In step 1 of the process costing procedure, the "total units to account for" is the sum of

Process Costing and Hybrid

Product-Costing Systems

Chapter 4

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Reviewer (R) - CHAPTER 4 CORRECTIONS ARE REQUIRED Note that the font used for the narration notes is inconsistent throughtout the chapter and with previous chapters. Note that some slides are numbered, while other slides are not. Note that some slides have page numbers, while other slides do not.

*

Chapter 4: Process Costing and Hybrid Product-Costing Systems

Learning Objective 4-1 – List and explain the similarities and important differences between job-order and process costing.

4-*

*

Learning Objective 4-1. List and explain the similarities and important differences between job-order and process costing.

Comparison of Job-Order Costing and Process Costing

4-*

*

This chapter covers process-costing systems. Process costing is used in repetitive production environments, where large numbers of identical or very similar products are manufactured in a continuous flow. (LO 4-1)

Comparison of Job-Order Costing and Process Costing

4-*

*

Industries using process costing include paper, petroleum, chemicals, textiles, food processing, lumber, and electronics. (LO 4-1)

Comparison of Job-Order Costing and Process Costing

Job-order costing

Costs accumulated by the job.

Work in process has a job-cost sheet for each job.

Many unique, high cost jobs.

Jobs built to customer order.

Process costing

Costs accumulated by department or process.

Work in process has a production report for each batch of products.

A few identical, low cost products.

Units continuously produced for inventory in automated process.

4-*

*

In many ways, job-order costing and process costing are similar. Both product-costing systems have the same ultimate purpose—assignment of production costs to units of output. Moreover, the flow of costs through the manufacturing accounts is the same in the two systems. (LO 4-1)

Direct Material

Finished

Goods

Cost of

Goods

Sold

Direct Labor

Manufacturing Overhead

Jobs

The work-in-process account consists of individual jobs in a

job-order cost system.

Differences Between Job-Order and Job Job-Order Costing

4-*

Reviewer (R) - Slide 6 Title: Deleted the words '(Covered in Chapter 3)' from the title. Note that this reference is provided in the narration notes. Bottom right: Shortened the arrow to fit the space.

*

In job-order costing, costs are accumulated by job order and recorded on job-cost records. The cost of each unit in a particular job order is found by dividing the total cost of the job order by the number of units in the job. This cost flow was described in the previous chapter. (LO 4-1)

Direct Material

Finished

Goods

Cost of

Goods

Sold

Products

The work-in-process account consists of individual products in a process-cost system.

Differences Between Job-Order and Process Costing

Direct Labor

& Overhead

(Conversion)

When direct labor is a relatively small amount compared to material and overhead, it is often combined with overhead.

4-*

*

In process costing, costs are accumulated by department, rather than by job order or batch. The cost per unit is found by dividing the total costs incurred by the units produced. (LO 4-1)

Learning Objective 4-2 – Prepare journal entries to record the flow of costs in a process-costing system with sequential production departments

4-*

Reviewer (R) - Slide 8 Changed the word 'depts.' to read 'departments' and reduced the font size the fit within the text box.

*

Learning Objective 4-2. Prepare journal entries to record the flow of costs in a process-costing system with sequential production departments.

Process Cost Flows

4-*

Sheet1

Managerial Accounting Financial Accounting

Users of Information Managers, within the organization. Interested parties, outside the organization.

Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.

Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.

Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department

Work-in-Process Finished Goods

Inventory Inventory Cost of Goods Sold

Direct material Cost of goods completed Cost of goods sold

Direct labor Two Sequential Production Departments

Applied manufacturing and transferred to during current Work-in-Process Inventory Work-in-Process Inventory

overhead finished goods period Production Department A Production Department B

Direct material Cost of goods completed in department A and Cost of goods completed

Direct labor

Applied manufacturing transferred to and transferred to

overhead department B finished goods

Direct material

Direct labor

Applied manufacturing

overhead

Finished Goods Inventory Cost of Goods Sold

Cost of goods sold

during current period

One Production Department

Work-in-Process Inventory Finished Goods Inventory

Direct material Cost of goods completed Cost of goods completed

Direct labor

Applied manufacturing and transferred to and transferred to

overhead Finished goods finished goods

Direct material

Direct labor

Applied manufacturing

overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31

Direct Material: Direct Material: Direct Material:

10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Convserion: Convserion: Convserion:

5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

Sheet1

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit $ 28,000

Conversion:

5,000 equivalent units × $4.46 per equivalent unit 22,300

Total cost of March 31 work in process 50,300

Total costs accounted for $ 340,700

&A

Page &P

Sheet2

&A

Page &P

Sheet3

&A

Page &P

Sheet4

&A

Page &P

Sheet5

&A

Page &P

Sheet6

&A

Page &P

Sheet7

&A

Page &P

Sheet8

&A

Page &P

Sheet9

&A

Page &P

Sheet10

&A

Page &P

Sheet11

&A

Page &P

Sheet12

&A

Page &P

Sheet13

&A

Page &P

Sheet14

&A

Page &P

Sheet15

&A

Page &P

Sheet16

&A

Page &P

*

In a single production department situation, direct-material, direct-labor, and manufacturing-overhead costs are added to a Work-in-Process Inventory account. As goods are finished, costs are transferred to Finished-Goods Inventory. During the period when goods are sold, the product costs are transferred to Cost of Goods Sold. Let’s take a look at the specific journal entries involved in a two-department process. (LO 4-2)

Journal Entry

Direct Material, Direct Labor, and Overhead Applied

The journal entry for the case of two sequential departments, as illustrated in your text, will be demonstrated. In this journal entry, we see $50,000 of direct materials, $20,000 of direct labor, and $30,000 of manufacturing overhead applied to the WIP account for Department A – the first department. The overhead would have been applied using the same method as we learned about in the job order costing chapter. The numbers used in the journal entry are assumed for the purpose of showing the form of the entries. (LO 4-2)

Process Cost Flows

4-*

Reviewer (R) - Slide 11 Update the artwork (see Exhibit 4-1, page 139, Hilton 11e).

