Chapter 20

PROCESS COST ACCOUNTING

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved

 20 - 2

C1
PROCESS OPERATIONS

 Used
Used for
for production
production of of small,
small,
identical,
identical, low-cost
low-cost items.
items.
 Mass
Mass produced
produced in in automated
automated
continuous
continuous production
production process.
process.
 Costs
Costs cannot
cannot be
be directly
directly traced
traced
to
to each
each unit
unit of
of product.
product.
 20 - 3

A1 COMPARING JOB ORDER

AND PROCESS OPERATIONS
Job Order Systems Process Systems

 Custom orders  Repetitive operations

 Heterogeneous products  Homogeneous products
 Low production volume  High production volume
 High product flexibility
 Low product flexibility
 Low to medium
standardization  High standardization
 20 - 4

A1 COMPARING JOB ORDER

AND PROCESS OPERATIONS
The goods in process
Direct account consists of
Materials individual jobs in a
job order system.

Direct Finished
Jobs
Labor Goods

Factory Cost for

Overhead each job
 20 - 5

A1 COMPARING JOB ORDER

AND PROCESS OPERATIONS
The goods in process
Direct account consists of
Materials specific processes in a
process cost system.

Direct Finished
Processes
Labor Goods

Factory Cost
Overhead per unit
processed
 20 - 6

A1 COMPARING JOB ORDER

AND PROCESS OPERATIONS
Same objective: to determine
the cost of products

Same inventory accounts: raw materials,

work in process, and finished goods

Same overhead assignment method:

predetermined rate times actual activity
 20 - 7

A1 COMPARING JOB ORDER

AND PROCESS OPERATIONS

The difference
Journal entries for between job
both job order and order and
process costing process costing
are identical lies in how the
cost of goods
transferred to
finished goods
is determined.
 20 - 8

A1 COMPARING JOB ORDER

AND PROCESS OPERATIONS

Job order costing Process costing

The cost of goods The cost of goods
transferred to transferred to finished
finished goods is goods equals the
equal to the sum of number of completed
all of the completed units times the cost
jobs for that period. per equivalent unit.
 20 - 9

A1 GENX COMPANY ─
AN ILLUSTRATION

GenX makes a
product called
Profen in a
process cost
system.
 20 - 10

A1 PROCESS OPERATIONS
AND COSTS – GENX
Direct
Materials
Indirect

Factory Applied Goods in Finished

Overhead Overhead Process Goods
Indirect

Cost of
Goods
Direct
Labor Sold
 20 - 11

C2 EQUIVALENT UNITS OF
PRODUCTION
Costs are accumulated for a period of time
by process or department.

Unit cost is computed by dividing the

accumulated costs by the number of
equivalent units produced in the period.
 20 - 12

C2
EQUIVALENT UNITS OF
PRODUCTION
Equivalent units is a concept expressing a
number of partially completed units as a
smaller number of fully completed units.

Two one-half full pitchers are

equivalent to one full pitcher.

+ =
So, 4,000 units that are 60 percent complete
would total 2,400 equivalent units.
 20 - 13

C2 EQUIVALENT UNITS OF
PRODUCTION

For
For the
the current
current period,
period, PencilCo
PencilCo started
started 15,000
15,000
units
units and
and completed
completed 10,000
10,000 units,
units, leaving
leaving
5,000
5,000 units
units in
in process
process 3030 percent
percent complete.
complete.
How
How many
many equivalent
equivalent units
units ofof production
production diddid
PencilCo
PencilCo have
have for
for the
the period?
period?

10,000 units + (5,000 units × .30)

= 11,500 equivalent units
 20 - 14

C2
COST PER EQUIVALENT UNIT

Cost per
Product costs for the period
equivalent =
Equivalent units for the period
unit

IfIf PencilCo
PencilCo incurred
incurred $27,600
$27,600 in in production
production
costs
costs during
during the
the period,
period, what
what is is the
the cost
cost
per
per equivalent
equivalent unit
unit for
for the
the period?
period?

