978-0077633059 Chapter 16 Lecture Note Part 2

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Chapter Outline

3. Sources of amounts used in cost reconciliation:

a. Cost assigned to units completed during the period equals:

i. Direct material cost assigned during the period (equivalent

units in units completed for direct materials x the related

equivalent cost per unit).

ii. Conversion cost assigned during the period (equivalent

units in units completed for Conversion Costs X the

related equivalent cost per unit).

b. Cost assigned to ending inventory equals:

i. Direct material cost assigned during the period (equivalent

units in ending inventory for direct material times the

related equivalent cost per unit).

ii. Conversion Cost assigned during the period (equivalent

units in ending inventory for conversion costs X the

related equivalent cost per unit).

E. Process Cost Summary

1. Primary managerial accounting report. Also called a production

report.

2. A separate Process Cost Summary is prepared for each process or

production department

3. Purposes:

a. Help managers control and monitor departments.

b. Helps factory managers evaluate department managers’

performance.

c. Provides cost information for financial statements.

4. Three sections:

d. Costs charged to production, including direct materials and

conversion costs incurred during the period as well as the cost

of the beginning work in process inventory

e. Equivalent Units of Production and also direct materials and

conversion costs equivalent unit costs.

f. Cost assignment for units worked on during the period and

reconciliation.

V. Accounting and Reporting for Process Accounting

A. Direct and Indirect Costs

1. Materials and labor that can be traced to a specific process are

assigned to those processes as direct costs.

2. Materials and labor that cannot be traced to a specific process are

Notes

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Chapter Outline

B. Accounting for Materials Costs

1. Record cost of materials acquired on credit for use in factory by

debiting Raw Materials Inventory and crediting Accounts

Payable.

2. Assign costs of direct materials used in production by debiting

each department’s separate Work in Process Inventory account

and crediting Raw Materials Inventory.

3. Assign cost of indirect materials used by debiting Factory

Overhead and crediting Raw Materials Inventory.

C. Accounting for Labor Costs

1. Assign costs of direct labor used in production by debiting each

department’s separate Work in Process Inventory account and

crediting Factory Payroll Payable

2. Assign cost of indirect labor used by debiting Factory Overhead

and crediting Factory Payroll Payable

D. Accounting for Factory OverheadSame steps as Job Order Costing,

except performed now for each individual department (or process).

1. Record other factory overhead items incurred by debiting Factory

Overhead and crediting the related accounts.

2. Compute each department’s predetermined overhead rate. With

increasing automation, companies are more likely to use machine

hours to allocate the overhead costs.

3. Determine the amount of overhead to apply to each department.

(Predetermined rate x actual cost driver quantity.

4. Apply factory overhead costs to each department by debiting the

department’s Work in Process Inventory and crediting Factory

Overhead.

E. Accounting for Transfers Across Production Departments

1. Units and costs are transferred out of one department’s Work in

Process account and transferred into the next processing

department’s Work in Process account.

F. Transferring to Finished Goods Inventory and Cost of Goods Sold.

1. Record cost of completed units transferred out by debiting

Finished Goods Inventory and crediting the Work in Process

Inventory account of the final production department.

2. Record cost of goods sold by debiting Cost of Goods Sold and

crediting Finished Goods Inventory.

G. Summary of Cost FlowsAs shown in Exhibit 20.14, the flow of

costs through accounts reflects the flow of manufacturing activities

and products in the factory.

Notes

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Chapter Outline

1. Materials Costs are often applied to specific jobs as in a job order

cost system.

2. Conversion costs (direct labor and factory overhead) are usually

accounted for using a process costing system.

B. A hybrid system of processes requires a hybrid costing system.

1. Assembly line costs may be compiled using process costing.

2. Customizing the product may use a job order system.

3. The total product cost will include the assembly line cost per unit

plus the cost of customizing the product.

VII. Appendix 16A – FIFO method of process costing

A. The objectives, concepts, and journal entries (but not amounts) are the

same as for the weighted average method.