Sheet1

Managerial Accounting Financial Accounting

Users of Information Managers, within the organization. Interested parties, outside the organization.

Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.

Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.

Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department

Work-in-Process Finished Goods

Inventory Inventory Cost of Goods Sold

Direct material Cost of goods completed Cost of goods sold

Direct labor Two Sequential Production Departments

Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory

overhead finished goods Production Department A Production Department B

Direct material Cost of goods completed in department A and Cost of goods completed

Direct labor

Applied manufacturing transferred to and transferred to

overhead department B finished goods

Direct material

Direct labor

Applied manufacturing

overhead

Finished Goods Inventory Cost of Goods Sold

Cost of goods sold

during current period

One Production Department

Work-in-Process Inventory Finished Goods Inventory

Direct material Cost of goods completed Cost of goods completed

Direct labor

Applied manufacturing and transferred to and transferred to

overhead Finished goods finished goods

Direct material

Direct labor

Applied manufacturing

overhead

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31

Direct Material: Direct Material: Direct Material:

10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Convserion: Convserion: Convserion:

5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

Sheet1

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit $ 28,000

Conversion:

5,000 equivalent units × $4.46 per equivalent unit 22,300

Total cost of March 31 work in process 50,300

Total costs accounted for $ 340,700

&A

Page &P

Sheet2

&A

Page &P

Sheet3

&A

Page &P

Sheet4

&A

Page &P

Sheet5

&A

Page &P

Sheet6

&A

Page &P

Sheet7

&A

Page &P

Sheet8

&A

Page &P

Sheet9

&A

Page &P

Sheet10

&A

Page &P

Sheet11

&A

Page &P

Sheet12

&A

Page &P

Sheet13

&A

Page &P

Sheet14

&A

Page &P

Sheet15

&A

Page &P

Sheet16

&A

Page &P

*

In the two-department case, when goods are finished in the first production department, costs accumulated in the Work-in-Process Inventory account for production department A are transferred to the Work-in-Process Inventory account for production department B. Let’s take a look at a typical entry when the costs are transferred from one department to the next. (LO 4-2)

Journal Entry

Dept. B – Transferred In Costs

When production in Department A completes its work on some units of the product, those units are transferred to production department B. The costs assigned to these goods are transferred from the Work-In-Process Inventory account for department A to the Work-In-Process Inventory Account for Department B. In Department B, the costs assigned to those partially completed products are called transferred-in costs. (LO 4-2)

Journal Entry

Dept. B – Direct materials, Direct Labor, and Manufacturing Overhead

Direct material and direct labor are used in production department B, and manufacturing overhead is applied using a predetermined rate. These costs are accumulated in Department B and recorded as shown. (LO 4-2)

Journal Entry

Goods Completed

As goods are completed in Department B, the cost of those goods are transferred out of Work-In-Process and into Finished Goods Inventory. (LO 4-2)

Journal Entry

Goods Sold

The costs of the goods completed stay in the Finished-Goods Inventory account until the units are sold, at which point the costs are transferred OUT of Finished-Goods Inventory and INTO Cost of Goods Sold. At this point, the cost has finally been transferred to the Income Statement. The costs have no more future value. (Note: Just as in Job-Order Costing, the revenue earned from the units sold would also typically be recorded when the goods are sold.) (LO 4-2)

Learning Objective 4-3 – Prepare a table of equivalent units under weighted-average process costing.

4-*

*

Learning Objective 4-3. Prepare a table of equivalent units under weighted-average process costing.

Equivalent Units: A Key Concept

Costs are accumulated for a period of time for products in work-in-process inventory.

Products in work-in-process inventory at the beginning and end of the period are only partially complete.

Equivalent units is a concept expressing these partially completed products as a smaller number of fully completed products.

The term equivalent units is used in process costing to refer to the amount of manufacturing activity that has been applied to a batch of physical units. (LO 4-3)

*

Equivalent Units Example

Two half completed products are equivalent to one completed product.

So, 10,000 units that are 70% complete

are equivalent to 7,000 complete units.

4-*

*

For example, two units which are 50 percent complete are equivalent to one unit that is 100 percent complete. Likewise, 10,000 units that are 70 percent complete is 7,000 equivalent units. (LO3)

For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30% 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 Question 1

4-*

*

Jones started 15,000 units and transferred 10,000 units to finished goods. The remaining 5,000 units were 30 percent complete. How many equivalent units did Jones have for the period? (LO 4-3)

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

10,000 units + (5,000 units × .30)

= 11,500 equivalent units

Equivalent Units Question 1

4-*

*

The 5,000 units that are 30 percent complete are equivalent to 1,500 units. Add that to the 10,000 units that are 100 percent complete for a total of 11,500 equivalent units. (LO 4-3)

Jones incurred $27,600 in

production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a. $1.84

b. $2.40

c. $2.76

d. $2.90

Equivalent Units Question 2

4-*

*

The production costs incurred for the period were $27,600. What is the cost per equivalent unit? (LO 4-3)

Jones incurred $27,600 in

production costs for the 11,500 equivalent units. What was Jones’s cost per equivalent unit for the period?

a. $1.84

b. $2.76

c. $2.40

d. $2.90

Equivalent Units Question 2

4-*

*

The production costs are divided by the number of equivalent units to arrive at the cost per equivalent unit. (LO 4-3)

Calculating and Using Equivalent Units of Production

To calculate the direct materials and conversion costs per equivalent unit for the period:

Materials cost per

equivalent

unit

=

Materials cost for the period

Materials equivalent units for the period

Conversion cost per

equivalent

unit

=

Conversion cost for the period

Conversion equivalent units for the period

4-*

*

Direct material is usually placed into production at beginning of the production process. In contrast, direct labor and manufacturing overhead, called conversion costs, usually are incurred uniformly throughout the process. When an accounting period ends, the partially completed goods that remain in process generally are at different stages of completion with respect to material and conversion activity. The most important feature of process costing is that the costs of direct material and conversion are assigned to equivalent units rather than to physical units. (LO 4-3)

Departmental Production Report

4-*

*

The key document in a typical process-costing system is the departmental production report, prepared for each production department at the end of each accounting period. The departmental production report summarizes the flow of production quantities through the department, and it shows the amount of production cost transferred out of the department’s Work-in-Process Inventory account during the period. There are four steps used in preparing a departmental production report:

1. Analysis of physical flow of units.

2. Calculation of equivalent units.

3. Computation of unit costs.

4. Analysis of total costs.

(LO 4-3)

Equivalent Units of Production –

Weighted-Average Method

The weighted-average method . . .

Makes no distinction between work done in the prior period and work done in the current period.

Blends together units and costs from the prior period and the current period.

4-*

*

The method of process costing that we will focus on in this chapter is called the weighted-average method. This method is almost always used in practice by companies using process costing. There is another process-costing method called the first-in, first-out, or FIFO, method. (LO 4-3)

Production Report Example

MVP Sports Equipment Company makes baseball gloves in two departments, Cutting and Stitching.

MVP uses the weighted-average process costing.

Material is added at the beginning of the Cutting Department, while conversion is incurred uniformly throughout the process.

Using the following information for the month of March, let’s prepare a production report for the Cutting Department.

4-*

*

The MVP Sports Equipment Company manufactures baseball gloves. Two production departments are used in sequence: the Cutting Department and the Stitching Department. In the Cutting Department, direct material is placed into production at the beginning of the process. Direct-labor and manufacturing overhead costs are incurred uniformly throughout the process. The predetermined overhead rate used in the Cutting Department is 125 percent of direct-labor cost. (LO 4-3)

Production Report Example

Work in process, March 1: 20,000 units Cost

Materials: 100% complete $ 50,000

Conversion: 10% complete 7,200

Units started into production in March: 30,000 units

Units completed and transferred out in March: 40,000 units

Work in process, March 31: 10,000 units

Materials 100% complete

Conversion 50% complete

Costs incurred during March

Materials cost 90,000

Conversion costs:

Direct labor $ 86,000

Applied manufacturing overhead 107,500

Total conversion costs 193,500

Total costs to account for $ 340,700

4-*

Reviewer (R) - Slide 27 Deleted periods after the word 'complete' (4Xs) and moved the word 'Cost' and the values '$50,000' and '7,200' to the right.

*

This slide presents a summary of the activity and costs in the Cutting Department during March. The direct-material and conversion costs for the March 1 work in process consist of costs that were incurred during February. These costs were assigned to the units remaining in process at the end of February. Materials costs of $90,000 and conversion costs of $193,500 were added during the month of March. The beginning work in process and the costs added during March equal the total costs to be accounted for. (LO 4-3)

Analysis of Physical Flow of Units

Production Report Example

4-*

Reviewer (R) - Slide 28 Recentered the arrow to the two values.

Sheet1

Physical

Units

Work in process, March 1 20,000

Units started during March 30,000

Total units to account for 50,000

Units completed and transferred out during March 40,000

Work in process, March 31 10,000

Total units accounted for 50,000

&A

Page &P

Sheet2

&A

Page &P

Sheet3

&A

Page &P

Sheet4

&A

Page &P

Sheet5

&A

Page &P

Sheet6

&A

Page &P

Sheet7

&A

Page &P

Sheet8

&A

Page &P

Sheet9

&A

Page &P

Sheet10

&A

Page &P

Sheet11

&A

Page &P

Sheet12

&A

Page &P

Sheet13

&A

Page &P

Sheet14

&A

Page &P

Sheet15

&A

Page &P

Sheet16

&A

Page &P

*

The first step is to prepare a table summarizing the physical flow of production units during March. (LO 4-3)

Production Report Example

Calculation of Equivalent Units

4-*

Sheet: Sheet1

Sheet: Sheet2

Sheet: Sheet3

Sheet: Sheet4

Sheet: Sheet5

Sheet: Sheet6

Sheet: Sheet7

Sheet: Sheet8

Sheet: Sheet9

Sheet: Sheet10

Sheet: Sheet11

Sheet: Sheet12

Sheet: Sheet13

Sheet: Sheet14

Sheet: Sheet15

Sheet: Sheet16

Conversion

Equivalent Units

Physical

Percentage

Direct

Units

Complete

Material

Conversion

Work in process, March 1

20000.0

0.1

Units started during March

30000.0

Total units to account for

50000.0

Units completed and transferred

40000.0

1.0

40000.0

40000.0

Work in process, March 31

10000.0

0.5

10000.0

5000.0

Total units accounted for

50000.0

Total equivalent units

50000.0

45000.0

*

The second step is to calculate the equivalent units of direct material and conversion activity. The table of equivalent units, displayed on this slide, is based on the table of physical flows prepared in step 1. The Cutting Department completed its work on 40,000 physical units. Thus, it represents 40,000 equivalent units for both direct material and conversion. The 10,000 units in the Cutting Department’s ending work-in-process inventory are 50 percent complete with respect to conversion. Therefore, the ending work-in-process inventory represents 5,000 equivalent units of conversion activity (10,000 physical units x 50% complete). (LO 4-3)