$27,600 ÷ 11,500 equivalent units

= $2.40 per equivalent unit
 20 - 15

C2
EQUIVALENT UNITS
40% of
Material
Equivalent
Equivalentunits
unitsmay
maybe bedifferent
different
for
for material,
material, labor,
labor, and
andoverhead,
overhead,
Stage 1
given
giventhat
that costs
costsmay
maybe beadded
addedatat
different
different stages
stagesofof aaprocess.
process.
25% of
Labor and
Overhead

At
At completion
completionof
ofStage
Stage11ofof the
theprocess,
process, material
material
is
is40%
40%complete,
complete, but
but labor
laborand
andoverhead
overheadare
areonly
only
25%
25%complete.
complete.
 20 - 16

C2
EQUIVALENT UNITS
40% of 60% of
Material + Material = 100%

Stage 1 Stage 2

25% of 25% of
Labor and + Labor and = 50%
Overhead Overhead
 20 - 17

C2
EQUIVALENT UNITS
40% of 60% of
Material Material

Stage 1 Stage 2 Stage 3

25% of 25% of 50% of

Labor and Labor and Labor and
Overhead Overhead Overhead

The process is now complete.

 20 - 18

C2
PROCESS COSTING ILLUSTRATION

GenX
GenX uses
uses aa weighted
weighted average
average cost
cost flow
flow
system
system with
with the
the following
following four
four steps:
steps:


 Determine
Determine physical
physical flow
flow of
of units.
units.

 Compute
Compute equivalent
equivalent units
units of
of production.
production.

 Compute
Compute cost
cost per
per equivalent
equivalent unit.
unit.

 Assign
Assign and
and reconcile
reconcile costs.
costs.
 20 - 19

C2
PROCESS OPERATIONS – GENX
GenX
GenX Production
Production Data
Data for
for April
April

Beginning
Beginning Inventory:
Inventory:
Units
Unitsof
of product
product 30,000
30,000
Percentage
Percentage of
of completion
completion -- direct
direct materials
materials 100%
100%
Percentage
Percentage of
of completion
completion -- direct
direct labor
labor 65%
65%
Units
Unitsstarted
started in
in April
April 90,000
90,000
Units
Unitstransferred
transferred from
from grinding
grinding to
to mixing
mixing 100,000
100,000
Ending
Ending Inventory:
Inventory:
Units
Unitsof
of product
product 20,000
20,000
Percentage
Percentage of
of completion
completion -- direct
direct materials
materials 100%
100%
Percentage
Percentage of
of completion
completion -- direct
direct labor
labor 25%
25%
 20 - 20

C2
PROCESS OPERATIONS – GENX
 20 - 21

C2  DETERMINE PHYSICAL
FLOW OF UNITS
These two amounts are reconciled.

GenX Physical Flow for April

Units to account for:

Beginning inventory 30,000
Units started during April 90,000
Total number of units 120,000

Units accounted for as:

Units transferred from grinding to mixing 100,000
Ending inventory 20,000
Total number of units 120,000
  COMPUTE EQUIVALENT
20 - 22

C2
UNITS OF PRODUCTION -
MATERIALS
GenX
Direct Materials Equivalent Units of Production for April

Units of Percentage Equivalent

Product of Completion Units
Equivalent units completed and
transferred out 100,000 100% 100,000
Ending goods in process 20,000 100% 20,000
Total units 120,000 120,000
  COMPUTE EQUIVALENT
20 - 23

C2
UNITS OF PRODUCTION – DIRECT
LABOR AND FACTORY OVERHEAD
GenX Direct Labor and Factory
Overhead Equivalent Units of Production for April

Units of Percentage Equivalent

Product of Completion Units
Equivalent units completed and
transferred out 100,000 100% 100,000
Ending goods in process 20,000 25% 5,000
Total units 120,000 105,000
 20 - 24

C2  COMPUTE EQUIVALENT
UNITS OF PRODUCTION

GenX
Equivalent Units of Production for April

Direct Direct Factory

Materials Labor Overhead
Equivalent units completed and
tramsferred out 100,000 100,000 100,000
Equivalent units for ending
goods in process 20,000 5,000 5,000

