Attaches dollar amounts to equivalent output units for each input-cost category to units completed and units not yet completed ending work in process [from Step 2] by multiplying equival
Trang 1CHAPTER 17 PROCESS COSTING LEARNING OBJECTIVES
1 Identify the situations in which process-costing systems are appropriate
2 Describe the five steps in process costing
3 Calculate equivalent units and understand how to use them
4 Prepare journal entries for process-costing systems
5 Use the weighted-average method of process costing
6 Use the first-in, first-out (FIFO) method of process costing
7 Incorporate standard costs into a process-costing system
8 Apply process-costing methods to cases with transferred-in costs
CHAPTER OVERVIEW
Chapter 17 presents a system of costing a product or service in which the cost assignment is more
allocation, an averaging, than tracing of costs The costing system should reflect the underlying process leading to the product or service, and process costing does just that—the process forms the basis of the costing system
Process costing is appropriate when a common process or series of similar processes produce relatively homogeneous products Process costing and job costing are viewed as the two ends of a continuum of costing systems: from products produced through almost identical processes to a job that yields a
distinctly identifiable product The accounting system supporting the manufacturing operation must be designed in a way that captures the underlying process The chapter gives examples and illustrations of the accounting required for process costing A hybrid system of costing, operation costing, is also
illustrated in the appendix to the chapter
The visual approach to demonstrate process costing used in this text is student oriented A five-step procedure is described in the chapter and illustrated through exhibits The five steps are clear and
straightforward, incorporating inventory flow The five-step process used in the text for developing costs
in process costing has several excellent features The first step is simple but sets the pattern followed
throughout the remaining steps: to account for and accounted for categories The first two steps pertain
only to units, both physical units and equivalent units Costs are considered only after the units are clearly identified Step 3 begins the calculation of the inventory cost flow to be used, allowing for a clear determination in connecting costs with equivalent units calculated in Step 2 Steps 4 and 5 use the
categories established in Step 1 (to account for and accounted for) but for costs rather than units Two
separate steps are used, one for each category The feature of having units identified in the first two steps before looking at costs is a plus
Trang 2CHAPTER OUTLINE
I Costing systems
A Types
1 Job costing: cost object is a job that constitutes a distinctly identifiable product or service
2 Process costing: process forms basis of costing system
B Principal functions
1 Determining the cost of products or services that aid in planning decisions such as pricing and product mix
2 Valuing inventory and cost of goods sold for external reporting
3 Controlling and evaluating performance (not emphasized in this chapter)
II Basics of process costing
Learning Objective 1:
Identify the situations in which process-costing systems are appropriate
A Appropriate use of process costing: unit cost of a product or service obtained by assigning total
costs to many identical or similar units [Surveys of Company Practice]
1 In manufacturing, each unit receives same or similar amount of direct materials costs, direct manufacturing labor costs, and indirect manufacturing costs
2 In computing product unit costs, total costs incurred divided by number of units of output— same average production cost per unit
3 In comparison to job costing, the extent of averaging is main difference
4 In mass production of product units, similar or identical units of product or service processed
B Factors in computing product costs
1 Costs separated into cost categories according to when costs introduced into the process
a Each cost item assigned to category identified by when added to the process
i Beginning of process (includes different kinds of costs but all added at start)
ii Evenly through the process (includes different kinds of costs but all added evenly) iii Different times within the process
Trang 32 Presence of ending inventories (zero beginning inventory)
a Zero beginning/ending inventory: all units started and completed in accounting period
i Average costs for accounting period calculated from dividing total costs by total units produced
ii Situation common in service-sector organizations
b Zero beginning inventory but some amount of ending inventory:
i Costs of partially assembled units not same as fully assembled units
ii Accuracy of completion estimate depends upon care, skill, and experience of estimator and nature of conversion process
Learning Objective 2:
Describe the five steps in process costing
3 Steps to calculate costs with some fully assembled units and some partially assembled units
in process costing
a Step 1: Summarize the flow of physical units of output [Exhibit 17-1]
i Tracks physical units of output –whether complete or incomplete
ii Categorizes units to account for (Where did the units come from?) and units accounted for (Where did the units go?)
