In this chapter, the learning objectives are: Discuss the uses of a process cost system and how it compares to a job order system, explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs, Compute equivalent units.
Chapter 21-1 CHAPTER 21 PROCESS COST ACCOUNTING Accounting Principles, Eighth Edition Chapter 21-2 Study Objectives Study Objectives Understand who uses process cost systems Explain the similarities and differences between job order and process cost systems Explain the flow of costs in a process cost system Make the journal entries to assign manufacturing costs in a process cost system Chapter 21-3 Study Objectives Study Objectives Chapter 21-4 Compute equivalent units Explain the four steps necessary to prepare a production cost report Prepare a production cost report Explain justintime (JIT) processing Explain activitybased costing (ABC) Preview of Chapter Preview of Chapter Process cost accounting focuses on massproduction of products that are identical or very similar in nature In contrast, job order cost accounting focuses on the individual job Chapter 21-5 Process Cost Accounting Process Cost Accounting Nature Natureof of Process ProcessCost Cost Systems Systems Uses Similarities and Differences Process Cost Flow Assignment of Manufacturing Costs Equivalent Equivalent Units Units WeightedAverage Method Refinements Production Cost Report Comprehensive Comprehensive Example Exampleof of Process Process Costing Costing Physical Units Equivalent Units of Production Unit Production Costs Cost Reconciliation Schedule Production Cost Report Costing Systems – Final Comment Chapter 21-6 Contemporary Contemporary Developments Developments Just-in-Time Processing Activity-Based Costing Nature of Process Cost Systems Nature of Process Cost Systems Use to apply costs to similar products that are massed produced in a continuous fashion Examples include the production of Cereal, Paint, and Soft Drinks Chapter 21-7 LO 1: Understand who uses process cost systems Comparison of Products Produced Comparison of Products Produced Under Process and Job Order Cost Systems Under Process and Job Order Cost Systems Chapter 21-8 LO 1: Understand who uses process cost systems Let’s Review Let’s Review Which of the following items is not a characteristic of a process cost system: a Once production begins, it continues until the finished product emerges emerges b. The focus is on continually producing homogenous products. c. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead d. The products produced are heterogenous in nature. Chapter 21-9 LO 1: Understand who uses process cost systems Job Order Cost and Process Cost Flow Job Order Cost and Process Cost Flow Job Order Cost Systems Chapter 21-10 Process Cost Systems Costs are assigned to each job Costs are tracked through a series of connected manufacturing processes or departments Products have unique characteristics Products are uniform or relatively homogeneous and produced in a large volume LO 2: Explain the similarities and differences between job order cost and process cost systems Comprehensive Example Continued Comprehensive Example Continued Step 1: Compute Physical Unit Flow continued Chapter 21-38 LO 6: Explain the four steps necessary to prepare a production cost report Comprehensive Example Continued Comprehensive Example Continued Step 2: Compute Equivalent Units of Production Measure of a department’s productivity Two computations required: one for materials and one for conversion costs Beginning work in process ignored Chapter 21-39 LO 6: Explain the four steps necessary to prepare a production cost report Comprehensive Example Continued Comprehensive Example Continued Step 3: Compute Unit Production Costs Costs expressed in terms of equivalent units of production When equivalent units of production are different for materials and for conversion costs, three unit costs are computed: Materials Conversion Total Manufacturing Chapter 21-40 LO 6: Explain the four steps necessary to prepare a production cost report Comprehensive Example Continued Comprehensive Example Continued Step 3: Compute Unit Production Cost continued Total Materials Cost Computation: Direct Materials Cost in Beginning Work in Process $ 50,000 Conversion Costs Added to Production During Month 400,000 Total Materials Costs $450,000 The Computation of Unit Materials Costs: Chapter 21-41 LO 6: Explain the four steps necessary to prepare a production cost report Comprehensive Example Continued Comprehensive Example Continued Step 3: Compute Unit Production Cost continued Conversion Cost Computation: Conversion Costs in Beginning Work in Process $ 35,000 Conversion Costs Added to Production During Month 170,000 Total Conversion Costs $205,000 The Computation of Unit Conversion Costs: Chapter 21-42 LO 6: Explain the four steps necessary to prepare a production cost report Comprehensive Example Continued Comprehensive Example Continued Step 3: Compute Unit Production Cost – continued Total Manufacturing Cost Per Unit The computation of unit total manufacturing cost: Chapter 21-43 LO 6: Explain the four steps necessary to prepare a production cost report Comprehensive Example Continued Comprehensive Example Continued Step 4: Prepare Cost Reconciliation Schedule Costs Charged to Mixing Department: Cost of Beginning Work in Process Costs Started into Production During Period Total Costs to be Accounted For Chapter 21-44 $ 85,000 570,000 $ 655,000 LO 6: Explain the four steps necessary to prepare a production cost report Production Cost Report Mixing Department Production Cost Report Mixing Department Chapter 21-45 LO 7: Prepare a production cost report Let’s Review Let’s Review Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is: Chapter 21-46 a $45,000 $45,000 b. $55,000 c. $75,000 d. $100,000. LO 6: Explain the four steps necessary to preprae a production cost report Contemporary Developments Contemporary Developments JustinTime (JIT) Processing A processing system that is dedicated to having the right products or parts as they are needed Objective: To eliminate all manufacturing inventories to make funds and space available for more productive purposes Elements of JIT: Dependable suppliers; Multiskilled workforce; Total quality control system Benefits of JIT: Reduced inventory; Enhanced product quality; Reduced rework and storage costs; Savings from improved flow of goods Chapter 21-47 LO 8: Explain justintime (JIT) processing Contemporary Developments JIT Chapter 21-48 LO8: Explain justintime (JIT) processing Contemporary Developments Contemporary Developments ActivityBased Costing (ABC) An overhead cost allocation system that focuses on activities performed in producing a product. Traditional Costing System: allocates overhead to products using predetermined unitbased output rate ABC System: allocates overhead to multiple activity cost pools and assigns cost pools to products using cost drivers that represent activities used Assumptions of ABC: All overhead costs for an activity must have the same cost driver and should respond proportionally to changes in the activity of the cost driver Chapter 21-49 LO 9: Explain activitybased costing (ABC) Contemporary Developments Contemporary Developments ActivityBased Costing (ABC) continued May be used with either a job order or a process costing system. Primary Benefit: More accurate and meaningful product costing Secondary Benefit: Improved cost data regarding an activity may lead to reduced costs for that activity ABC makes managers realize that activities not products ultimately determine company profitability Chapter 21-50 LO 9: Explain activitybased costing (ABC) Chapter Review Brief Exercise 218 Chapter Review Brief Exercise 218 Production costs chargeable to the Finishing Department in June in Castilla Company are materials $15,000, labor $29,500, overhead $18,000. Equivalent units of production are materials 20,000 and conversion costs 19,000. Compute the unit costs for materials and conversion costs Unit costs for Materials: $15,000 ÷ 20,000 units = $.75 per unit Unit costs for Conversion Costs: Conversion Costs = $29,500 + 18,000 = $47,500 $47,500 ÷ 19,000 = $2.50 per unit Total Manufacturing Costs per Unit: $.75 + $2.50 = $3.25 per unit Chapter 21-51 LO 6: Explain the four steps necessary to prepare a cost production report Copyright Copyright Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 21-52 ... The products produced are heterogenous in nature. Chapter 21-9 LO 1: Understand who uses? ?process? ?cost? ?systems Job Order? ?Cost? ?and? ?Process? ?Cost? ?Flow Job Order? ?Cost? ?and? ?Process? ?Cost? ?Flow Job Order? ?Cost? ?Systems Chapter 21-10 Process? ?Cost? ?Systems... In contrast, job order? ?cost? ? accounting? ?focuses on the individual job Chapter 21-5 Process? ?Cost? ?Accounting Process? ?Cost? ?Accounting Nature Natureof of Process ProcessCost Cost Systems Systems Uses... LO 2: Explain the similarities and differences between job order? ?cost? ? and? ?process? ?cost? ?systems Job Order? ?Cost? ?vs? ?Process? ?Cost? ?Flow Job Order? ?Cost? ?vs? ?Process? ?Cost? ?Flow Chapter 21-11 LO 2: Explain the similarities and differences between job order? ?cost? ?