Production Report Example

Calculation of Equivalent Units

100% of 10,000 units, all

material added at beginning

4-*

Sheet1

Conversion Equivalent Units

Physical Percentage Direct

Units Complete Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000

Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000

Total units accounted for 50,000

Total equivalent units 50,000 45,000

&A

Page &P

Sheet2

&A

Page &P

Sheet3

&A

Page &P

Sheet4

&A

Page &P

Sheet5

&A

Page &P

Sheet6

&A

Page &P

Sheet7

&A

Page &P

Sheet8

&A

Page &P

Sheet9

&A

Page &P

Sheet10

&A

Page &P

Sheet11

&A

Page &P

Sheet12

&A

Page &P

Sheet13

&A

Page &P

Sheet14

&A

Page &P

Sheet15

&A

Page &P

Sheet16

&A

Page &P

*

With respect to direct material, the 10,000 units in the Cutting Department’s ending work-in-process inventory are 100 percent complete. Therefore, the ending work-in-process inventory represents 10,000 equivalent units of direct material. (LO 4-3)

Learning Objective 4-4 – Compute the cost per equivalent unit under the weighted-average method of process costing.

4-*

*

Learning Objective 4-4. Compute the cost per equivalent unit under the weighted-average method of process costing.

Computation of unit costs

Production Report Example

4-*

Sheet1

Direct

Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500

Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

&A

Page &P

Sheet2

&A

Page &P

Sheet3

&A

Page &P

Sheet4

&A

Page &P

Sheet5

&A

Page &P

Sheet6

&A

Page &P

Sheet7

&A

Page &P

Sheet8

&A

Page &P

Sheet9

&A

Page &P

Sheet10

&A

Page &P

Sheet11

&A

Page &P

Sheet12

&A

Page &P

Sheet13

&A

Page &P

Sheet14

&A

Page &P

Sheet15

&A

Page &P

Sheet16

&A

Page &P

*

The third step in the process-costing procedure is calculating the cost per equivalent unit for both direct material and conversion activity. The cost per equivalent unit for direct material is computed by dividing the total direct-material cost, including the cost of the beginning work in process and the cost incurred during March, by the total equivalent units (from step 2). The same procedure is used for conversion costs. (LO 4-4)

Learning Objective 4-5 – Analyze the total production costs for a department under the weighted-average method of process costing.

4-*

*

Learning Objective 4-5. Analyze the total production costs for a department under the weighted-average method of process costing.

Production Report Example

Analysis of total costs

4-*

Sheet1

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31

Direct Material: Direct Material: Direct Material:

10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Convserion: Convserion: Convserion:

5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700

Sheet2

Sheet3

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000EA94A.xls

Sheet: Sheet1

Sheet: Sheet2

Sheet: Sheet3

Sheet: Sheet4

Sheet: Sheet5

Sheet: Sheet6

Sheet: Sheet7

Sheet: Sheet8

Sheet: Sheet9

Sheet: Sheet10

Sheet: Sheet11

Sheet: Sheet12

Sheet: Sheet13

Sheet: Sheet14

Sheet: Sheet15

Sheet: Sheet16

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit

290400.0

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit

28000.0

Conversion:

5,000 equivalent units × $4.46 per equivalent unit

22300.0

Total cost of March 31 work in process

50300.0

Total costs accounted for

340700.0

*

The final step is to determine the total cost to be transferred out of the Cutting Department’s Work-in-Process Inventory account and into the Stitching Department’s Work-in-Process Inventory account. The cost per equivalent unit, $7.26, was calculated in step 3. The number of units transferred is multiplied by the total cost per equivalent unit. (LO 4-5)

Production Report Example

Analysis of total costs

4-*

Sheet1

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31

Direct Material: Direct Material: Direct Material:

10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Convserion: Convserion: Convserion:

5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700

Sheet2

Sheet3

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000EA94A.xls

Sheet: Sheet1

Sheet: Sheet2

Sheet: Sheet3

Sheet: Sheet4

Sheet: Sheet5

Sheet: Sheet6

Sheet: Sheet7

Sheet: Sheet8

Sheet: Sheet9

Sheet: Sheet10

Sheet: Sheet11

Sheet: Sheet12

Sheet: Sheet13

Sheet: Sheet14

Sheet: Sheet15

Sheet: Sheet16

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit

290400.0

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit

28000.0

Conversion:

5,000 equivalent units × $4.46 per equivalent unit

22300.0

Total cost of March 31 work in process

50300.0

Total costs accounted for

340700.0

*

The direct material equivalent units is multiplied by the direct materials cost per equivalent unit. The conversion equivalent units is multiplied by the conversion cost per equivalent unit. These two amounts are added together. (LO 4-5)

Production Report Example

Analysis of total costs

4-*

Sheet1

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31

Direct Material: Direct Material: Direct Material:

10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Convserion: Convserion: Convserion:

5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700

Sheet2

Sheet3

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000EA94A.xls

Sheet: Sheet1

Sheet: Sheet2

Sheet: Sheet3

Sheet: Sheet4

Sheet: Sheet5

Sheet: Sheet6

Sheet: Sheet7

Sheet: Sheet8

Sheet: Sheet9

Sheet: Sheet10

Sheet: Sheet11

Sheet: Sheet12

Sheet: Sheet13

Sheet: Sheet14

Sheet: Sheet15

Sheet: Sheet16

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit

290400.0

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit

28000.0

Conversion:

5,000 equivalent units × $4.46 per equivalent unit

22300.0

Total cost of March 31 work in process

50300.0

Total costs accounted for

340700.0

*

The sum of these costs is added to the cost of goods completed and transferred. Now all costs on the production report have been accounted for. These calculations are used as the basis for the journal entries to transfer the cost of goods completed and transferred out to the Stitching Department. (LO 4-5)

Learning Objective 4-6 – Prepare a departmental production report under weighted-average process costing.

4-*

*

Learning Objective 4-6. Prepare a departmental production report under weighted-average process costing.

