Test bank managerial accounting by kieso weygandt 5e ch003

manufacturing cost elements of direct materials, direct labor, and manufacturing overhead; bboth accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor byde

CHAPTER 3 Process Costing

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives Questions

Brief Exercises Exercises

A Problems

B Problems

1 Understand who uses

process cost systems

2 Explain the similarities

and differences between

job order cost and

process cost systems

3 Explain the flow of costs

in a process cost system

6 Explain the four steps

necessary to prepare

a production cost report

8, 9, 14, 15,18

4, 6, 7, 8,9

7 Prepare a production

cost report

16, 17, 19,20

5A, 6A

1B, 2B, 4B,5B, 6B

*8 Compute equivalent units

using the FIFO method

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Number Description

Difficulty Level

Time Allotted (min.)

costs for processes; prepare production cost report

costs for processes; prepare production cost report

BLOOM’S TAXONOMY TABLE

Q3-10 Q3-11

Q3-12 Q3-13 BE3-5 BE3-10 E3-3 E3-5 E3-6 E3-7 E3-8 E3-9 E3-10 E3-11 E3-13 E3-14 E3-15 E3-16 E3-17 E3-18 E3-19 P3-1A P3-2A P3-4A P3-5A P3-6A P3-1B P3-2B P3-4B P3-5B P3-6B P3-1A P3-2A P3-1B P3-2B

Q3-16 Q3-17 Q3-19 Q3-16 Q3-20

E3-7 E3-12 E3-13 P3-1A P3-2A P3-4A P3-5A P3-6A P3-1B P3-2B P3-4B P3-5B P3-6B

Q3-21 Q3-22 BE3-11 BE3-12 BE3-13 E3-16 E3-17 E3-18 E3-19 E3-20 P3-7A P3-7B

Real-World Focus Exploring the Web

Managerial Analysis Decision Making Across the Organiz

STUDY OBJECTIVES

BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS.

COST SYSTEM.

MANU-FACTURING COSTS IN A PROCESS COST SYSTEM.

PRE-PARE A PRODUCTION COST REPORT.

METHOD.

CHAPTER REVIEW

Process Manufacturing and Accounting

produced in a continuous fashion, such as the production of ice cream, steel or soft drinks Incomparison, costs in a job order cost system are assigned to a specific job, such as theconstruction of a customized home, the making of a motion picture, or the manufacturing of aspecialized machine

manufacturing cost elements of direct materials, direct labor, and manufacturing overhead; (b)both accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor bydebiting Factory Labor, and manufacturing overhead costs by debiting Manufacturing Overhead;and (c) both flow costs to the same accounts of Work in Process, Finished Goods Inventory, andCost of Goods Sold

Feature Cost System Cost System

accounts

total manufacturing

costs

Process Cost Flow

processes: machining and assembly In the Machining Department, the raw materials are shaped,honed, and drilled In the Assembly Department, the parts are assembled and packaged

Departments When the Machining Department finishes its work, the partially completed units aretransferred to the Assembly Department In the Assembly Department, the goods are finished andare then transferred to the finished goods inventory Upon sale, the goods are removed from thefinished goods inventory

Assignment of Manufacturing Costs

Materials requisition slips may be used in a process cost system, but fewer requisitions aregenerally required than in a job order cost system, because the materials are used for processesrather than for specific jobs The entry to record the materials used is:

departments The labor cost chargeable to a process can be obtained from the payroll register ordepartmental payroll summaries All labor costs incurred within a producing department are a cost

of processing the raw materials The entry to assign the labor costs is:

equitable manner is the activity that “drives” or causes the costs A primary driver of overheadcosts in continuous manufacturing operations is machine time used, not direct labor Thus,machine hours are widely used in allocating manufacturing overhead costs The entry to allocateoverhead is:

Equivalent Units

units of production measure the work done during the period, expressed in fully completed

units This concept is used to determine the cost per unit of completed product

11 The formula to compute equivalent units of production under the weighted average method is asfollows:

Units Completed and

Equivalent Units ofEnding Work inProcess

Production

considers the degree of completion (weighting) of the units completed and transferred out and theending work in process A lesser used method, called the FIFO method, is discussed in theappendix to this chapter

materials are entered at the beginning of the process and the following information is provided forthe Processing Department of the Silva Company:

Percentage Complete

Work in process, End

Production Cost Report

activities in a department because it shows the production quantity and cost data related to thatdepartment In order to be ready to complete a production cost report, the company must performfour steps:

16 The computation of physical units involves:

process at the beginning of the period to determine the total units to be accounted for; and

transferred out during the period and units in process at the end of the period

In the example above, the total units to be accounted for and the units accounted for are both

equal to 7,000 units for the Silva Company

When equivalent units are different for materials and conversion costs, the formulas for computingunit costs are as follows:

Equivalent Units

Unit ConversionCostUnit Materials

Unit Conversion

Total ManufacturingCost per Unit

to be accounted for as follows:

Costs to be accounted for

Work in process, Beg

Costs incurred during production

20 The Silva Company’s Processing Department Production Cost Report at the end of the period is

as follows:

Processing Department Production Cost Report For the Period Ended

Equivalent Units

Units Materials Costs QUANTITIES

Units to be accounted for

Unit costs

Costs to be accounted for

Cost Reconciliation Schedule

Costs accounted for

operations costing Operations costing is similar to process costing in that standardized

methods are used to manufacture the product At the same time, the product may have somecustomized, individual features that require the use of a job order cost system

Equivalent Units Using the FIFO Method

*22 (S.O 8) To illustrate the computation of equivalent units using the FIFO method, assume thatmaterials are entered at the beginning of the process and the following information is provided forthe Processing Department of the Silva Company:

Percentage Complete Physical Units Materials Conversion Costs

*23 The equivalent units for material costs of the Processing Department under the FIFO method arecomputed as follows:

Processing Department

Work Added Equivalent

*24 The equivalent units for conversion costs of the Processing Department under the FIFO methodare computed as follows:

Processing Department

Work Added Equivalent

Production Cost Report Using the FIFO Method

*25 Assume the Processing Department of the Silva Company has the following additional costinformation:

Work in process, Beg

Costs incurred during the production

*26 The Silva Company’s Processing Department Production Cost Report at the end of the periodusing the FIFO method is as follows:

Processing Department Production Cost Report For the Period Ended

Equivalent Units

Units Materials Costs QUANTITIES

Units to be accounted for

Units accounted for

Completed and transferred out

Conversion Materials Costs Total COSTS

Unit costs

Costs to be accounted for

Cost Reconciliation Schedule

Costs accounted for

Work in process, End

LECTURE OUTLINE

A Uses of Process Cost Systems.

1 Process cost systems are used to apply costs to similar products that are mass-produced in a continuous fashion.

2 Once production begins, it continues until the finished product emerges, and each unit of finished product is like every other unit.

B Similarities and Differences Between Job Order Cost and Process Cost Systems.

1 In a process cost system, costs are tracked through a series of connected manufacturing processes or departments, rather than by individual jobs

as in a job order cost system.

2 Companies use process cost systems when they produce a large volume

of relatively homogeneous products.

3 Job order cost and process cost systems are similar in three ways:

a Both systems track the same manufacturing cost elements—direct materials, direct labor, and manufacturing overhead.

b Costs are accumulated in the same accounts—Raw Materials tory, Factory Labor, and Manufacturing Overhead.

Inven-c Accumulated costs are assigned to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold.

4 There are four main differences between the two cost systems:

a In a job order cost system, only one work in process account is used

b In a job order cost system, costs are charged to individual jobs and summarized in a job cost sheet; in a process cost system, costs are summarized in a production cost report for each department.

c Costs are totaled at the completion of a job in a job cost system but

at the end of a time period (i.e a month or year) in a process cost system.

d In a job cost system, the unit cost is the total cost per job ÷ by the units produced In a process cost system, the unit cost is total manufac- turing costs for the period ÷ by the units produced during the period.

ILLUSTRATION 3-1 contrasts the differences between a job order cost and a

process cost system.

C Process Cost Flow.

1 The company can add materials, labor, and manufacturing overhead in each production department.

2 The costs of units completed are transferred from one department to another as those units move through the manufacturing process.

3 The costs of completed work are transferred to Finished Goods Inventory.

4 When inventory is sold, costs are transferred to Cost of Goods Sold.

TEACHING TIP

ILLUSTRATION 3-2 provides an overview of the flow of costs in a process cost

system Point out that a work in process account is maintained for each department

or process in a process cost system.

D Assignment of manufacturing costs.

