ch21, Accounting Principles

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
21-1
21 Process Costing
Learning Objectives
After studying this chapter, you should be able to:
[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.
[4] Make the journal entries to assign manufacturing costs in a process cost
system.
[5] Compute equivalent units.
[6] Explain the four steps necessary to prepare a production cost report.
[7] Prepare a production cost report.
[8] Explain just-in-time (JIT) processing.
[9] Explain activity-based costing (ABC).
21-2
Preview of Chapter 21
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
21-3
The Nature of Process Cost Systems
Uses of Process Cost Systems

To apply costs to similar products that are mass-
produced in a continuous fashion
Examples include the production of Cereal, Paint,
Manufacturing Steel, Oil Refining and Soft Drinks
Illustration 21-1
21-4 LO 1 Understand who uses process cost systems.

Process and Job Cost Comparison Illustration 21-2

Question
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.
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 heterogeneous in nature.

Process Costing for Service Companies

Service companies that
provide specific, nonroutine services will probably benefit from
using a job order cost system.
perform routine, repetitive services will probably be better off
with a process cost system.

Similarities and Differences Between Job

Order Cost and Process Cost Systems
Job Order Cost Process Cost
Costs assigned to Costs tracked through a series
each job. 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

21-8 job order cost and process cost systems.
Illustration 21-3
Job order cost and
process cost flow
Illustration 21-3

Similarities Differences
1. Manufacturing cost 1. Number of work in
elements. process accounts used.
2. Accumulation of the 2. Documents used to track

costs of materials, labor, costs.
and overhead.
3. Point at which costs are
3. Flow of costs. totaled.
4. Unit cost computations.

Illustration 21-4
Job order versus
process cost systems

Question
Indicate which of the following statements is not correct:
a. Both a job order and a process cost system track the same
three manufacturing cost elements direct materials, direct
labor, and manufacturing overhead.
b. In a job order cost system, only one work in process account is
used, whereas in a process cost system, multiple work in
process accounts are used.
c. Manufacturing costs are accumulated the same way in a job
order and in a process cost system.
d. Manufacturing costs are assigned the same way in a job order
and in a process cost system.
21-12 LO 2
> DO IT!
Indicate whether the following statements are true or false.
False 1. A law firm is likely to use process costing for major

lawsuits.
2. A manufacturer of paintballs is likely to use process

True
costing.
3. Both job order and process costing determine product

False
costs at the end of a period of time, rather than when a
product is completed.
4. Process costing does not keep track of manufacturing

False
overhead.
21-13 Advance slide in presentation mode to reveal answers. LO 2

Process Cost Flow

Tyler Company manufactures roller blade and skateboard wheels that it
sells to manufacturers and retail outlets. Manufacturing consists of two
processes: machining and assembly. The Machining Department
shapes, hones, and drills the raw materials. The Assembly Department
assembles and packages the parts.
Illustration 21-5
21-14 LO 3 Explain the flow of costs in a process cost system.

Assigning Manufacturing CostsJournal Entries

Accumulation of materials, labor, and overhead costs is the
same as in job order costing.
Debit - Raw Materials Inventory for purchases of raw
materials.
Debit - Factory Labor for factory labor incurred.
Debit - Manufacturing Overhead for overhead cost
incurred.
Assignment of the three manufacturing cost elements to
Work in Process in a process cost system is different from a
job order cost system
LO 4 Make the journal entries to assign manufacturing

21-15 costs in a process cost system.
Material Costs
A process cost system requires fewer material
requisition slips than a job order cost system.
Materials are used for processes and not specific
jobs.
Requisitions are for larger quantities of materials.
Journal entry to record materials used:

Factory Labor Costs

Time tickets may be used in both systems.
All labor costs incurred within a production
department are a cost of processing.
The journal entry to record factory labor costs:

Manufacturing Overhead Costs

Objective of assigning overhead is to allocate overhead to
production departments on objective and equitable basis.
Use the activity that drives or causes the costs.
Primary driver is machine time used.
Journal entry to allocate overhead:

Transfers
Transfer to next department:
Transfer to Finished Goods:
Transfer to record Cost of Goods sold :
21-19 LO 4
Question
In making the journal entry to assign raw materials costs:
a. The debit is to Finished Goods Inventory.

b. The debit is often to two or more work in process
accounts.
c. The credit is generally to two or more work in process
accounts.
d. The credit is to Finished Goods Inventory.