4-*

Reviewer (R) - Slide 38 Update the artwork (see Exhibit 4-9, page 148, Hilton 11e).

Sheet1

Managerial Accounting Financial Accounting

Users of Information Managers, within the organization. Interested parties, outside the organization.

Regulation Not required and unregulated, since it is intended only for management. Required and must conform to generally accepted accounting principles. Regulated by the Financial Accounting Standards Board, and, to a lesser degree, the Securities and Exchange Commission.

Source of Data The organization's basic accounting system, plus various other sources, such as rates of effective products manufactured, physical quantities of material and labor used in production, occupancy rates in hotels and hospitals, and average take-off delays Almost exclusively drawn from the organization's basic accounting system, which accumulates financial information.

Nature of Reports and Procedures Reports often focus on subunits within the organization, such as departments, divisions, geographical regions, or product lines. Based on a combination of historical data, estimates, and projections of future events. Reports focus on the enterprise in its entirety. Based almost exclusively on historical transaction data.

Sheet2

One Production Department

Work-in-Process Finished Goods

Inventory Inventory Cost of Goods Sold

Direct material Cost of goods completed Cost of goods sold

Direct labor Two Sequential Production Departments

Applied manufacturing and transferred to Work-in-Process Inventory Work-in-Process Inventory

overhead finished goods Production Department A Production Department B

Direct material Cost of goods completed in department A and Cost of goods completed

Direct labor

Applied manufacturing transferred to and transferred to

overhead department B finished goods

Direct material

Direct labor

Applied manufacturing

overhead

Finished Goods Inventory Cost of Goods Sold

Cost of goods sold

during current period

One Production Department

Work-in-Process Inventory Finished Goods Inventory

Direct material Cost of goods completed Cost of goods completed

Direct labor

Applied manufacturing and transferred to and transferred to

overhead Finished goods finished goods

Direct material

Direct labor

Applied manufacturing

overhead

Sheet6

MVP SPORTS EQUIPMENT COMPANY

Production Report: Cutting Department

Percentage of

Completion Equivalent Units

Physical with Respect to Direct

Units Conversion Material Conversion

Work in process, March 1 20,000 10%

Units started during March 30,000

Total units to account for 50,000

Units completed and transferred 40,000 100% 40,000 40,000

Work in process, March 31 10,000 50% 10,000 5,000

Total units accounted for 50,000

Total equivalent units 50,000 45,000

Direct

Material Conversion Total

Work in Process, March 1 $ 50,000 $ 7,200 $ 57,200

Costs incurred during March 90,000 193,500 283,500

Total costs to account for $ 140,000 $ 200,700 $ 340,700

Equivalent units 50,000 45,000

Cost per equivalent unit $ 2.80 $ 4.46 $ 7.26

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Conversion:

5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700

Sheet3

Cost of goods completed and transferred during March Cost of goods completed and transferred during March Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400 40,000 units x $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31 Costs remaining in work-in-process on March 31

Direct Material: Direct Material: Direct Material:

10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000 10,000 equivalent units x $2.80 per equivalent unit $ 28,000

Convserion: Convserion: Convserion:

5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300 5,000 equivalent units x $4.46 per equivalent unit 22,300

Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300 Total cost of March 31 work-in-process 50,300

Total costs accounted for $ 340,700 Total costs accounted for $ 340,700 Total costs accounted for $ 340,700

Cost of goods completed and transferred out of Stitching Dept. during March

30,000 units x $12.228 per equivalent unit $ 366,840

Costs remaining in work-in-process in Stitching Dept. on March 31

Direct Material:

20,000 equivalent units x $7.028 per equivalent unit $ 140,560

Convserion:

18,000 equivalent units x $4.95 per equivalent unit 89,100

Total cost of March 31 work-in-process 229,660

Total costs accounted for $ 596,500

Sheet4

Conversion

Physical Physical Percentage Transferred Direct

Units Units Completion In Material Conversion

Work in process, March 1 10,000 Work in process, March 1 10,000 20%

Units transferred in during March 40,000 Units transferred in during March 40,000

Total units to account for 50,000 Total units to account for 50,000

Units completed and transferred out during March 30,000 Units completed and transferred out during March 30,000 30,000 30,000 30,000

Work in process, March 31 20,000 Work in process, March 31 20,000 90% 20,000 -0- 18,000

Total units accounted for 50,000 Total units accounted for 50,000

Total equivalent units 50,000 30,000 48,000

Physical

Units

Work in process, March 1 10,000

Units transferred in during March 40,000

Total units to account for 50,000

Units completed and transferred out during March 30,000

Work in process, March 31 20,000

Total units accounted for 50,000

Sheet5

Work-in-Process Inventory: Work-in-Process Inventory:

Transferred Direct Cutting Department Stitching Department

In Material Conversion Total Direct material Cost of goods Transferred-

completed and in costs

Work in Process, March 1 $ 61,000 -0- $ 7,600 $ 68,600 Conversion: transferred out

Costs incurred during March 290,400 $ 7,500 230,000 527,900 Direct labor Direct material

Total costs to account for $ 351,400 $ 7,500 $ 237,600 $ 596,500 Manufacturing

overhead Conversion:

Equivalent units 50,000 30,000 48,000 Direct labor

Cost per equivalent unit $ 7.028 $ 0.25 $ 4.95 $ 12.228 Manufacturing

overhead

$351,400 $7,500 $237,600 $ 7.028

50,000 30,000 48,000 + $.25

+ $4.95

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units × $4.46 per equivalent unit22,300

Total cost of March 31 work in process50,300

Total costs accounted for340,700$

MBD000FE9F8.xls

Sheet1

Cost of goods completed and transferred during March

40,000 units × $7.26 per equivalent unit $ 290,400

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units × $2.80 per equivalent unit $ 28,000

Conversion:

