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costacctg13_sm_ch17 - CHAPTER 17 PROCESS COSTING 17­1...

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Unformatted text preview: CHAPTER 17 PROCESS COSTING 17­1 Industries using process costing in their manufacturing area include chemical processing, oil refining, pharmaceut icals, plast ics, brick and tile manufacturing, semiconductor chips, beverages, and breakfast cereals. 17­2 Process costing systems separate costs into cost categories according to the timing o f when costs are introduced into the process. Often, only two cost classificat ions, direct materials and conversio n costs, are necessary. Direct materials are frequent ly added at one point in t ime, often the start or the end of the process, and all conversio n costs are added at about the same time, but in a pattern different from direct materials costs. 17­3 Equivalent units is a derived amount of output units that takes the quantit y of each input (factor of production) in units completed or in incomplete units in work in process, and converts the quant ity of input into the amount of co mpleted output units that could be made wit h that quant it y of input. Each equivalent unit is co mprised of the physical quant it ies of direct materials or conversio n costs inputs necessary to produce output of one fully co mpleted unit. Equivalent unit measures are necessary since all physical units are not completed to the same extent at the same time. 17­4 The accuracy o f the estimates of complet ion depends on the care and skill o f the estimator and the nature of the process. Semiconductor chips may differ substant ially in the finishing necessary to obtain a final product. The amount of work necessary to finish a product may not always be easy to ascertain in advance. 17­5 The five key steps in process costing fo llow: Step 1: Summarize the flow o f physical units o f output. Step 2: Compute output in terms of equivalent units. Step 3: Summarize total costs to account for. Step 4: Compute cost per equivalent unit. Step 5: Assign total costs to units completed and to units in ending work in process. 17­6 Three inventory methods associated with process costing are: · Weighted average. · First­in, first­out. · Standard costing. 17­7 The weighted­average process­costing method calculates the equivalent­unit cost of all the work done to date (regardless o f the accounting period in which it was done), assigns this cost to equivalent units completed and transferred out of the process, and to equivalent units in ending work­in­process inventory. 17­1 17­8 FIFO co mputations are dist inct ive because they assign the cost of the previous accounting period’s equivalent units in beginning work­in­process inventory to the first units completed and transferred out of the process and assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work­in­process inventory. In contrast, the weighted­average method costs units completed and transferred out and in ending work in process at the same average cost. 17­9 FIFO should be called a modified or departmental FIFO method because the goods transferred in during a given period usually bear a single average unit cost (rather than a dist inct FIFO cost for each unit transferred in) as a matter of convenience. 17­10 A major advantage of FIFO is that managers can judge the performance in the current period independently fro m the performance in the preceding period. 17­11 The journal entries in process costing are basically similar to those made in jo b­costing systems. The main difference is that, in process costing, there is often more than one work­in­ process account––one for each process. 17­12 Standard­cost procedures are particularly appropriate to process­costing systems where there are various combinat ions o f materials and operations used to make a wide variet y of similar products as in the textiles, paints, and ceramics industries. Standard­cost procedures also avoid the intricacies invo lved in detailed tracking with weighted­average or FIFO methods when there are frequent price variat ions over time. 17­13 There are two reasons why the accountant should distinguish between transferred­in costs and additional direct materials costs for a particular department: (a) All direct materials may not be added at the beginning of the department process. (b) The control methods and responsibilit ies may be different for transferred­in items and materials added in the department. 17­14 No. Transferred­in costs or previous department costs are costs incurred in a previous department that have been charged to a subsequent department. These costs may be costs incurred in that previous department during this accounting period or a preceding accounting period. 