> DO IT!
Blue Diamond Company manufactures ZEBO through two

processes: blending and bottling. In June, raw materials used were
Blending $18,000 and Bottling $4,000. Factory labor costs were
Blending $12,000 and Bottling $5,000. Manufacturing overhead
costs were Blending $6,000 and Bottling $2,500. The company
transfers units completed at a cost of $19,000 in the Blending
Department to the Bottling Department. The Bottling Department
transfers units completed at a cost of $11,000 to Finished Goods.
Journalize the assignment of these costs to the two processes and
the transfer of units as appropriate.

> DO IT!
Journalize the assignment of these costs to the two processes.
To Record Materials Used:

Work in ProcessBlending 18,000
Work in ProcessBottling 4,000
Raw Materials Inventory 22,000
To Assign Factory Labor to Production:

Factory Labor 17,000

> DO IT!
Journalize the assignment of these costs to the two processes.
To Assign Overhead to Production:

Manufacturing Overhead 8,500

> DO IT!
Journalize the transfer of units as appropriate.
To Record Transfer of Units to the Bottling Department:

To Record Transfer of Units to Finished Goods:
Finished Goods Inventory 11,000


Equivalent Units
Illustration: Suppose you have a work-study job in the office of

your colleges president, and she asks you to compute the cost of
instruction per full-time equivalent student at your college. The
colleges vice president for finance provides the following
information.
Costs: Illustration 21-6
Total cost of instruction $9,000,000
Student population:
Full-time students 900
Part-time students 1,000
21-25 LO 5 Compute equivalents units.

Equivalent Units
Illustration: Part-time students take 60% of the classes of a full-

time student during the year. To compute the number of full-time
equivalent students per year, you would make the following
computation.
Illustration 21-7
Cost of instruction per full-time equivalent student =

Total cost of instruction $9,000,000
Number of full-time equivalent students 1,500
$ 6,000

Equivalent Units
Weighted Average Method

Considers the degree of completion (weighting) of units
completed and transferred out and units in ending work in
process.
Beginning work in process not part of computation of
equivalent units.
Illustration 21-8

Equivalent Units
Weighted Average Method

Illustration: The output of Kori Companys Packaging Department
during the period consists of 10,000 units completed and transferred
out, and 5,000 units in ending work in process which are 70%
completed.
Calculate the equivalent units of production.
Completed units 10,000

Work in process equivalent units (5,000 x 70%) + 3,500
13,500

Equivalent Units
Refinements on the Weighted-Average Method

Illustration: Kellogg Company has produced Eggo Waffles
since 1970. Three departments produce these waffles: Mixing,
Baking, and Freezing/Packaging. The Mixing Department
combines dry ingredients, including flour, salt, and baking
powder, with liquid ingredients, including eggs and vegetable oil,
to make waffle batter.
Illustration 21-9 [on next slide] provides information related to the

Mixing Department at the end of June.

Equivalent Units
Refinements on the Weighted-Average Method

Illustration: Information related to the Mixing Department at the
end of June.
Illustration 21-9

Equivalent Units
Illustration 21-10
Conversion costs are labor costs plus overhead costs.

Beginning work in process is not part of the equivalent-units-
of-production formula.

Equivalent Units
Illustration 21-11
Refined Equivalent Units
of Production Formula

Equivalent Units
Question
The Mixing Departments output during the period consists of
20,000 units completed and transferred out, and 5,000 units in
ending work in process 60% complete as to materials and
conversions costs. Beginning inventory is 1,000 units, 40%
complete as to materials and conversion costs. The equivalent
units of production are:
a. 22,600 b. 23,000
c. 24,000 d. 25,000

21-34
> DO IT!
The fabricating department has the following production and

cost data for the current month.
Beginning Units Ending

Work in Process Transferred Out Work in Process
0 15,000 10,000
Materials are entered at the beginning of the process. The

ending work in process units are 30% complete as to conversion
costs. Compute the equivalent units of production for (a)
materials and (b) conversion costs.

> DO IT!


0 15,000 10,000
Compute the equivalent units of production for (a) materials and

(b) conversion costs.
Units transferred out 15,000

Ending work in process units + 10,000
25,000

> DO IT!


