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Managerial Accounting Tools for Business Decision-MakingSecond Canadian Edition : 

Weygandt - Kimmel - Kieso - Aly Prepared by: W. Marcellin Managerial Accounting Tools for Business Decision-MakingSecond Canadian Edition

Chapter 4 Process Cost Accounting : 

Prepared by: W. Marcellin Chapter 4 Process Cost Accounting

Chapter 4 Process Cost Accounting : 

Study Objectives Chapter 4 Process Cost Accounting 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.

Slide 4: 

Calculate equivalent units using the weighted average method Explain the four steps necessary to prepare a production cost report. Prepare a production cost report Prepare a production cost report for a sequential department setting Calculate equivalent units using the FIFO method (Appendix 4A). Study Objectives (Continued)

Nature of Process Cost SystemsUses of Process Cost Systems : 

Nature of Process Cost SystemsUses of Process Cost Systems Used to apply costs to similar products that are mass produced in a continuous fashion Examples include the production of cereal, paint, and soft drinks

Nature of Process Cost SystemsUses of Process Cost Systems : 

Nature of Process Cost SystemsUses of Process Cost Systems Costs in a job order cost system are assigned to a specific job Examples include: Building a customized home Making a motion picture Making specialized machines

Nature of Process Cost SystemsUses of Process Cost SystemsComparison of Process Cost and Job Order Cost : 

Nature of Process Cost SystemsUses of Process Cost SystemsComparison of Process Cost and Job Order Cost

Nature of Process Cost SystemsSimilarities and Differences : 

Nature of Process Cost SystemsSimilarities and Differences In job order cost systems: Costs are assigned to each job. The products have unique characteristics. In process cost systems: Costs are tracked through a series of connected manufacturing processes or departments. The products are uniform or relatively homogeneous and produced in a large volume.

Nature of Process Cost SystemsSimilarities and Differences : 

Nature of Process Cost SystemsSimilarities and Differences Job-Order Cost Flow Direct Materials Direct Labour Manufacturing Overhead Cost of Goods Sold Finished Goods Inventory Work in Process— Department B Work in Process— Department A Direct Materials Direct Labour Manufacturing Overhead Finished Goods Inventory Work in Process Inventory Job No. 101 Job No. 102 Job No. 103 Cost of Goods Sold Process Cost Flow

Nature of Process Cost SystemsSimilarities Between Systems : 

Nature of Process Cost SystemsSimilarities Between Systems Job order and process cost systems are similar in 3 ways: Same manufacturing cost elements Direct Materials, Direct Labour, and Manufacturing Overhead Similar accumulation of costs Debit raw materials costs to Raw Material Inventory Debit factory labour costs to Factory Labor Debit manufacturing overhead costs Manufacturing Overhead

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Nature of Process Cost SystemsSimilarities Between Systems Same accounts for flow of costs Work in Process, Finished Goods Inventory, and Cost of Goods Sold; however, the methods of assigning the costs differ significantly.

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Nature of Process Cost SystemsDifferences Between Systems Features Job-Order Cost System Process Cost System Work in process accounts • one for each job • one for each process Documents used • job cost sheets • production cost reports Determination of total manufacturing costs • each job • each period Unit cost calculations • cost of each job ÷ units •total manufacturing costs produced for the job ÷ units produced during the period Job order and process cost systems differ in four ways:

Nature of Process Cost SystemsProcess Cost Flow : 

Nature of Process Cost SystemsProcess Cost Flow Example – Tyler Company Manufacturing of automatic can openers consists of two processes: Machining – raw materials are shaped, honed, drilled Assembly – parts assembled and packaged Materials, labour, and manufacturing overhead added in both departments

Nature of Process Cost SystemsProcess Cost Flow : 

Nature of Process Cost SystemsProcess Cost Flow

Nature of Process Cost SystemsAssignment of Manufacturing Costs : 

Nature of Process Cost SystemsAssignment of Manufacturing Costs Accumulation of materials and labour costs is the same as in job order costing. Debit Raw Materials Inventory for all purchases of raw materials Debit Factory Labour for all factory labour incurred However, assignment of the three manufacturing cost elements to Work in Process is different.