Equivalent units of production

for period 120,000 105,000 105,000
 20 - 25

C2  COMPUTE THE COST

PER EQUIVALENT UNIT
GenX
Cost Per Equivalent Unit for April

Direct Direct Factory

Materials Labor Overhead
Costs of beginning goods
in process inventory $ 3,300 $ 600 $ 720
Costs incurred this period 9,900 5,700 6,840
Total costs $ 13,200 $ 6,300 $ 7,560
÷ Equivalent units of
production ÷ 120,000 ÷ 105,000 ÷ 105,000
= Cost per equivalent unit
of production = $ 0.11 = $ 0.06 = $ 0.072
 20 - 26

C2
 ASSIGN AND RECONCILE COSTS

In
In the
the cost
cost reconciliation,
reconciliation, wewe will
will
account
account for
for all
all costs
costs incurred
incurred by by
assigning
assigning unit
unit costs
costs toto the:
the:

A.
A. 100,000
100,000 units
units transferred
transferred out.
out.
B.
B. 20,000
20,000 units
units remaining
remaining in
in ending
ending
inventory.
inventory.
 20 - 27

C2
 20 - 28

C3
PROCESS COST SUMMARY
Shows the flow Provides cost
of units and costs information for
through work in financial
process. statements.

Process
Cost
Summary
Helps factory
Helps managers
managers evaluate
control their
department manager
departments.
performance.
 20 - 29

C3
PROCESS COST SUMMARY

We
We will
will illustrate
illustrate the
the process
process cost
cost
summary
summary for for GenX
GenX inin three
three sections:
sections:
 Costs
Costs charged
charged to to production.
production.
 Equivalent
Equivalent units
units of
of production
production and
and cost
cost per
per
equivalent
equivalent unit.
unit.
 Cost
Cost assignment
assignment and and reconciliation
reconciliation
 20 - 30

C3
PROCESS COST SUMMARY
 20 - 31

C3 PROCESS COST SUMMARY

 20 - 32

C3
PROCESS COST SUMMARY
 20 - 33

C3
TRENDS IN PROCESS OPERATIONS

Process Just-in-time
design production

Customer
orientation

Automation Services
 20 - 34

GLOBAL VIEW
As part of a series of global environmental
goals, Anheuser-Busch InBev set targets to
reduce its water usage. To meet these goals,
the company followed recent trends in process
operations, including extensive redesign of
production processes and the use of advanced
technology to increase efficiency at wastewater
treatment plants. As a result water usage
decreased by almost 37 percent.
 20 - 35

A2
HYBRID COSTING SYSTEMS

Hybrid
Hybridcosting
costingsystems
systemscontain
contain features
features
of
ofboth
bothjob
joborder
orderand
andprocess
processoperations.
operations.

Job Order Hybrid Costing Process

Costing Costing

Material costs are Conversion costs are

accounted for using accounted for using
a job order system. a process system.
 20 - 36

PROCESS COSTING JOURNAL

ENTRIES

Let’s look at the

accounting journal entries
for the process cost
system at GenX.
 20 - 37

P1 PROCESS COSTING JOURNAL

ENTRIES
 20 - 38

P2 PROCESS COSTING JOURNAL

ENTRIES
 20 - 39

P3 PROCESS COSTING JOURNAL

ENTRIES
 20 - 40

P4 PROCESS COSTING JOURNAL

ENTRIES
 20 - 41

C4 APPENDIX 20A: FIFO METHOD

OF PROCESS COSTING

The same GenX data for April will also be used to illustrate the FIFO method.
 20 - 42

C4  DETERMINE PHYSICAL
FLOW OF UNITS
  COMPUTE EQUIVALENT
20 - 43

C4
UNITS OF PRODUCTION –
MATERIALS
 20 - 44

C4  COMPUTE COST PER

EQUIVALENT UNIT – FIFO
 20 - 45

C4  ASSIGN AND RECONCILE COSTS

 20 - 46

C4
 ASSIGN AND RECONCILE COSTS
 20 - 47

END OF CHAPTER 20