0 15,000 10,000
Compute the equivalent units of production for (a) materials and

(b) conversion costs.
Units transferred out 15,000

Equivalent unit in ending WIP (10,000 x 30%) + 3,000
18,000

Production Cost Report
A production cost report is the

Key document used to understand activities.
Shows Production Quantity and Cost data for each
department.
Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
21-38 LO 6 Explain the four steps necessary to prepare a production cost report.
Illustration 21-12
Flow of costs in making
Eggo Waffles
Illustration 21-13
Unit and cost data
Mixing
Department
Compute the Physical Unit Flow (Step 1)

Physical units - actual units to be accounted for during
a period, irrespective of any work performed.
Total units to be accounted for - units started (or

transferred) into production during the period + units in
production at beginning of period.
Total units accounted for - units transferred out during

period + units in process at end of period.
Compute the Physical Unit Flow (Step 1)

Illustration 21-14
Compute Equivalent Units of Production (Step 2)

Mixing Department
Department adds materials at beginning of process and
Incurs conversion costs uniformly during the process.
Illustration 21-15
Compute Unit Production Costs (Step 3)

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:
1. Materials
2. Conversion
3. Total Manufacturing

Compute total materials cost related to Eggo Waffles:
Illustration 21-16
Work in process, June 1
Direct materials costs $ 50,000
Cost added to production during June
Direct material cost 400,000
Total material costs $450,000
Illustration 21-17
21-45 LO 6

Compute total conversion costs related to Eggo Waffles:
Illustration 21-18
Work in process, June 1
Conversion costs $ 35,000
Costs added to production during June
Conversion costs 170,000
Total conversion costs $205,000
Illustration 21-19
21-46 LO 6

Illustration 21-19
Compute total manufacturing costs per unit:

Illustration 21-20
Prepare a Cost Reconciliation Schedule (Step 4)

Kellogg charged total costs of $655,000 to the Mixing
Department in June, calculated as follows.
Illustration 21-21
Costs to be accounted for
Work in process, June 1 $ 85,000
Started into production 570,000
Total costs $655,000
Prepare a Cost Reconciliation Schedule (Step 4)

Illustration 21-22
Illustration 21-23
Prepare the
Production
Cost Report
21-50 LO 7
Question
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:
a. $45,000.
b. $55,000.
c. $75,000.
d. $100,000.
21-51 LO 7 Prepare a production cost report.

> DO IT!
In March, Rodayo Manufacturing had the following unit production

costs: materials $6 and conversion costs $9. On March 1, it had zero
work in process. During March, Rodayo transferred out 12,000 units.
As of March 31, 800 units that were 25% complete as to conversion
costs and 100% complete as to materials were in ending work in
process. Assign the costs to the units transferred out and in process.
Costs transferred out (12,000 x $15) $180,000

Work in process, March 31
Materials (800 x $6) $4,800
Conversion costs (200 x $9) 1,800
Total costs $186,600

Costing Systems Final Comments

Companies often use a combination of a process cost
and a job order cost system.
Called operations costing, this hybrid system is similar to
process costing in its assumption that standardized
methods are used to manufacture the product.
At the same time, the product may have some
customized, individual features that require the use of a
job order cost system.

Contemporary Developments
Just-In-Time 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; Multi-skilled workforce;

Total quality control system.
Benefits of JIT: Reduced inventory; Enhanced product quality;

Reduced rework and storage costs; Savings from improved flow
of goods.
21-54 LO 8 Explain just-in-time (JIT) processing.

Illustration 21-24
Just-in-time processing
21-55 LO 8 Explain just-in-time (JIT) processing.

Activity-Based Costing
An overhead cost allocation system that focuses on activities
performed in producing a product.
ABC System: More that one basis of allocating activity costs to
products is needed.
Assumptions of ABC: All overhead costs related to the activity

must be driven by the cost driver used to assign costs to
products.
should respond proportionally to changes in the activity level
of the cost driver.
21-56 LO 9 Explain activity-based costing (ABC).

Activity-Based Costing Illustration 21-25

Activities and cost
drivers in ABC
21-57 LO 9 Explain activity-based costing (ABC).

21-58
APPENDIX 21A Traditional Costing versus ABC
Production and Cost Data

Illustration: Atlas Company produces two abdominal-training
products, the Ab Bench and the Ab Coaster. The Ab Bench is a high-
volume item totaling 25,000 units annually. The Ab Coaster is a low-
volume item totaling only 5,000 units per year. Each product requires
one hour of direct labor for completion. Therefore, total annual direct
labor hours are 30,000 (25,000 + 5,000). Expected annual
manufacturing overhead costs are $900,000. The predetermined
overhead rate is $30 ($900,000 30,000) per direct labor hour. The
direct materials cost per unit is $40 for the Ab Bench and $30 for the
Ab Coaster. The direct labor cost is $12 per unit for each product.
21-59 LO 10 Apply activity-based costing to specific company data.