Nature of Process Cost SystemsAssignment of Manufacturing Costs : 

Nature of Process Cost SystemsAssignment of Manufacturing Costs Materials Costs A process cost system requires fewer materials requisitions than a job order cost system. Materials are used for processes not specific jobs Requisitions are for larger quantities of materials The entry to record the materials used:

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Factory Labour Costs Time tickets used in both systems All labour costs incurred within a production department are a cost of processing The entry to assign these costs: Nature of Process Cost SystemsAssignment of Manufacturing Costs

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Manufacturing Overhead Costs Objective of assigning overhead – allocate overhead to departments on an objective and equitable basis Use the activity that “drives” or causes the costs Machine time used – primary driver in continuous manufacturing operations; widely used The entry to allocate overhead to the two processes: Nature of Process Cost SystemsAssignment of Manufacturing Costs

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Nature of Process Cost SystemsAssignment of Manufacturing Costs Monthly entry to transfer goods to next department: Entries to Transfer Costs Through System Entry to transfer completed goods to Finished Goods: Entry to record Cost of Goods Sold at the time of sale:

Let’s Review : 

Let’s Review Which of the following items is not a characteristic of a process cost system? Once production begins, it continues until the finished product emerges. The focus is on continually producing homogenous products. When the finished product emerges, all units have precisely the same amount of materials, labour, and overhead. The products produced are heterogeneous in nature.

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Which of the following items is not a characteristic of a process cost system? Once production begins, it continues until the finished product emerges. The focus is on continually producing homogenous products. When the finished product emerges, all units have precisely the same amount of materials, labour, and overhead. The products produced are heterogeneous in nature. Let’s Review: Solution

Equivalent Units : 

Equivalent Units A measure of the work done during the period, expressed in fully completed units Used to determine the cost per unit of the completed product

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Equivalent UnitsExample Full-Time Students + = Full-timeEquivalent Students Equivalent Units of Part-time Students 900 + (60% x 1,000) = 1,500 Calculate the cost of instruction at XYZ college per full-time equivalent student based on the following information: Total cost of instruction is $9,000,000 Student population consists of 900 full-time and 1,000 part-time students Part-time students take 60% of the classes of a full-time student Cost of instruction per full-time equivalent student $9,000,000 / 1,500 = $6,000

Equivalent UnitsWeighted-Average Method : 

Equivalent UnitsWeighted-Average Method Considers the degree of completion (weighting) of units completed and transferred out and units in ending work in process Most widely used method Beginning work in process not part of calculation of equivalent units Units Completed and Transferred Out Equivalent Unitsof production Equivalent Units of Ending Workin Process + =

Equivalent Units ― Refinements Weighted-Average Method: Example : 

Equivalent Units ― Refinements Weighted-Average Method: Example The Kellogg Company uses three departments (Mixing, Baking, and Freezing/Packaging) to produce waffles Physical units for Mixing Department: Beginning work in process 100,000 Started into production during period 800,000 Transferred out to Baking Department 700,000 Ending work in process 200,000

Equivalent Units Refinements: Weighted-Average Method Example (Continued) : 

Equivalent Units Refinements: Weighted-Average Method Example (Continued) Mixing Department Raw Materials Information All ingredients (materials) are added at the beginning of the mixing process. All units, regardless of degree of completion, are 100% complete as to materials. Equivalent Units for Materials: Units Transferred Out 700,000 100% Complete 700,000 Ending Work in Process 200,000 100% Complete 200,000 Total Equivalent Units 900,000

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Mixing Department Conversion Cost Information Conversion costs – sum of labour costs and overhead costs Incurred uniformly throughout the mixing process. Beginning work in process – 70% complete as to conversion costs. Ending work in process – 60% complete as to conversion costs Equivalent Units for Conversion Costs: Units Transferred Out 700,000 100% Complete 700,000 Ending Work in Process 200,000 60% Complete 120,000 Total Equivalent Units 820,000 Equivalent Units Refinements: Weighted-Average Method Example (Continued)

Production Cost Report : 

