14-1

14
Process Costing
and the Cost
Accounting Cycle
Prepared by
Douglas Cloud
Pepperdine University
 14-2

Objectives
 Determine when process costing is appropriate.
After reading
 Explain the concept this
of equivalent unit
production. chapter, you should
be able to:
 Determine unit costs, inventories, and costs
transferred.
 Use the backflush costing method.
 Describe and apply the cost accounting cycle
for manufacturers.
 14-3

Process Costing

The essence of process

costing is the
accumulation of costs
by process, or
department, for a
period of time.
 14-4

Process Costing

Production costs
Unit cost =
Production
Basic process costing formula used
by a manufacturer of a single,
homogeneous product.
 14-5

Equivalent Unit Production

and Unit Cost
Equivalent unit
production is the sum
of (1) the units
finished during the
period and (2) the
equivalent units in the
ending inventory of
work in process.
 14-6

Equivalent Unit Production

and Unit Cost
Units in Percentage
Equivalent Units
= + ending x complete
production completed
inventory

Equivalent 10,000 x 60%

= 50,000 +
production

Equivalent
production = 56,000
 14-7

Equivalent Unit Production

and Unit Cost
The weighted-average unit cost formula is:

Cost of beginning
inventory + Current period cost
Unit cost =
Weighted-average equivalent
unit production
 14-8

Equivalent Unit Production

and Unit Cost
The weighted-average unit cost formula is:

Cost of beginning
inventory + Current period cost
Unit cost =
Weighted-average equivalent
unit production

Unit cost = $112,000 ÷ 56,000 = $2.00

 14-9

Data for Kelco Company

May June
Production costs $112,000$128,400
Unit data:
WIP, beg. of month 010,000
Completed in month 50,00070,000
WIP, end of month 10,00020,000
WIP, percentage completed 60% 40%
 14-10

Ending Inventory and Transfers

Cost of units transferred + Cost of
Production to finished goods ending inventory
costs
= $100,000 + (10,000 units x 60% x $2)
accounted
for
Production
costs = $112,000
accounted
for
 14-11

Effects of Beginning Inventory

June Equivalent Units for Kelco

Units completed 70,000

Equivalent units in ending
inventory, 20,000 x 40% 8,000
Weighted-average equivalent unit
production 78,000
 14-12

Effects of Beginning Inventory

Cost of beginning
inventory + Current period cost
Unit cost =
Weighted-average equivalent
unit production

$12,000 + $128,400
Unit cost = = $1.80
78,000
 14-13

Effects of Beginning Inventory

The disposition of the costs follows:

Ending inventory of work in

process, 20,000 x 40% x $1.80 $ 14,400
To finished goods inventory,
70,000 x $1.80 126,000
Total $140,400
 14-14

Materials and Conversion Costs

Ending inventory:
Material cost (15,000 units x 100% x $1.10) $16,500
Conversion cost (15,000 units x 40% x $0.90) 5,400
Total cost of ending WIP inventory $21,900
Transferred to finished goods:
Material cost (45,000 units x $1.10) $49,500
Conversion cost (45,000 units x $0.90) 40,500
Total cost transferred to finished goods $90,000
 14-15

Materials and Conversion Costs

Total costs to be accounted for:
Costs in beginning inventory ($8,000 + $4,900) $ 12,900
Costs for current month ($58,000 + $41,000) 99,000
Total $111,900
Total costs accounted for as:
Cost of finished units transferred to finished
goods $ 90,000
Cost of ending inventory 21,900
Total $111,900
 14-16

Multiple Processes
Unit Data:
Unit on hand at beginning of June 0
Transferred in from Cutting Department 45,000
Completed and transferred to finished goods 40,000
On hand at end of period (80% complete) 5,000
Cost Data:
Beginning inventory $ 0
Transferred in from Cutting Department $ 90,000
Sanding Department conversion costs
for June $132,000
 14-17

Multiple Processes
Calculate the Equivalent Production
for the Sanding Process
Units completed 40,000
Equivalent units in ending inventory,
5,000 x 80% 4,000
Weighted –average equivalent unit
production 44,000
$0 + $132,000
Unit cost = = $3.00
44,000
 14-18

Multiple Processes
The cost of a unit transferred from Sanding to finished
goods is the $2.00 from the Cutting Department plus
$3.00 from the Sanding Department, a total of $5.00.