Unit Costs Under Traditional Costing

Illustration 21A-1

Unit Costs Under ABC

Determining Overhead Rates Under ABC
Atlas Companys expected annual overhead costs of $900,000 relate
to three activitiesmachine setups, machining, and inspections.
Illustration 21A-2

Unit Costs Under ABC

Assigning Overhead Cost to Products Under ABC
Because of its low volume, the Ab Coaster requires more setups
and inspections than the Ab Bench. The expected number of cost
drivers for each product is as follows.
Illustration 21A-3


Illustration 21A-3
Assignment of overhead costs to products follows.

Illustration 21A-4
21-63

The data shows that under ABC, overhead costs are shifted from
the high-volume product (Ab Bench) to the low-volume product
(Ab Coaster). This shift results in more accurate costing for two
reasons.
1.Low-volume products often require more special handling, such as

more machine setups and inspections, than high-volume products.
2.Assigning overhead using ABC will usually increase the cost per
unit for low-volume products as compared to a traditional overhead
allocation.

Comparing Unit Costs

Illustration 21A-5
The comparison shows that unit costs under traditional costing have
been significantly distorted.

Benefits of ABC
The primary benefit of ABC is more accurate product costing.
Heres why:
1.ABC leads to more cost pools being used to assign overhead costs
to products.
2.ABC leads to enhanced control over overhead costs.
3.ABC leads to better management decisions.

Limitations of ABC
ABC systems often provide better product cost data than
traditional volume-based systems, there are limitations:
1.ABC can be expensive to use.
2.Some arbitrary allocations continue.

Copyright
Copyright 2013 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 back-up 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.
21-68

ch21, Accounting Principles

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ch21, Accounting Principles

Uploaded by

Copyright:

Available Formats

Prepared by

Uses of Process Cost Systems

21-4 LO 1 Understand who uses process cost systems.

Process and Job Cost Comparison Illustration 21-2

21-5 LO 1 Understand who uses process cost systems.

a. Once production begins, it continues until the finished

21-6 LO 1 Understand who uses process cost systems.

Process Costing for Service Companies

21-7 LO 1 Understand who uses process cost systems.

Similarities and Differences Between Job

LO 2 Explain the similarities and differences between

LO 2 Explain the similarities and differences between

2. Accumulation of the 2. Documents used to track

4. Unit cost computations.

LO 2 Explain the similarities and differences between

LO 2 Explain the similarities and differences between

Indicate whether the following statements are true or false.

False 1. A law firm is likely to use process costing for major

2. A manufacturer of paintballs is likely to use process

3. Both job order and process costing determine product

4. Process costing does not keep track of manufacturing

21-13 Advance slide in presentation mode to reveal answers. LO 2

Process Cost Flow

21-14 LO 3 Explain the flow of costs in a process cost system.

Assigning Manufacturing CostsJournal Entries

LO 4 Make the journal entries to assign manufacturing

LO 4 Make the journal entries to assign manufacturing

Factory Labor Costs

LO 4 Make the journal entries to assign manufacturing

Manufacturing Overhead Costs

LO 4 Make the journal entries to assign manufacturing

Transfer to Finished Goods:

Transfer to record Cost of Goods sold :

a. The debit is to Finished Goods Inventory.

LO 4 Make the journal entries to assign manufacturing

Blue Diamond Company manufactures ZEBO through two

LO 4 Make the journal entries to assign manufacturing

Journalize the assignment of these costs to the two processes.

To Record Materials Used:

To Assign Factory Labor to Production:

Work in ProcessBlending 12,000

LO 4 Make the journal entries to assign manufacturing

Journalize the assignment of these costs to the two processes.

To Assign Overhead to Production:

LO 4 Make the journal entries to assign manufacturing

Journalize the transfer of units as appropriate.

To Record Transfer of Units to the Bottling Department:

To Record Transfer of Units to Finished Goods:

Finished Goods Inventory 11,000

LO 4 Make the journal entries to assign manufacturing

Illustration: Suppose you have a work-study job in the office of

Costs: Illustration 21-6

Total cost of instruction $9,000,000

21-25 LO 5 Compute equivalents units.

Illustration: Part-time students take 60% of the classes of a full-

Cost of instruction per full-time equivalent student =

21-26 LO 5 Compute equivalents units.

Weighted Average Method

21-27 LO 5 Compute equivalents units.

Weighted Average Method

Calculate the equivalent units of production.

Completed units 10,000

21-28 LO 5 Compute equivalents units.

Refinements on the Weighted-Average Method