Production Cost Report Key document used to understand activities Prepared for each department and shows: - Production quantity - Cost data Four preparation steps Calculate physical unit flow Calculate equivalent units of production Calculate unit production costs Prepare a cost reconciliation schedule

Flow of Costs in Process SystemExample: Production of Waffles : 

Flow of Costs in Process SystemExample: Production of Waffles Raw Material Factory Labour Manufacturing Overhead Finished Goods Freezing/ Packaging Department Baking Department Mixing Department Production Cost Report Production Cost Report Production Cost Report WIP WIP

Comprehensive Example of Process Costing Using the Weighted-Average Method : 

Comprehensive Example of Process Costing Using the Weighted-Average Method Mixing Department Units Work in process, June 1 100,000 Direct materials: 100% complete Conversion costs: 70% complete Units started into production during June 800,000 Units completed and transferred out to Baking Department 700,000 Work in process, June 30 200,000 Direct materials: 100% complete Conversion costs: 60% complete Costs Work in process, June 1 Direct materials: 100% complete $50,000 Conversion costs: 70% complete 35,000 Cost of work in process, June 1 $85,000 Costs incurred during production in June Direct materials $400,000 Conversion costs 170,000 Costs incurred in June $570,000

Comprehensive Example Continued : 

Comprehensive Example Continued Step 1: Calculate Physical Unit Flow Physical units Actual units to be accounted for during a period, regardless of work performed Total units to be accounted for Units started (or transferred) into production during period + units in production at beginning of period Total units accounted for Units transferred out during period + units in production at end of period

Comprehensive Example Continued : 

Comprehensive Example Continued Step 2: Calculate Equivalent Units of Production Measure of a department’s productivity Two calculations required: one for materials and one for conversion costs Beginning work in process is ignored

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Comprehensive Example Continued 4-21

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Step 3: Calculate 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 calculated: materials conversion total manufacturing Comprehensive Example Continued

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Step 3: Calculate Unit Production Costs (Continued) Materials Direct Materials Cost in Beginning Work in Process $ 50,000 Direct Materials added to Production during Month $ 400,000 Total Materials Cost $ 450,000 Comprehensive Example Continued

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Comprehensive ExampleContinued The calculation of unit materials cost:

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Step 3: Calculate Unit Production Costs (Continued) Conversion Costs Conversion Costs in Beginning Work in Process $ 35,000 Conversion Costs added to Production during Month $170,000 Total Conversion Costs $205,000 Comprehensive Example Continued

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Comprehensive Example Continued The calculation of unit conversion cost:

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Step 3: Calculate Unit Production Costs (Continued) Total Manufacturing Cost Per Unit Comprehensive Example Continued

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Step 4: Prepare a Cost Reconciliation Schedule Determines cost of goods transferred to the next department Assigns total costs to units transferred out and to ending work in process Shows that total costs accounted for equal total costs to be accounted for Comprehensive Example Continued

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Step 4: Prepare a Cost Reconciliation Schedule (Cont’d) Costs charged to Mixing Department Cost of beginning Work in Process $ 85,000 Costs started into production during period $570,000 Total costs to be accounted for $655,000 Comprehensive Example Continued

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An internal document for management Shows production quantity and cost data for a department Presents results of the four steps in system Uses of Production Cost Report: Basis for evaluating productivity of each department Helps assess reasonableness of unit costs and total costs Aids in judging whether planned objectives are met The Production Cost Report

Calculate Equivalent Units For A Sequential Process Setting : 

Calculate Equivalent Units For A Sequential Process Setting A sequential process where goods are transferred from one department to another requires an additional cost component called transferred in. Features of this cost component: Percentage of completion factor of 100% Treated the same way as any other cost component in the calculation of equivalent units of production and the cost per equivalent unit of production

Let’s Review : 

In the RYZ Company, there are zero units in beginning work in process, 7,000 units started into production, and 500 units in ending work in process 20% completed. The physical units to be accounted for are: 7,000 7,360 7,600 7,340 Let’s Review

Slide 45: 

Let’s Review: Solution In the RYZ Company, there are zero units in beginning work in process, 7,000 units started into production, and 500 units in ending work in process 20% completed. The physical units to be accounted for are: 7,000 7,360 7,600 7,340

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