17­15 Materials are only one cost item. Other items (often included in a conversio n costs pool) include labor, energy, and maintenance. If the costs of these items vary over time, this variabilit y can cause a difference in cost of goods sold and inventory amounts when the weighted­average or FIFO methods are used. A second factor is the amount of inventory on hand at the beginning or end o f an accounting period. The smaller the amount of production held in beginning or ending inventory relat ive to the total number of units transferred out, the smaller the effect on operating inco me, cost of goods sold, or inventory amounts fro m the use of weighted­average or FIFO methods. 17­2 17­16 (25 min.) Equivalent units, zero beginning inventory. 1. Direct materials cost per unit ($750,000 ÷ 10,000) Conversio n cost per unit ($798,000 ÷ 10,000) Assembly Department cost per unit $ 75.00 79.80 $154.80 2a. Solution Exhibit 17­16A calculates the equivalent units of direct materials and conversio n costs in the Assembly Depart ment of Niho n, Inc. in February 2009. Solution Exhibit 17­16B computes equivalent unit costs. 2b. Direct materials cost per unit Conversio n cost per unit Assembly Department cost per unit $ 75 84 $159 3. The difference in the Assembly Depart ment cost per unit calculated in requirements 1 and 2 arises because the costs incurred in January and February are the same but fewer equivalent units o f work are done in February relative to January. In January, all 10,000 unit s introduced are fully co mpleted result ing in 10,000 equivalent units of work done with respect to direct materials and conversio n costs. In February, of the 10,000 units introduced, 10,000 equivalent units of work is done with respect to direct materials but only 9,500 equivalent units of work is done with respect to conversio n costs. The Assembly Department cost per unit is, therefore, higher. SOLUTION EXHIBIT 17­16A Steps 1 and 2: Summarize Output in Physical Unit s and Co mpute Output in Equivalent Units; Assembly Department of Nihon, Inc. for February 2009. (Step 2) Equivalent Units Direct Conversion Materials Costs Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period Work in process, ending* (given) 1,000 ´ 100%; 1,000 ´ 50% Accounted for Work done in current period (Step 1) Physical Units 0 10,000 10,000 9,000 1,000 10,000 9,000 1,000 10,000 9,000 500 9,500 * egree of completion in this department: direct materials, 100%; conversion costs, 50%. D 17­3 SOLUTION EXHIBIT 17­16B Compute Cost per Equivalent Unit, Assembly Department of Nihon, Inc. for February 2009. Total Production Costs $1,548,000 (Step 3) Costs added during February Divide by equivalent units of work done in current period (Solut ion Exhibit 17­l6A) Cost per equivalent unit Direct Conversion Materials Costs $750,000 $798,000 ¸ 10,000 $ 75 ¸ 9,500 $ 84 17­17 (20 min.) Journal entries (continuation of 17­16). 1. Work in Process––Assembly Accounts Payable To record $750,000 of direct materials purchased and used in production during February 2009 Work in Process––Assembly Various accounts To record $798,000 of conversio n costs for February 2009; examples include energy, manufacturing supplies, all manufacturing labor, and plant depreciat ion Work in Process––Testing Work in Process––Assembly To record 9,000 units completed and transferred from Assembly to Testing during February 2009 at $159 ´ 9,000 units = $1,431,000 750,000 750,000 2. 798,000 798,000 3. 1,431,000 1,431,000 Postings to the Work in Process––Assembly account fo llow. Work in Process –– Assembly Department Beginning inventory, Feb. 1 0 3. Transferred out to 1. Direct materials 750,000 Work in Process––Testing 2. Conversio n costs 798,000 Ending inventory, Feb. 28 117,000 1,431,000 17­4 17­18 (25 min.) Zero beginning inventory, materials introduced in middle of process. 1. Solution Exhibit 17­18A shows equivalent units of work done in the current period of Chemical P, 50,000; Chemical Q, 35,000; Conversio n costs, 45,000. 2. Solution Exhibit 17­18B summarizes the total Mixing Depart ment costs for July 2009, calculates cost per equivalent unit of work done in the current period for Chemical P, Chemica l Q, and Conversio n costs, and assigns these costs to units completed (and transferred out) and to units in ending work in process. SOLUTION EXHIBIT 17­18A Steps 1 and 2: Summarize Output in Physical Unit s and Co mpute Output in Equivalent Units; Mixing Depart ment of Roary Chemicals for July 2009. (Step 1) Physical Flow of Production Units Work in process, beginning (given) 0 Started during current period (given) 50,000 To account for 50,000 Completed and transferred out during current period 35,000 Work in process, ending* (given) 15,000 15,000 ´ 100%; 15,000 ´ 0%; 15,000 ´ 66 2/3% Accounted for 50,000 Work done in current period only (Step 