Learning Objective 3:
Calculate equivalent units and understand how to use them
b Step 2: Compute output in terms of equivalent units [Exhibit 17-1]
i Measures output as fully assembled and partially assembled from physical units
ii Equivalent units: derived amount of output units that
• takes the quantity of each input (factor of production) in units completed or in incomplete units of work in process, and
• converts the quantity of input into the amount of completed output units that could be made with that quantity of input
iii Calculates equivalent units for each input (cost category based on timing of costs
introduced into process )
c Step 3: Compute equivalent unit costs (Steps 3, 4, and 5 together are production cost
worksheet) [Exhibit 17-2]
Trang 4i Determine cost incurred for work done [Exhibit 17-2]
ii Divide sum of cost of each input by related quantity of equivalent units of work done
d Step 4: Summarize total costs to account for [Exhibit 17-2]
e Step 5: Assign total costs to units completed and to units in ending work in process
i Provides summary of costs accounted for (parallel to units accounted for)
ii Equals total of costs to account for [Exhibit 17-2]
iii Attaches dollar amounts to equivalent output units for each input-cost category to units completed and units not yet completed (ending work in process) [from Step 2]
by multiplying equivalent units by cost per equivalent unit [from Step 3]
Learning Objective 4:
Prepare journal entries for process-costing systems
4 Journal entries for process costing [Exhibit 17-3]
a Similar to entries made in job-costing systems with respect to direct materials and conversion costs
b Main difference is one Work-in-Process account for each process rather than each job
5 Presence of beginning inventory and ending inventory—requires choice of cost-flow method which produces differing amounts for cost of units completed and for ending work in process
Assign Exercises 17-16, 17-17, and 17-18.
II Inventory-flow methods and process costing
Learning Objective 5:
Use the weighted-average method of process costing
A Weighted-average process-costing method: calculates equivalent-unit cost of all work done to
date and assigns this cost to equivalent units completed and transferred out of the process and those in ending work-in-process inventory
1 Step 1: Summarize the flow of physical units of output [Exhibit 17-4]
a Units to account for are sum of units in beginning work in process and of units started during the period
b Units accounted for are sum of units completed and transferred out and of units in ending work-in-process inventory
2 Step 2: Compute output in terms of equivalent units [Exhibit 17-4]
a Weighted-average method merges equivalent units in beginning inventory with
equivalent units of work done in current period [to account for] because concern is work done to date (stage of completion of current-period beginning work in process is
irrelevant)
b Weighted-average method keeps separate equivalent units of completed and transferred out from ending work in process [accounted for]
Trang 53 Step 3: Compute equivalent unit costs [Exhibit 17-5]
a Cost of work done to date (sum of costs of beginning work-in-process inventory plus costs of work done in current period) divided by total equivalent units of work done to date
b Cost per equivalent unit is weighted-average cost for each input-cost category
4 Step 4: Summarize total costs to account for (same as cost of work done to date in Step 3)
[Exhibit 17-5]
5 Step 5: Assign total costs to units completed and to units in ending work in process
a Costs assigned to equivalent units completed and transferred out—for each input-cost category, equivalent units multiplied by weighted-average cost of equivalent unit
b Costs assigned to equivalent units in ending work in process by multiplying equivalent units within each input-cost category by weighted-average equivalent unit cost for that category
Do multiple choice 1-3 Assign Exercises 17-19, 20, and 17-24 and Problems 17-30 and 17-31.