5,000 equivalent units × $4.46 per equivalent unit 22,300

Total cost of March 31 work in process 50,300

Total costs accounted for $ 340,700

&A

Page &P

Sheet2

&A

Page &P

Sheet3

&A

Page &P

Sheet4

&A

Page &P

Sheet5

&A

Page &P

Sheet6

&A

Page &P

Sheet7

&A

Page &P

Sheet8

&A

Page &P

Sheet9

&A

Page &P

Sheet10

&A

Page &P

Sheet11

&A

Page &P

Sheet12

&A

Page &P

Sheet13

&A

Page &P

Sheet14

&A

Page &P

Sheet15

&A

Page &P

Sheet16

&A

Page &P

*

We have now completed all four steps necessary to prepare a production report. The report simply combines the tables prepared in Learning Objectives 3, 4, and 5. The report provides a convenient summary of all of the process-costing calculations made under the weighted-average method. This method is called the weighted-average method because the cost per equivalent unit, for both direct material and conversion activity, is computed as a weighted average of the costs incurred during two different accounting periods. (LO 4-6)

Manufacturing overhead is applied

to Work-in-Process Inventory using a predetermined overhead rate

Actual costs of manufacturing overhead are entered in Work-in-Process Inventory

Actual Costing

vs.

Normal Costing

4-*

*

Both actual and normal costing can be used in conjunction with a process costing system. Our illustration used a predetermined overhead rate based on direct-labor cost, which is normal costing. (LO 4-6)

Departmental Production Report

Analysis of

physical flow

of units.

4-*

*

The four-step process is summarized on this slide. In our illustration, production requires two sequential production operations: cutting and stitching. Although the process-costing procedures for the second department are similar to those illustrated for the first, there is one additional complication. The cost of goods completed and transferred out of the Cutting Department must remain assigned to the partially completed product units as they undergo further processing in the Stitching Department. Note that process-costing procedures for subsequent production departments are covered in the appendix at the end of this chapter, which may be studied now. (LO 4-6)

Learning Objective 4-7 – Describe how an operation costing system accumulates and assigns the costs of direct-material and conversion activity in a batch manufacturing process.

4-*

*

Learning Objective 4-7. Describe how an operation costing system accumulates and assigns the costs of direct-material and conversion activity in a batch manufacturing process.

Operation Costing

Operation costing employs some aspects

of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

4-*

*

Job-order and process costing represent the polar extremes of product-costing systems. But some production processes exhibit characteristics of both job-order and process costing environments. These production processes often are referred to as batch manufacturing processes. Such processes are characterized by high-volume production of several product lines that differ in some important ways but are nearly identical in others. Since batch manufacturing operations have characteristics of both job-order costing and process-costing environments, a hybrid product-costing system is required. One common approach is called operation costing. (LO 4-7)

Operation Costing

Operation costing employs some aspects

of both job-order and process costing.

Job-order Operation Costing Process

Costing (Products produced in batches) Costing

4-*

*

This product-costing system is used when conversion activities are very similar across product lines, but the direct materials differ significantly. Conversion costs are accumulated by department, and process costing methods are used to assign these costs to products. In contrast, direct-material costs are accumulated by job order or batch, and job-order costing is used to assign material costs to products. (LO 4-7)

End Chapter 4

4-*

*

*

Chapter 4: Process Costing and Hybrid Product-Costing Systems

*

Learning Objective 4-1. List and explain the similarities and important differences between job-order and process costing.

*

This chapter covers process-costing systems. Process costing is used in repetitive production environments, where large numbers of identical or very similar products are manufactured in a continuous flow. (LO 4-1)

*

Industries using process costing include paper, petroleum, chemicals, textiles, food processing, lumber, and electronics. (LO 4-1)

*

In many ways, job-order costing and process costing are similar. Both product-costing systems have the same ultimate purpose—assignment of production costs to units of output. Moreover, the flow of costs through the manufacturing accounts is the same in the two systems. (LO 4-1)

*

In job-order costing, costs are accumulated by job order and recorded on job-cost records. The cost of each unit in a particular job order is found by dividing the total cost of the job order by the number of units in the job. This cost flow was described in the previous chapter. (LO 4-1)

*

In process costing, costs are accumulated by department, rather than by job order or batch. The cost per unit is found by dividing the total costs incurred by the units produced. (LO 4-1)

*

Learning Objective 4-2. Prepare journal entries to record the flow of costs in a process-costing system with sequential production departments.

*

In a single production department situation, direct-material, direct-labor, and manufacturing-overhead costs are added to a Work-in-Process Inventory account. As goods are finished, costs are transferred to Finished-Goods Inventory. During the period when goods are sold, the product costs are transferred to Cost of Goods Sold. Let’s take a look at the specific journal entries involved in a two-department process. (LO 4-2)

The journal entry for the case of two sequential departments, as illustrated in your text, will be demonstrated. In this journal entry, we see $50,000 of direct materials, $20,000 of direct labor, and $30,000 of manufacturing overhead applied to the WIP account for Department A – the first department. The overhead would have been applied using the same method as we learned about in the job order costing chapter. The numbers used in the journal entry are assumed for the purpose of showing the form of the entries. (LO 4-2)

*

In the two-department case, when goods are finished in the first production department, costs accumulated in the Work-in-Process Inventory account for production department A are transferred to the Work-in-Process Inventory account for production department B. Let’s take a look at a typical entry when the costs are transferred from one department to the next. (LO 4-2)

When production in Department A completes its work on some units of the product, those units are transferred to production department B. The costs assigned to these goods are transferred from the Work-In-Process Inventory account for department A to the Work-In-Process Inventory Account for Department B. In Department B, the costs assigned to those partially completed products are called transferred-in costs. (LO 4-2)

Direct material and direct labor are used in production department B, and manufacturing overhead is applied using a predetermined rate. These costs are accumulated in Department B and recorded as shown. (LO 4-2)

As goods are completed in Department B, the cost of those goods are transferred out of Work-In-Process and into Finished Goods Inventory. (LO 4-2)

The costs of the goods completed stay in the Finished-Goods Inventory account until the units are sold, at which point the costs are transferred OUT of Finished-Goods Inventory and INTO Cost of Goods Sold. At this point, the cost has finally been transferred to the Income Statement. The costs have no more future value. (Note: Just as in Job-Order Costing, the revenue earned from the units sold would also typically be recorded when the goods are sold.) (LO 4-2)

*

Learning Objective 4-3. Prepare a table of equivalent units under weighted-average process costing.