2) Equivalent Units Chemical P Chemical Q Conversion Costs 35,000 35,000 35,000 15,000 50,000 0 35,000 10,000 45,000 * egree of completion in this department: Chemical P, 100%; Chemical Q, 0%; conversion costs, 66 2/3%. D 17­5 SOLUTION EXHIBIT 17­18B Steps 3, 4, and 5: Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed and to Units in Ending Work in Process; Mixing Depart ment of Roary Chemicals for July 2009. Total Production Costs (Step 3) Costs added during July Total costs to account for (Step 4) Costs added in current period Divide by equivalent units of work done in current period (Solution Exhibit 17­l8A) Cost per equivalent unit (Step 5) Assignment of costs: Completed and transferred out (35,000 units) Work in process, ending (15,000 units) Total costs accounted for $455,000 $455,000 Chemical P $250,000 $250,000 $250,000 Chemical Q $70,000 $70,000 $70,000 Conversion Costs $135,000 $135,000 $135,000 ¸ 50,000 $ 5 ¸35,000 $ 2 ¸ 45,000 $ 3 $350,000 (35,000* ´ $5) + (35,000* ´ $2) + (35,000* ´ $3) 105,000 $455,000 † † † (15,000 ´ $5) + (0 ´ $2) + (10,000 ´ $3) $250,000 + $70,000 + $135,000 *Equivalent units completed and transferred out from Solution Exhibit 17­18A, Step 2. † Equivalent units in ending work in process from Solution Exhibit 17­18A, Step 2. 17­19 (15 min.) Weighted­average method, equivalent units. Under the weighted­average method, equivalent units are calculated as the equivalent unit s of work done to date. Solut ion Exhibit 17­19 shows equivalent units of work done to date for the Assembly Divis io n of Fenton Watches, Inc., for direct materials and conversio n costs. SOLUTION EXHIBIT 17­19 Steps 1 and 2: Summarize Output in Physical Unit s and Co mpute Output in Equivalent Units; Weighted­Average Method of Process Costing, Assembly Divisio n of Fenton Watches, Inc., for May 2009. (Step 2) (Step 1) Equivalent Units Physical Direct Conversion Flow of Production Units Materials Costs Work in process beginning (given) 80 Started during current period (given) 500 To account for 580 Completed and transferred out during current period 460 460 460 Work in process, ending* (120 ´ 60%; 120 ´ 30%) 120 72 36 Accounted for 580 ___ ___ Work done to date 532 496 * egree of completion in this department: direct materials, 60%; conversion costs, 30%. D 17­6 17­20 (20 min.) Weighted­average method, assigning costs (continuation of 17­19). Solution Exhibit 17­20 summarizes total costs to account for, calculates cost per equivalent unit of work done to date in the Assembly Divisio n of Fenton Watches, Inc., and assigns costs to units co mpleted and to units in ending work­in­process inventory. SOLUTION EXHIBIT 17­20 Steps 3, 4, and 5: Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed and to Units in Ending Work in Process; Weighted­Average Method of Process Costing, Assembly Divisio n of Fenton Watches, Inc., for May 2009. Total Production Costs $ 584,400 4,612,000 $5,196,400 Direct Materials $ 493,360 3,220,000 $3,713,360 $3,713,360 ¸ $ 532 6,980 Conversion Costs $ 91,040 1,392,000 $1,483,040 $1,483,040 ¸ $ 496 2,990 (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17­19) Cost per equivalent unit of work done to date (Step 5) Assignment of costs: Completed and transferred out (460 units) Work in process, ending (120 units) Total costs accounted for * † $4,586,200 610,200 $5,196,400 (460* ´ $6,980) + (460* ´ $2,990) † † (72 ´ $6,980) + (36 ´ $2,990) $3,713,360 + $1,483,040 Equivalent units completed and transferred out from Solution Exhibit 17­19, Step 2. Equivalent units in work in process, ending from Solution Exhibit 17­19, Step 2. 17­7 17­21 (15 min.) FIFO method, equivalent units. Under the FIFO method, equivalent units are calculated as the equivalent units of work done in the current period only. Solut ion Exhibit 17­21 shows equivalent units o f work done in May 2009 in the Assembly Divisio n of Fenton Watches, Inc., for direct materials and conversio n costs. SOLUTION EXHIBIT 17­21 Steps 1 and 2: Summarize Output in Physical Unit s and Co mpute Output in Equivalent Units; FIFO Method of Process Costing, Assembly Division of Fenton Watches, Inc., for May 2009. (Step 2) Equivalent Units Direct Conversion Materials Costs (work done before current period) Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 80 ´ (100% - 90%); 80 ´ (100% - 40%) Started and completed 380 ´ 100%, 380 ´ 100% * Work in process, ending (given) 120 ´ 60%; 120 ´ 30% Accounted for Work done in current period only § † (Step 1) Physical Units 80 500 580 80 8 380 † 48 380 36 464 380 120 ___ 580 72 460 Degree of completion in this department: direct materials, 90%; conversion costs, 40%. 460 physical units completed and transferred out minus 80 physical units completed and transferred out from beginning work­in­process inventory. *Degree of completion in this department: direct materials, 60%; conversion costs, 30%. 