B. The computation of equivalent units of production and cost

assignments are slightly different. The key difference is in the

treatment of beginning work in process inventory.

C. Step 1: Determine the physical flow of units.

1. The following totals should agree:

a. Units in beginning inventory + units started during the period

= number of units to account for.

b. Units completed and transferred out (beginning inventory

units plus units started and completed) during the period +

units in ending inventory =l units accounted for.

D. Step 2: Compute Equivalent Units of Production (EUP)

1. Focus is on what was done during the period.

2. Equivalent UnitsDirect Materialsadd together the results of a

three-step calculation:

a. Units in beginning inventory X the percent of materials added

during the period.

b. Units started and completed during the period X 100% (since

all materials were added during the period).

c. Units in ending inventory X the percent of materials added

during the period.

3. Equivalent UnitsConversion Costsadd together the results of

a three-step calculation:

a. Units in beginning inventory X the percent of conversion

Notes

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Chapter Outline

E. Step 3: Compute Cost per Equivalent Unit

1. Costs assigned to the department during the period divided by the

equivalent units of production in the current period equals the

cost per equivalent unit for the period.

2. Perform calculation separately for direct materials and conversion

costs.

F. Step 4: Cost Assignment and Reconciliation

1. Similar in concept to the reconciliation of the physical flow of

units (except that dollars are used instead of units).

2. The following totals should agree:

a. Costs of beginning inventory plus costs incurred during the

period (i.e., amounts debited to the Work in Process Inventory

during the period) equals total costs to account for.

b. Costs assigned to the completed beginning inventory units,

plus costs assigned to the units started and completed during

the period, plus the costs assigned to ending inventory equals

the costs accounted for (see 3 below).

3. Sources of amounts used in cost reconciliation:

a. Cost of the completed beginning inventory units equals

beginning balance of the Work in Process Inventory plus the

following costs to complete the beginning inventory:

i. Direct material cost assigned: (EU to complete beginning

inventory for direct materials X the equivalent cost per

unit).

ii. Conversion costs assigned: (EU to complete beginning

inventory for conversion costs X equivalent cost per unit

b. Cost assigned to units started and completed during the

i. Direct material cost assigned: (EU for units started and

finished for materials X equivalent cost per unit).

ii. Conversion costs assigned: (EU in ending inventory for

conversion costs X equivalent cost per unit).

c. Cost assigned to ending inventory equals:

i. Direct material cost assigned: (EU of ending inventory

for direct material X equivalent cost per unit).

ii. Conversion costs assigned: (EUs in ending inventory for

conversion costs X equivalent cost per unit).

Notes

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Alternate Demo Problem 16

The Malbim Company uses a process costing system. Materials are added

at the beginning of the process. On July 1 there are 400 units in the

beginning inventory that are 100% complete as to materials. With regard to

labor and overhead, however, the units in beginning inventory (July 1) are

only 75% complete.

During July, 10,000 units were started in production; of these, 7,000 were

completed and transferred to the next department. On July 31, the

remaining 3,000 units were 20% complete with regard to labor and

overhead.

Required:

Using the Weighted Average method, calculate the equivalent units of

Direct Materials

Direct Labor and Factory Overhead

Using the FIFO method, calculate the equivalent units of

Direct Materials

Direct Labor and Factory Overhead

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Solution: Alternate Demo Problem 16

Weighted-average Method

Direct

Materials

Direct Labor

and Factory

Overhead

Units completed this period* 7,400 7,400

Equivalent units in ending inventory

*Beginning inventory units of 400 + units started and completed 7,000

Solution: Alternate Demo Problem 16

FIFO Method

Direct

Materials

Direct Labor

and Factory

Overhead

Equivalent units needed to complete

beginning inventory:

400 units x 0%* 0

400 units x 25% 100

Units started and completed 7,000 7,000

Equivalent units in ending inventory

*Beginning inventory units had 100% of the materials at the beginning of

the period. Therefore, no additional materials are used to complete the

units in beginning inventory this period.

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