1 The accumulation of the costs of materials, labor, and manufacturing overhead is the same in a process cost system as in a job order cost system.

2 Entries to assign the costs of raw materials, factory labor, and overhead consist of a debit to Work in Process for each department and a credit to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead.

3 The assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system.

a All raw materials issued for production are a materials cost to the producing department A process cost system may use materials requisition slips, but fewer requisitions are generally required than

in a job order system, because the materials are used for processes rather than specific jobs.

b Companies may use time tickets to determine the cost of factory labor assignable to production departments Since labor costs are assigned to a process rather than a job, the labor cost chargeable

to a process can be obtained from the payroll register or departmental payroll summaries.

c The objective in assigning overhead in a process cost system is to allocate the overhead costs to the production departments on an objective and equitable basis A primary driver of overhead costs

TEACHING TIP

4 The entry to record units completed and transferred to the warehouse is

a debit to Finished Goods Inventory and a credit to Work in Process.

5 The entry to record the sale of goods is a debit to Cost of Goods Sold and a credit to Finished Goods Inventory.

E Equivalent Units.

1 Equivalent units of production measure the work done during the period, expressed in fully completed units.

2 This amount is used to determine the cost per unit of completed product.

3 Equivalent units of production are the sum of:

a Units completed and transferred out.

b Equivalent units of ending work in process.

4 The weighted-average method is used to compute equivalent units of production.

5 This method considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process.

6 In computing equivalent units, the beginning work in process is not part

of the equivalent units of production formula.

7 Companies need to make two equivalent unit computations: one for materials, and the other for conversion costs This is necessary because ending work in process is fully complete as to materials, but only partially complete as to conversion costs.

F Production Cost Report.

Use ILLUSTRATION 3-3 to identify the four-step procedure to be followed at the

end of a period for each department or process Illustrations 3-4 through 3-8 provide an integrated example of each of the four required steps, culminating in the preparation of a production cost report.

1 In order to complete a production cost report, the company must perform four steps:

a Compute the physical unit flow.

b Compute the equivalent units of production.

c Compute unit production costs.

d Prepare a cost reconciliation schedule.

2 The first step in completing a production cost report requires computing physical unit flow.

ILLUSTRATION 3-4 provides an example of computing the physical units within

a department Point out that it is necessary to know how many units were worked

on during the period and to know what happened to the units.

a The physical units are computed by adding the units started (or transferred) into production during the period to the units in process

at the beginning of the period This amount is called the total units

TEACHING TIP TEACHING TIP

b These units then are accounted for by the output of the period, which consists of units transferred out during the period and any units in process at the end of the period.

3 The second step in completing a production cost report requires computing equivalent units of production.

a Each processing department adds materials at the beginning of the process, and incurs conversion costs uniformly during the process.

b Two computations of equivalent units are required—one for materials and one for conversion costs.

ILLUSTRATION 3-5 provides an example of the computation of equivalent units

of production for materials and conversion costs Emphasize that when facturing cost elements are not incurred at the same time, there must be a separate equivalent unit computation for each cost element.

manu-4 The third step in completing a production cost report requires computing unit production costs.

ILLUSTRATION 3-6 provides an example of calculating unit production costs.

Individual calculations of unit cost for materials and conversion costs are made Emphasize that both beginning inventory costs and the current period’s material and conversion costs are used in the unit cost calculations.

a Unit production costs are costs expressed in terms of equivalent units

of production.

TEACHING TIP TEACHING TIP

c Total manufacturing cost per unit is computed as the sum of unit materials cost + unit conversion cost.

5 The fourth step in completing a production cost report requires preparing

a cost reconciliation schedule.

a The company then prepares a cost reconciliation schedule to assign total costs to (1) units transferred out to the next department and (2) ending work in process.

b The total manufacturing cost per unit is used in costing the units completed and transferred out.

c The cost reconciliation schedule shows that the total costs counted for equal the total costs to be accounted for.

ac-ILLUSTRATION 3-7 provides an example of the preparation of a cost

recon-ciliation schedule Point out that the cost reconrecon-ciliation schedule shows that the total costs accounted for equal the total costs to be accounted for.

G Preparing the Production Cost Report.

1 The production cost report contains both quantity and cost data for a production department.

a This report is an internal document for management that shows production quantity and cost data for a production department.

TEACHING TIP