Ending work in process:

Cost from prior department, 5,000 x $2.00 $10,000
Sanding Department conversion costs,
5,000 x 80% x $3.00 12,000
Ending work in process $22,000
 14-19

Multiple Processes

Transferred to finished goods,

40,000 x $5.00 $200,000
Ending inventory of work in process
(from Slide 14-18) 22,000
Total $222,000
 14-20

The Cost Accounting Cycle

Bryan Company produces

a plywood countertop
backing. Bryan had no
beginning inventories of
work in process.
 14-21

The Cost Accounting Cycle

Purchase of materials: Bryan bought 1,400,000 feet

of wood at $0.095 per foot.

1. Materials Inventory $133,000

Cash or Accounts Payable
$133,000
 14-22

The Cost Accounting Cycle

Bryan used 1,300,000 feet of wood.

2. Work in Process $123,500

Materials Inventory
$123,500
 14-23

The Cost Accounting Cycle

Direct laborers earned $344,400 for 41,000 hours of

work at $8.40 per hour.

3a. Direct Labor $344,400

Cash or Accrued Payroll
$344,400
3b. Work in Process Inventory $344,400
Direct Labor
$344,400
 14-24

The Cost Accounting Cycle

Bryan incurred various overhead costs.

4. Variable Manufacturing Overhead $251,300

Fixed Manufacturing Overhead 461,000
Various, Cash, Accrued

Expenses, Accumulated

Depreciation
$712,300
 14-25

The Cost Accounting Cycle

Bryan finished 40,000 square yards of plywood.

Another 3,000 square yards were still in process at
the end of 20X5.
5. Work in Process Inventory $251,300
Variable Mfg. Overhead
$251,300
Work in Process Inventory $461,000
Fixed Mfg. Overhead
$461,000
 14-26

The Cost Accounting Cycle

Materials (Slide 14-23) $ 123,500

Direct labor (Slide 14-24) 344,400
Variable overhead (Slide 14-26) 251,300
Fixed overhead (Slide 14-26) 461,000
Total $1,180,200
Divided by equivalent production 42,000
Equals cost per unit $ 28.10
 14-27

The Cost Accounting Cycle

The $28.10 cost per unit is used to transfer to

Finished Goods Inventory (40,000 units).

6. Finished Goods Inventory $1,124,000

Work in Process Inventory
$1,124,000
 14-28

The Cost Accounting Cycle

Bryan sold 35,000 square yards that cost

$28.10 at $40 each.

7a. Cash or Accounts

Receivable $1,400,000
Sales $1,400,000
7b. Cost of Goods Sold $983,500
Finished Goods Inventory $983,500
 14-29

The Cost Accounting Cycle

The company incurred $340,000 in selling

and administrative expenses.

8. Selling and Administrative

Expenses
$340,000
Cash, Accrued Expenses
$340,000
 14-30

The Cost Accounting Cycle

Work in Process Inventory
(2) $ 123,500
(3b) 344,400
(5) 251,300 $1,124,000 (6)
(5) 461,000
1,180,200 $1,124,000
Bal. $ 56,200
 14-31

The Cost Accounting Cycle

Finished Goods Inventory
(6) $1,124,000
$983,500 (7b)
Bal. $ 140,500

Cost of Goods Sold

(7b) $983,500
 14-32

The Cost Accounting Cycle

Income Statement for Bryan Company, Actual Process Costing
Sales (Slide 14-28) $1,400,000
Cost of goods sold (Slide 14-28) 983,500
Gross profit $ 416,500
Selling and administrative expenses
(Slide 14-29) 340,000
Income $ 76,500
 14-33

Illustration of Job-Order Costing

Portland Mill Works makes industrial products in a
highly mechanized environment. The company uses
activity-based costing. The company has established
the following predetermined overhead rates:
Machine-Related
Total budgeted overhead $600,000
Divided by budgeted levels of activity 100,000 MH
Equals predetermined overhead rates $6 per MH

Continued
 14-34

Illustration of Job-Order Costing

Setup-Related
Total budgeted overhead $250,000
Divided by budgeted levels of activity 10,000 SH
Equals predetermined overhead rates $25 per SH
Total applied overhead ($660,000 +
$225,000) $885,000
Total actual overhead ($645,000 +
$235,000) 880,000
Total overapplied overhead $ 5,000
 14-35

Illustration of Job-Order Costing

Materials are purchased.
1. Materials Inventory $720,000
Cash, Accounts Payable $720,000

Materials are placed into production.

