapter (which is omitted for this course). The Weighted-Average Method This method will be covered in the main portion of the chapter. Quick Check For the current period, Jones 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 Jones have for the period? a. 10,000 b. 11,500 c. 13,500 d. 15,000 Equivalent Units of Production Weighted-Average Method Makes no distinction between work done in prior or current periods. Blends together units and costs from prior and current periods. Cost per equivalent = unit Costs for the period Equivalent units of production for the period Process Costing & Direct Labor Direct Materials Dollar Amount MOH Direct Labor Type of Product Cost Direct labor costs may be small in comparison to other product costs in process cost systems. Process Costing & Direct Labor Direct Materials Dollar Amount Direct labor costs may be small Conversion in comparison to other product costs in process cost systems. Type of Product Cost Direct labor and manufacturing overhead may be combined into one product cost called conversion. Weighted-Average Example Smith Company reported the following activity in Department A for the month of June: Percent Completed Units Work in process, June 1 Units started into production in June Units completed and transferred out of Department A during June Work in process, June 30 Materials Conversion 40% 20% 300 6,000 5,400 900 60% 30% Weighted-Average Example The first step in calculating the equivalent units is to identify the units completed and transferred out of Department A in June (5,400 units) Materials Units completed and transferred out of Department A in June 5,400 Conversion 5,400 Weighted-Average Example The second step is to identify the equivalent units of production in ending work in process with respect to materials for the month (540 units) and add this to the 5,400 units from step one. Materials Units completed and transferred out of Department A in June Work in process, June 30: 900 units 60% Equivalent units of Production in Department A during June 540 5,400 Conversion 5,400 5,940 Weighted-Average Example The third step is to identify the equivalent units of production in ending work in process with respect to conversion for the month (270 units) and add this to the 5,400 units from step one. Materials Units completed and transferred out of Department A in June Work in process, June 30: 900 units 60% 900 units 30% Equivalent units of Production in Department A during June Conversion 5,400 5,400 540 270 5,940 5,670 Weighted-Average Example Equivalent units of production always equals: Units completed and transferred out + Equivalent units remaining in work in process Materials Units completed and transferred out of Department A in June Work in process, June 30: 900 units 60% 900 units 30% Equivalent units of Production in Department A during June Conversion 5,400 5,400 540 270 5,940 5,670 In Class Practice Calculate Equivalent Units Weighted-Average Example Materials Beginning Work in Process 300 Units 40% Complete 6,000 Units Started 5,100 Units Started and Completed Ending Work in Process 900 Units 60% Complete 5,400 Units Completed 540 Equivalent Units 5,940 Equivalent units of production 900 60% Weighted-Average Example Conversion Beginning Work in Process 300 Units 20% Complete 6,000 Units Started 5,100 Units Started and Completed Ending Work in Process 900 Units 30% Complete 5,400 Units Completed 270 Equivalent Units 5,670 Equivalent units of production 900 30% Cost Per EU Example EXAMPLE: Double Diamond Skis uses the weightedaverage method of process costing to determine unit costs in its Shaping and Milling Department. Production Data for Example Work in process, May 1: 200 units Materials: 55% complete $ 9,600 Conversion: 30% complete 5,575 Production started during May 5,000 units Production completed during May 4,800 units Costs added to production in May Materials cost $ 368,600 Conversion cost 350,900 Work in process, May 31 400 units Materials: 40% complete Conversion: 25% complete Cost Per EU Example Step1: Calculate Equivalent Units. Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Completed and transferred Work in process, May 31 4,800 400 4,800 4,800 Cost Per EU Example Step1: Calculate Equivalent Units. Step1: Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Completed and transferred Work in process, May 31 Materials 40% complete 4,800 400 4,800 160 5,200 4,800 4,960 Cost Per EU Example Step1: Calculate Equivalent Units. Step1: Units to be accounted for: Work in process, May 1 Started into production Total units 200 5,000 5,200 Equivalent units Materials Conversion Completed and transferred Work in process, May 31 Materials 40% complete Conversion 25% complete 4,800 400 4,800 160 4,800 5,200 4,960 100 4,900 Step 2: Calculating the Costs Per Equivalent Unit To calculate the cost per equivalent unit for the period: Cost per equivalent unit Costs for the period Equivalent units of production for the period = Cost Per EU Example Step 2: Compute the cost per equivalent unit. Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shaping and Milling Department Total cost Equivalent units Cost per equivalent unit $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 Conversion $ 5,575 350,900 $ 356,475 4,900 Cost Per EU Example Step 2: Compute the cost per equivalent unit. Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shaping and Milling Department Total cost Equivalent units Cost per equivalent unit $ $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 76.25 Conversion $ 5,575 350,900 $ 356,475 4,900 $378,200 4,960 units = $76.25 Cost Per EU Example Step 2: Compute the cost per equivalent unit. Total Cost Cost to be accounted for: Work in process, May 1 Costs added in the Shaping and Milling Department Total cost Equivalent units $ 15,175 719,500 $ 734,675 Materials $ 9,600 368,600 $ 378,200 4,960 $ Conversion $ 5,575 350,900 $ 356,475 4,900 72.75 Cost per equivalent unit $ 76.25 Total cost per equivalent unit = $76.25 + $72.75 = $149.00 $356,475 4,900 units = $72.75 In Class Practice Calculate Cost Per Equivalent Unit ...
View Full Document

This note was uploaded on 08/25/2008 for the course ACC 202 taught by Professor Woollen during the Spring '08 term at Hawaii.

Ask a homework question - tutors are online