Learning Objective 6:
Use the first-in, first-out (FIFO) method of process costing
B First-in, first-out (FIFO) process-costing method: calculates and separates cost according to
order of time periods in which the work was done (ordinal number of “first”)—work done on beginning inventory before the current period is kept separate from work done in current period
1 Step 1: Summarize the flow of physical units of output [Exhibit 17-6]
a Units to account for is same regardless of inventory flow method
b Units accounted for are subdivided by time period in which work is done
i Completed and transferred out during current period
• Started in prior period (beginning work in process) and completed this period
• Started this time period and completed this period
ii Work in process, ending (started this time period but not completed this time period)
2 Step 2
a Equivalent units calculated only for work done during current period for each input-cost category, includes
i Work done to complete units in beginning work-in-process inventory
ii Work done to complete units started this time period
Trang 6iii Work done on units started this time period but not completed
b No equivalencies calculated for work done in prior period
3 Step 3: Compute equivalent unit costs—only costs for each input category added in the current period divided by equivalent units for each input-cost category of work done in
current period [Exhibit 17-7]
4 Step 4: Summarize total costs to account for (costs of beginning work-in-process inventory plus costs added in the current period )
5 Step 5: Assign total costs to units completed and to units in ending work in process
a Units completed and transferred out assigned costs according to
i Beginning work-in-process units assigned costs from costs to account for in beginning work-in-process
ii Beginning work-in-process units also assigned costs of costs used to complete them using equivalent units of work for each input-cost category multiplied by equivalent cost per unit of work done this period
iii Started and completed this time period—assigned costs from multiplying equivalent units of work for each input-cost category by equivalent cost per unit of work for input category
b Units in work in process, ending—equivalent units of work for the current time period multiplied by equivalent cost for corresponding input-cost category of current time period
6 Averages cost transferred in for departments to become modified or departmental FIFO
method rather than pure FIFO
Do multiple choice 4 – 6 Assign Exercises 17-21, 22 and 17-25 and Problem 17-32.
C Comparison of process-costing methods
1 Operating income can differ materially between weighted-average and FIFO methods when two conditions exist
a If direct materials or conversion costs per unit vary significantly from period to period
b If physical inventory levels of work in process are large in relation to the total number of units transferred out
2 Feedback about performance and information for pricing and product-mix decisions can differ between the two methods
a FIFO has major advantage of providing managers with information about changes in costs from one period to the next
b Weighted average merges unit costs from different periods making comparisons difficult
Trang 7c Weighted average has major advantage of simple computations and more representative average unit cost when large fluctuations of input prices from period to period
3 Activity-based costing less applicable to process-costing environments than job-costing systems
a Products are homogeneous and use resources in similar way
b Cost of activities reduced by controlling costs of individual processes
III Standard costs and process costing
Learning Objective 7:
Incorporate standard costs into a process-costing system
A Standards determinable
1 Standards set for quantities of inputs needed to produce output straightforward
2 Standards set for different technical processing specifications for each product
B Standard costing applicable to process costing
1 Weighted-average and FIFO methods complicated for variety of similar products
2 Weighted-average and FIFO methods yield inaccurate costs for variety of products when broad averaging of actual costs occurs
C Standard costing usable with five-step procedure [Exhibits 17-8 and 17-9]
1 Steps 1 and 2 can be same as for FIFO
2 Step 3 uses standard cost per equivalent unit and is therefore not computed in same way as for actual cost-based weighted-average and FIFO
3 Step 4 debits Work in Process at standard costs rather than actual costs
4 Step 5 attaches standard cost per equivalent unit to assign costs as in FIFO method
D Variances may be calculated when actual costs incurred in current period do not equal standard
costs assigned to products on basis of work done in current period [Exhibit 17-10]
Do multiple choice 7–9 Assign Exercises 17-23 and 17-26.
V Multiple departments and process costing
Learning Objective 8:
Apply process-costing methods to cases with transferred-in costs
A Transferred-in costs (also called previous department costs) [Refer to Exhibits 17-11 through
17-14]
Trang 81 Transferred-in costs: costs incurred in previous departments carried forward as the
product’s cost as it moves to a subsequent process in production cycle
2 Transferred-in costs are treated as if they are a separate direct material added at the beginning
of the process in successive departments
B Transferred-in costs and process-costing methods
1 Standard costing: accounting for transfers to successive departments relatively simple
2 Weighted-average method: computations basically same for calculation of equivalent units
except for addition of transferred-in costs [Exhibits 17-11 and 17-12]
3 FIFO method: computations basically same but only costs transferred in during current period
are used with work done during current period [Exhibits 17-13 and 17-14]
C Accounting for transferred-in costs
1 Remember to include transferred-in costs of previous department
2 Remember to include transferred-in costs in beginning work-in-process inventory costs for units started in prior period and completed during current period for FIFO
3 Remember that when units are transferred, they are costed at one average unit cost under
FIFO
4 Remember that units may be measured in different denominations in different departments and each department, therefore, should be considered separately
Do multiple choice 10 Assign Exercises 17-27 and 17-28 and Problems 17-33 and 17-34.
