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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
16-7
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 OverheadSame 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 FlowsAs shown in Exhibit 20.14, the flow of
costs through accounts reflects the flow of manufacturing activities
and products in the factory.
Notes
16-8
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 UnitsDirect Materialsadd 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 UnitsConversion Costsadd 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
16-10
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
16-11
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.
16-12