The term equivalent units is used in process costing to refer to the amount of manufacturing activity that has been applied to a batch of physical units. (LO 4-3)

*

*

For example, two units which are 50 percent complete are equivalent to one unit that is 100 percent complete. Likewise, 10,000 units that are 70 percent complete is 7,000 equivalent units. (LO3)

*

Jones started 15,000 units and transferred 10,000 units to finished goods. The remaining 5,000 units were 30 percent complete. How many equivalent units did Jones have for the period? (LO 4-3)

*

The 5,000 units that are 30 percent complete are equivalent to 1,500 units. Add that to the 10,000 units that are 100 percent complete for a total of 11,500 equivalent units. (LO 4-3)

*

The production costs incurred for the period were $27,600. What is the cost per equivalent unit? (LO 4-3)

*

The production costs are divided by the number of equivalent units to arrive at the cost per equivalent unit. (LO 4-3)

*

Direct material is usually placed into production at beginning of the production process. In contrast, direct labor and manufacturing overhead, called conversion costs, usually are incurred uniformly throughout the process. When an accounting period ends, the partially completed goods that remain in process generally are at different stages of completion with respect to material and conversion activity. The most important feature of process costing is that the costs of direct material and conversion are assigned to equivalent units rather than to physical units. (LO 4-3)

*

The key document in a typical process-costing system is the departmental production report, prepared for each production department at the end of each accounting period. The departmental production report summarizes the flow of production quantities through the department, and it shows the amount of production cost transferred out of the department’s Work-in-Process Inventory account during the period. There are four steps used in preparing a departmental production report:

1. Analysis of physical flow of units.

2. Calculation of equivalent units.

3. Computation of unit costs.

4. Analysis of total costs.

(LO 4-3)

*

The method of process costing that we will focus on in this chapter is called the weighted-average method. This method is almost always used in practice by companies using process costing. There is another process-costing method called the first-in, first-out, or FIFO, method. (LO 4-3)

*

The MVP Sports Equipment Company manufactures baseball gloves. Two production departments are used in sequence: the Cutting Department and the Stitching Department. In the Cutting Department, direct material is placed into production at the beginning of the process. Direct-labor and manufacturing overhead costs are incurred uniformly throughout the process. The predetermined overhead rate used in the Cutting Department is 125 percent of direct-labor cost. (LO 4-3)

*

This slide presents a summary of the activity and costs in the Cutting Department during March. The direct-material and conversion costs for the March 1 work in process consist of costs that were incurred during February. These costs were assigned to the units remaining in process at the end of February. Materials costs of $90,000 and conversion costs of $193,500 were added during the month of March. The beginning work in process and the costs added during March equal the total costs to be accounted for. (LO 4-3)

*

The first step is to prepare a table summarizing the physical flow of production units during March. (LO 4-3)

*

The second step is to calculate the equivalent units of direct material and conversion activity. The table of equivalent units, displayed on this slide, is based on the table of physical flows prepared in step 1. The Cutting Department completed its work on 40,000 physical units. Thus, it represents 40,000 equivalent units for both direct material and conversion. The 10,000 units in the Cutting Department’s ending work-in-process inventory are 50 percent complete with respect to conversion. Therefore, the ending work-in-process inventory represents 5,000 equivalent units of conversion activity (10,000 physical units x 50% complete). (LO 4-3)

*

With respect to direct material, the 10,000 units in the Cutting Department’s ending work-in-process inventory are 100 percent complete. Therefore, the ending work-in-process inventory represents 10,000 equivalent units of direct material. (LO 4-3)

*

Learning Objective 4-4. Compute the cost per equivalent unit under the weighted-average method of process costing.

*

The third step in the process-costing procedure is calculating the cost per equivalent unit for both direct material and conversion activity. The cost per equivalent unit for direct material is computed by dividing the total direct-material cost, including the cost of the beginning work in process and the cost incurred during March, by the total equivalent units (from step 2). The same procedure is used for conversion costs. (LO 4-4)

*

Learning Objective 4-5. Analyze the total production costs for a department under the weighted-average method of process costing.

*

The final step is to determine the total cost to be transferred out of the Cutting Department’s Work-in-Process Inventory account and into the Stitching Department’s Work-in-Process Inventory account. The cost per equivalent unit, $7.26, was calculated in step 3. The number of units transferred is multiplied by the total cost per equivalent unit. (LO 4-5)

*

The direct material equivalent units is multiplied by the direct materials cost per equivalent unit. The conversion equivalent units is multiplied by the conversion cost per equivalent unit. These two amounts are added together. (LO 4-5)

*

The sum of these costs is added to the cost of goods completed and transferred. Now all costs on the production report have been accounted for. These calculations are used as the basis for the journal entries to transfer the cost of goods completed and transferred out to the Stitching Department. (LO 4-5)

*

Learning Objective 4-6. Prepare a departmental production report under weighted-average process costing.