VI Hybrid costing systems [Concepts in Action]
A Product-costing systems are best viewed on a continuum between job-costing and process-costing systems
B Product-costing systems should reflect the nature of the underlying operations
C Appendix illustrates a hybrid-costing system—operation costing
CHAPTER QUIZ SOLUTIONS: 1.c 2.a 3.d 4.b 5.d 6.a 7.b 8.c 9.b 10.d
Trang 9CHAPTER QUIZ
Use the following information for questions 1–10.
Top That manufactures baseball-style hats Material is introduced at the beginning of the process in Cutting Department Conversion costs are incurred (and allocated) uniformly throughout the process As the cutting of material is completed, the pieces are immediately transferred to the Sewing Department Data for the Cutting Department for the month of February 2003 follow:
Work in process, January 31 - 50,000 units
100% complete for direct materials, 40% completed for conversion costs
actual costs of direct materials, $70,500; actual costs of conversion, $34,050
Units started during February, 225,000
Units completed during February, 200,000
Work in process, February 28 - 75,000 units
100% complete for direct materials, 20% completed for conversion costs
Direct materials added during February [actual costs] $342,000
Conversion costs added during February [actual costs] $352,950
1 Assuming Top That uses the weighted-average method to account for inventories, the equivalent units
of work for the month of February are
Direct Materials Conversion Costs
2 Assuming Top That used the weighted-average method to account for inventories, the cost per equivalent whole unit produced during February is
3 Assuming Top That uses the weighted-average method to account for inventories, the assignment of costs to work in process at the end of February is
a $300,000 b $266,250 c $166,525 d $139,500
4 If Top That uses the first-in, first-out (FIFO) method to account for inventories, the equivalent units
of work for the month of February are
Direct Materials Conversion Costs
5 If Top That uses the FIFO method to account for inventories, the costs per equivalent unit for
February are
Direct Materials Conversion Costs
Trang 10d $1.52 $1.81
6 Assuming Top That uses the first-in, first-out (FIFO) method to account for inventories, the
assignment of costs to units completed and transferred to the Sewing Department during February is
a $658,350 b $636,450 c $666,000 d $652,000
The following additional data applies to questions 7–9.
Standard costs for the Cutting Department: Direct materials - $1.50 per unit; Conversion costs - $1.75 per unit
7 The standard costs of units completed and transferred from the Cutting Department during February is
a $731,250 b $650,000 c $678,750 d $600,000
8 The conversion costs variance for the month of February is
a $40,800 favorable c $11,700 unfavorable
b $94,250 favorable d $29,750 unfavorable
9 The journal entry to record inventory costs and direct-material variances for the month of February is
Work in Process—Cutting Department 337,500
b Work in Process—Cutting Department 337,500
Direct Material Variances 4,500
c Work in Process—Cutting Department 342,000
d Work in Process—Cutting Department 341,250
Direct Material Variances 750
10 In the Sewing Department, additional direct materials are added to the product at the end of
production Without prejudice to your answer for questions 1- 9, assume that 200,000 units were transferred from the Cutting Department and that the weighted-average method is used Data for February follow:
Work in process, January 31 - 70,000 units (30% complete as to conversion)
Units completed during February - 240,000 units
Work in process, February 28 - 30,000 units (80% complete as to conversion)
For the Sewing Department, the equivalent units of work done in February is
Transferred In Direct Materials Conversion Costs