2. Work in Process Inventory $650,000
Materials Inventory $650,000
 14-36

Illustration of Job-Order Costing

Direct labor is incurred.
3a. Direct Labor $800,000
Cash or Accrued Payroll $800,000
3b. Work in Process Inventory $800,000
Direct Labor $800,000
 14-37

Illustration of Job-Order Costing

Overhead was incurred and applied.
4a. Factory Overhead-machine—
related $645,000
Factory Overhead—setup-
related 235,000
Various Credits, Cash,
Accrued Expenses,
Accumulated Depreciation $880,000
 14-38

Illustration of Job-Order Costing

Overhead was incurred and applied (continued).
4b. Work in Process Inventory $885,000
Factory Overhead—
machine-related $660,000
Factory Overhead—setup-
related 225,000
 14-39

Illustration of Job-Order Costing

Completed jobs are transferred to finished goods.
5. Finished Goods Inventory $2,262,000
Work in Process Inventory $2,262,000

The cost of goods sold is recorded.

6. Cost of Goods Sold $2,100,000
Finished Goods Inventory $2,100,000
 14-40

Illustration of Job-Order Costing

Factory Overhead—machine-related
(4a) $645,000 $660,000 (4b)
Bal. $ 15,000

Factory Overhead—setup-related
(4a) $235,000 $225,000 (4b)
Bal. $ 10,000
 14-41

Illustration of Job-Order Costing

Work in Process Inventory
(2) $ 650,000
(3b) 800,000
(4b) 885,000 $2,262,000 (5)
2,335,000 $2,262,000
Bal. $ 73,000
 14-42

Illustration of Job-Order Costing

Cost of Goods Sold
(6) $2,100,000

Finished Goods Inventory

(5) $2,262,000 $2,100,000 (6)
Bal. $ 162,000
 14-43

Illustration of Standard Costing

Materials are purchased.
1. Materials Inventory $100,000
Material Price Variance 4,000
Cash or Accounts Payable
20,000xx$5
18,000
$104,000
Materials are placed into production. $5.00
17,800 x $5
2. Work in Process Inventory $90,000
Materials Use Variance 1,000
Materials Inventory $89,000
 14-44

Illustration of Standard Costing

Direct labor is incurred.
3a. Direct Labor $75,200
Cash or Accrued Payroll $72,850
Direct Labor Rate Variance 4,700 x 2,350
$16
3b. Work in Process Inventory $72,000
Direct Labor Efficiency Variance 3,200
Direct Labor 4,500 x $75,200
$16
 14-45

Illustration of Standard Costing

Variable overhead was incurred and applied.
4a. Variable Manufacturing
Overhead $56,400
Variable Overhead Spending
Variance 2,600
4,700 x
Various Credits, Cash, $12
Accrued Expenses $59,000
 14-46

Illustration of Standard Costing

Overhead was incurred and applied (continued).
4b. Work in Process Inventory $54,000
Variable Overhead Efficiency
Variance 2,400
4,500 x
Variable Manufacturing $12
Overhead $56,400
 14-47

Illustration of Standard Costing

5a. Fixed Manufacturing
Overhead $100,000
Fixed Overhead Budget
Variance $ 2,000
Various Credits, Cash,
Accrued Expenses 98,000
 14-48

Illustration of Standard Costing

Overhead was incurred and applied (continued).
5b. Work in Process Inventory $90,000
Factory Overhead Volume
Variance 10,000
9,000 x
Factory Manufacturing Overhead $10 $100,000
 14-49

Illustration of Standard Costing

Completed jobs are transferred to finished goods.
6. Finished Goods Inventory $306,000
Work in Process Inventory $306,000
9,000 x
The cost of goods sold is recorded. $34
7. Cost of Goods Sold $272,000
Finished Goods Inventory $272,000
8,000 x
$34
 14-50

Illustration of Standard Costing

Work in Process Inventory
(2) $ 90,000
(3b) 72,000
(4b) 54,000
(5b) 90,000 $306,000 (6)
$306,000 $306,000

Materials Inventory
(1) $100,000 $89,000 (2)
Bal. $ 11,000
 14-51

Illustration of Standard Costing

Finished Goods Inventory
3-1 Bal $ 34,000
(6) 306,000 $272,000 (7)
340,000 272,000
3-31 Bal. $ 68,000

Cost of Goods Sold

(7) $272,000
 14-52

Backflushing

Backflushing
concentrates on
completed units, rather
than on the units making
their way through work
in process. Backflushing
therefore requires
relatively few entries.
 14-53

Chapter 14

The End
14-54