University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

278

Pages:

19
Author:

Sanaa Tate

Chapter 6: Process Costing Learning Objectives 1. Describe the basic characteristics and cost flows associated with process manufacturing. 2. Define equivalent units and explain their role in process costing. Explain the differences between the weighted average method and the FIFO method of accounting for process costs. 3. Prepare a departmental production report using the weighted average method. 4. Explain how nonuniform inputs and multiple processing departments affect process costing. 5. (Appendix 6A) Prepare a departmental production report using the FIFO method. 1 Characteristics of Process Manufacturing ►Since each product within a product line passing through the processes would receive similar ‘‘doses’’ of materials, labor, and overhead, costs are accumulated by process. ►Process costing works well whenever relatively homogeneous products pass through a series of processes and receive similar amounts of manufacturing costs. 1 Types of Processes ► Sequential processing requires that units pass through one process before they can be worked on in the next process in the sequence. ► Parallel processing is another processing pattern that requires two or more sequential processes to produce a finished good. 1 Types of Processes (continued) ► Partially completed units (e.g., two subcomponents) can be worked on simultaneously in different processes and then brought together in a final process for completion. 1 What’s In Common? ►Regardless of which processing pattern exists within a firm, all units produced share a common property. ►Units are homogeneous and subjected to the same operations for a given process and each unit produced in a period should receive the same unit cost. ►Understanding how unit costs are computed requires an understanding of the manufacturing cost flows that take place in a process-costing firm. 1 How Costs Flow through the Accounts in Process Costing ► The manufacturing cost flows for a process-costing system are generally the same as those for a job-order system. ► As raw materials are purchased, the cost of these materials flows into a raw materials inventory account. Similarly, raw materials, direct labor, and applied overhead costs flow into a work-in-process (WIP) account. ► When goods are completed, the cost of the completed goods is transferred from WIP to the finished goods account. ► Finally, as goods are sold, the cost of the finished goods is transferred to the cost of goods sold account. ► The journal entries generally parallel those described in a job-order costing system. 1 How Costs Flow through the Accounts in Process Costing (continued) ► Although job-order and process cost flows are generally similar, some differences exist. ► In process costing, each producing department has its own WIP account. As goods are completed in one department, they are transferred to the next department. ► The costs attached to the goods transferred out are also transferred to the next department. 1 Information: ► Cornerstone 6-1 Calculating Cost Flows without Work in Process Suppose that Healthblend decides to produce 2,000 bottles of multivitamins with the following costs (there is no beginning or ending work-in-process for each department): Required: 1. Calculate the costs transferred out of each department. 2. Prepare journal entries that reflect these cost transfers. 1 Solution: Cornerstone 6-1 Calculating Cost Flows without Work in Process (continued) 1 Accumulating Costs in the Production Report ► In process costing, costs are accumulated by department for a period of time. ► The production report is the document that summarizes the manufacturing activity that takes place in a process department for a given period of time. ► A production report contains information on costs transferred in from prior departments as well as costs added in the department such as direct ^^^^^^^^ materials, direct labor, and overhead; ^^^^^^^^ similar to the job-order cost sheet, ^^^^^^^^ it is subsidiary to the WIP account. ^^^^^^^^ 1 Accumulating Costs in the Production Report (continued) ► A production report is divided into the following sections and subdivisions: Unit information section: The unit information section has two Unit ^^^^^^^^ major subdivisions: Cost • units to account for ^^^^^^^^ • units accounted for Cost information section: The cost information section has two major subdivisions: • costs to account for • costs accounted for ► A production report traces the flow of units through a department, identifies the costs charged to the department, shows the computation of unit costs, and reveals the disposition of the department’s costs for the reporting period. 1 Service and Manufacturing Firms ►Any product or service that is basically homogeneous and repetitively produced can take advantage of a process-costing approach. ►Let’s look at three possibilities: services, manufacturing firms with a just-in-time (JIT) orientation, and traditional manufacturing firms. 1 Service Firms and Process Costing ►It is possible for firms engaged in service production to have WIP inventories. ►For example, an accounting firm can have a batch of tax returns that are partially completed. ►Process costing for services is relatively simple. ►The total costs for the period are divided by the number of services provided to compute unit cost: 1 Manufacturing Firms Using JIT ►Manufacturing firms may also operate without significant WIP inventories. ►Specifically, firms that have adopted a JIT approach try to reduce WIP inventories to very low levels. ►Furthermore, JIT firms usually structure their manufacturing so that process costing can be used to determine product costs. 1 Manufacturing Firms Using JIT (continued) ►In many JIT firms, work cells are created that produce a product or subassembly from start to finish. ►Costs are collected by cell for a period of time, and output for the cell is measured for the same period. ► Unit costs are computed by dividing the costs of the period by output of the period: 1 Traditional Manufacturing Firms ►On the other hand, traditional manufacturing firms may have significant beginning and ending WIP inventories. ►This causes complications in process costing due to several factors such as the presence of beginning and ending WIP inventories and different approaches to the treatment of beginning inventory cost. 2 The Impact of Work-In-Process Inventories on Process Costing ►The computation of unit cost for the work performed during a period is a key part of the production report. ►This unit cost is needed both to compute the cost of goods transferred out of a department and to value ending work-in-process (EWIP) inventory. The Impact of Work-In-Process Inventories on Process Costing 2 (continued) ► Conceptually, calculating the unit cost is easy—just divide total cost by the number of units produced. However, the presence of WIP inventories causes two problems: 1. 2. Defining the units produced can be difficult, given that some units produced during a period are complete, while those in ending inventory are not. This is handled through the concept of equivalent units of production. How should the costs and work of beginning work-in-process (BWIP) be treated? Should they be counted with the current period work and costs or treated separately? Two methods have been developed to solve this problem: the weighted average method and the FIFO method.