17­8 17­22 (20 min.) FIFO method, assigning costs (continuation of 17­21). Solution Exhibit 17­22 summarizes total costs to account for, calculates cost per equivalent unit of work done in May 2009 in the Assembly Divis io n of Fenton Watches, Inc., and assigns total costs to units completed and to units in ending work­in­process inventory. SOLUTION EXHIBIT 17­22 Steps 3, 4, and 5: Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed and to Units in Ending Work in Process; FIFO Method of Process Costing, Assembly Division of Fenton Watches, Inc., for May 2009. Total Production Costs $ 584,400 4,612,000 $5,196,400 Direct Materials $ 493,360 3,220,000 $3,713,360 (Step 4) Costs added in current period Divide by equivalent units of work done in current period (Solution Exhibit 17­21) Cost per equiv. unit of work done in current period (Step 5) Assignment of costs: Completed and transferred out (460 units): Work in process, beginning (80 units) Costs added to beginning work in process in current period Total from beginning inventory Started and completed (380 units) Total costs of units completed and transferred out Work in process, ending(120 units) Total costs accounted for * † (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for Conversion Costs $ 91,040 1,392,000 $1,483,040 $3,220,000 ¸ 460 $ 7,000 $1,392,000 ¸ 464 $ 3,000 $ 584,400 200,000 784,400 3,800,000 4,584,400 612,000 $5,196,400 $493,360 + $91,040 * * (8 ´ $7,000) + (48 ´ $3,000) † † (380 ´ $7,000) + (380 ´ $3,000) # # (72 ´ $7,000) + (36 ´ $3,000) $3,713,360 + $1,483,040 Equivalent units used to complete beginning work in process from Solution Exhibit 17­21, Step 2. Equivalent units started and completed from Solution Exhibit 17­21, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17­21, Step 2. 17­9 17­23 (20­25 min.) Standard­costing method, assigning costs. 1. SOLUTION EXHIBIT 17­23A Steps 1 and 2: Summarize Output in Physical Unit s and Co mpute Output in Equivalent Units; Standard Costing Method of Process Costing for Bucky’s Boxes for July 2010 (Step 2) Equi valent Units Direct Conversion Materials Costs 185,000 (work done before current period) (Step 1) Physical Units Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 185,000 ´ (100% - 100%); 185,000 ´ (100% – 25%) Started and completed 327,000 ´ 100%, 327,000 ´ 100% Work in process, ending* (given) 138,000 ´ 100%; 138,000 ´ 80% Accounted for Work done in current period only § † 465,000 650,000 185,000 0 327,000 † 138,750 327,000 110,400 _______ 576,150 327,000 138,000 _______ 650,000 138,000 _______ 465,000 Degree of completion in this department: direct materials, 100%; conversion costs, 25%. 512,000 physical units completed and transferred out minus 185,000 physical units completed and transferred out from beginning work­in­process inventory. *Degree of completion in this department: direct materials, 100%; conversion costs, 80%. 17­10 2. SOLUTION EXHIBIT 17­23B Steps 3, 4, and 5: Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign Total Costs to Units Completed and to Units in Ending Work in Process; Standard Costing Method of Process Costing for Bucky’s Boxes for July 2010 Total Production Direct Conversion Costs Materials Costs $ 337,625 $240,500 + $ 97,125 1,814,415 (465,000 ´ $1.30) + (576,150 ´ $2.10) $2,152,040 $845,000 + $1,307,040 $ 1.30 $ 2.10 (Step 3) Work in process, beginning (given) Costs added in current period at standard costs Total costs to account for (Step 4) Standard cost per equivalent unit (given) (Step 5) Assignment of costs at standard costs: Completed and transferred out (512,000 units): Work in process, beginning (185,000 units) $ 337,625 Costs added to beg. work in process in current period 291,375 Total from beginning inventory 629,000 Started and completed (327,000 units) 1,111,800 Total costs of units transferred out 1,740,800 Work in process, ending (138,000 units) 411,240 Total costs accounted for $2,152,040 Summary of variances for current performance: Costs added in current period at standard costs (see Step 3 above) Actual costs incurred (given) Variance $240,500 + $97,125 (0* ´ $1.30) + (138,750* ´ $2.10) † † (327,000 ´ $1.30) + (327,000 ´ $2.10) # # (138,000 ´ $1.30) + (110,400 ´ $2.10) $845,000 + $1,307,040 $604,500 $1,209,915 607,500 1,207,415 $ 3,000 U $ 2,500 F *Equivalent units to complete beginning work in process from Solution Exhibit 17­23A, Step 2. † Equivalent units started and completed from Solution Exhibit 17­23A, Step 2. Equivalent units in ending work in process from Solution Exhibit 17­23A, Step 2. # 17­11 17­24 (25 min.) Weighted­average method, assigning costs. 1. & 2. Solution Exhibit 17­24A shows equivalent units of work done...
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