*

We have now completed all four steps necessary to prepare a production report. The report simply combines the tables prepared in Learning Objectives 3, 4, and 5. The report provides a convenient summary of all of the process-costing calculations made under the weighted-average method. This method is called the weighted-average method because the cost per equivalent unit, for both direct material and conversion activity, is computed as a weighted average of the costs incurred during two different accounting periods. (LO 4-6)

*

Both actual and normal costing can be used in conjunction with a process costing system. Our illustration used a predetermined overhead rate based on direct-labor cost, which is normal costing. (LO 4-6)

*

The four-step process is summarized on this slide. In our illustration, production requires two sequential production operations: cutting and stitching. Although the process-costing procedures for the second department are similar to those illustrated for the first, there is one additional complication. The cost of goods completed and transferred out of the Cutting Department must remain assigned to the partially completed product units as they undergo further processing in the Stitching Department. Note that process-costing procedures for subsequent production departments are covered in the appendix at the end of this chapter, which may be studied now. (LO 4-6)

*

Learning Objective 4-7. Describe how an operation costing system accumulates and assigns the costs of direct-material and conversion activity in a batch manufacturing process.

*

Job-order and process costing represent the polar extremes of product-costing systems. But some production processes exhibit characteristics of both job-order and process costing environments. These production processes often are referred to as batch manufacturing processes. Such processes are characterized by high-volume production of several product lines that differ in some important ways but are nearly identical in others. Since batch manufacturing operations have characteristics of both job-order costing and process-costing environments, a hybrid product-costing system is required. One common approach is called operation costing. (LO 4-7)

*

This product-costing system is used when conversion activities are very similar across product lines, but the direct materials differ significantly. Conversion costs are accumulated by department, and process costing methods are used to assign these costs to products. In contrast, direct-material costs are accumulated by job order or batch, and job-order costing is used to assign material costs to products. (LO 4-7)

*

Direct material

Direct labor

Applied manufacturing and transferred toduring current

overheadfinished goodsperiod

One Production Department

InventoryInventory

Cost of goods completedCost of goods sold

Work-in-ProcessFinished Goods

Cost of Goods Sold

Direct material

Direct labor

Applied manufacturing transferred to and transferred to

overhead department B finished goods

Direct material

Direct labor

Applied manufacturing

overhead

during current period

Cost of goods sold

Cost of goods completed

in department A and Cost of goods completed

Finished Goods Inventory Cost of Goods Sold

Two Sequential Production Departments

Work-in-Process Inventory Work-in-Process Inventory

Production Department A Production Department B

Physical

Units

Work in process, March 120,000

Units started during March30,000

Total units to account for50,000

Units completed and transferred out during March40,000

Work in process, March 3110,000

Total units accounted for50,000

Conversion

Equivalent Units

Physical

Percentage

Direct

Units

Complete

Material

Conversion

Work in process, March 1

20,000

10%

Units started during March

30,000

Total units to account for

50,000

Units completed and transferred

40,000

100%

40,000

40,000

Work in process, March 31

10,000

50%

10,000

5,000

Total units accounted for

50,000

Total equivalent units

50,000

45,000

ConversionEquivalent Units

PhysicalPercentageDirect

UnitsCompleteMaterialConversion

Work in process, March 120,000 10%

Units started during March30,000

Total units to account for50,000

Units completed and transferred40,000 100%40,000 40,000

Work in process, March 3110,000 50%10,000 5,000

Total units accounted for50,000

Total equivalent units50,000 45,000

Direct

MaterialConversionTotal

Work in Process, March 150,000$ 7,200$ 57,200$

Costs incurred during March90,000 193,500 283,500

Total costs to account for140,000$ 200,700$ 340,700$

Equivalent units50,000 45,000

Cost per equivalent unit2.80$ 4.46$ 7.26$

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units x $2.80 per equivalent unit28,000$

Convserion:

5,000 equivalent units x $4.46 per equivalent unit22,300

Total cost of March 31 work-in-process50,300

Total costs accounted for340,700$

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units x $2.80 per equivalent unit28,000$

Convserion:

5,000 equivalent units x $4.46 per equivalent unit22,300

Total cost of March 31 work-in-process50,300

Total costs accounted for340,700$

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units x $2.80 per equivalent unit28,000$

Convserion:

5,000 equivalent units x $4.46 per equivalent unit22,300

Total cost of March 31 work-in-process50,300

Total costs accounted for340,700$

Percentage of

CompletionEquivalent Units

Physicalwith Respect toDirect

UnitsConversionMaterialConversion

Work in process, March 120,000 10%

Units started during March30,000

Total units to account for50,000

Units completed and transferred40,000 100%40,000 40,000

Work in process, March 3110,000 50%10,000 5,000

Total units accounted for50,000

Total equivalent units50,000 45,000

Direct

MaterialConversionTotal

Work in Process, March 150,000$ 7,200$ 57,200$

Costs incurred during March90,000 193,500 283,500

Total costs to account for140,000$ 200,700$ 340,700$

Equivalent units50,000 45,000

Cost per equivalent unit2.80$ 4.46$ 7.26$

Cost of goods completed and transferred during March

40,000 units x $7.26 per equivalent unit290,400$

Costs remaining in work-in-process on March 31

Direct Material:

10,000 equivalent units x $2.80 per equivalent unit28,000$

Conversion:

5,000 equivalent units x $4.46 per equivalent unit22,300

Total cost of March 31 work-in-process50,300

Total costs accounted for340,700$

MVP SPORTS EQUIPMENT COMPANY

Production Report: Cutting Department

Applied Sciences

Architecture and Design

Biology

Business & Finance

Chemistry

Computer Science

Geography

Geology

Education

Engineering

English

Environmental science

Spanish

Government

History

Human Resource Management

Information Systems

Law

Literature

Mathematics

Nursing

Physics

Political Science

Psychology

Reading

Science

Social Science

Home

Blog

Archive

Contact

google+twitterfacebook

Copyright © 2019 HomeworkMarket.com