### Chapter 1

```Chapter 3
Process Costing
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
McGraw-Hill/Irwin
Learning Objective 3-1
Describe the key features of a
process costing system.
3- 3
Basic Concepts in Process Costing
Process costing is used by companies that produce homogeneous
products or services using a series of standardized processes. Canned
and bottled goods, frozen foods, paper products, and petroleum
products are examples of homogeneous products that result from a
standardized process. Although process costing is most often identified
with manufacturing companies, it can also be used by service firms that
perform routine processes, such as an insurance company that has a
claims and reimbursement process or a financial institution that
processes home refinance loans.
3- 4
Flow of Costs in Process Costing
3- 5
Process Costing Production Report
The foundation of a process costing system is the
production report. In the report we provide information
1.The number of units produced.
2.The manufacturing costs transferred into Work in
Process Inventory.
3.The manufacturing costs transferred out of Work in
Process Inventory to Finished Goods Inventory.
4.The number of units remaining in process at the end of
the period.
5.The cost of units remaining in process at the end of the
period.
3- 6
Learning Objective 3-2
Reconcile the number of physical
units using the weighted-average
method.
3- 7
Preparing the Production Report
(Weighted-Average Method)
Step 1: Reconcile the
number of physical
units worked on
during the period.
Step 2:Translate the
physical units into
equivalent units.
Step 3: Calculate
the cost per
equivalent unit.
Step 5: Prepare a
Production
Report.
Step 4: Reconcile
the total cost of
work in process.
3- 8
Prepare the Production Report
(Weighted-Average Method)
Step 1: Reconcile the number of physical units.
(Unit = 1 Barrel of Wine)
3- 9
Prepare the Production Report
(Weighted-Average Method)
Step 1: Reconcile the number of physical units.
(Unit = 1 Barrel of Wine)
3- 10
Learning Objective 3-3
Calculate the number of equivalent
units using the weighted-average
method.
3- 11
Process Costing Production Report
Step 2: Convert Physical Units Into Equivalent Units
The next step in preparing the production report is to calculate the number
of equivalent units. An equivalent unit is a measure used to convert
partially completed units into the equivalent of a full unit. Consider the
information below.
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Process Costing Production Report
Step 2: Convert Physical Units Into Equivalent Units
3- 13
Process Costing Production Report
Step 3: Calculate Cost Per Equivalent Unit
3- 14
Process Costing Production Report
Step 4: Reconcile the total cost of Work in Process
Work in Process Inventory (CFA)
Beginning costs:
Cost of goods completed
Direct materials
84,000
Conversion costs
81,120
Current period costs:
Direct materials
810,000
Conversion costs
918,000
Total cost
1,893,120
Ending Balance
?
?
Work in Process Inventory (Bottling)
3- 15
Process Costing Production Report
Step 4: Reconcile the total cost of Work in Process
Completed and
transferred to bottling
Ending Inventory
= (\$715,200 + \$868,800 ) = \$1,584,000
= (\$178,800 + \$130,320) =
\$309,120
3- 16
Process Costing Production Report
Step 4: Reconcile the total cost of Work in Process
Work in Process Inventory (CFA)
Beginning costs:
Cost of goods completed
Direct materials
84,000
Conversion costs
81,120
Current period costs:
Direct materials
810,000
Conversion costs
918,000
Total cost
1,893,120
Ending Balance
1,584,000
309,120
Work in Process Inventory (Bottling)
1,584,000
3- 17
Learning Objective 3-4
Prepare a process costing production
report using the weighted-average
method.
3- 18
Step 5: Prepare a Production Report
Section 1 of the Production Report
CK Mondavi
Process Costing Production Report (Weighted Average)
Crushing, Fermenting, and Aging (CFA) Process
For the Quarter Ended March 31, 2013
Step 1
Physical
Units:
Units
Units to be accounted for:
Beginning inventory
200
Started this period
1,800
Step 2
Total
2,000
Equivalent Units
Direct
Units accounted for:
Materials Conversion
Completed
1,600
1,600
1,600
Ending inventory
400
400
240
Total
2,000
2,000
1,840
3- 19
Step 5: Prepare a Production Report
Section 2 of the Production Report
CK Mondavi
Process Costing Production Report (Weighted Average Method)
Crushing, Fermenting, and Aging (CFA) Process
For the Quarter Ended March 31, 2013
Step 3: Cost per equivalent unit
Costs:
Direct
Costs to be accounted for:
Materials
Conversion
Total
Beginning inventory
\$
84,000
\$ 81,120
\$ 165,120
Current period costs
810,000
918,000
1,728,000
Total cost
894,000
999,120
\$ 1,893,120
Equivalent units
÷
2,000 ÷
1,840
Cost per equivalent unit
\$
447
\$
543
\$
990
Cost accounted for:
Step 4: Reconcile the total cost
Cost of units completed
\$ 715,200
\$ 868,800
\$ 1,584,000
Ending inventory
178,800
130,320
309,120
Total
\$ 894,000
\$ 999,120
\$ 1,893,120
3- 20
Costing
1. We have not discussed process costing when the FIFO
method is applied. This material in covered in Supplement
3A to this chapter. The only difference between the two
methods is how we treat beginning inventory.
2. We have not considered how to account for subsequent
departments in process costing. We did not look at
extending our example to cover the Bottling Department.
3- 21
Supplement 3A
FIFO Method
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
McGraw-Hill/Irwin
Learning Objective 3-S1
Prepare a process costing production
report using the first-in, first-out
(FIFO) method.
3- 23
Step 1: Reconcile the Number of
Physical Units
FIFO assumes that the units in beginning inventory were
completed first. So, not all units that were completed during
the current period were started in the current period.
3- 24
Step 1: Reconcile the Physical Units
Mondavi CFA Process Physical Flow
Beginning Barrels in Process
Barrels Started and Completed
Ending Barrels in Process
Total Barrels Accounted For
200
1,400
?
400
2,000
Units Started and Completed = 2,000 ‒ 200 ‒ 400 = 1,400
OR
Units Started
and Completed
=
Units
Completed
‒
Beginning
Units
= 1,600 – 200 = 1,400
OR
Units Started
and Completed
=
Units
Started
‒
Ending
Units
= 1,800 – 400 = 1,400
3- 25
Step 2: Convert Physical Units into
Equivalent Units
Beginning inventory is 100% complete as to materials and 70%
complete as to conversion.
Complete as to materials
400 units × 60% = 240
200 units × 30% = 60
3- 26
Step 3: Calculate Cost per Equivalent
Unit
Cost per
Equivalent Unit
=
Current Period Costs
Equivalent Units
3- 27
Step 4: Reconcile the Total Cost of
Work in Process
Work in Process Inventory (CFA)
Beginning costs:
Direct materials
84,000 Mondavi CFA Process
84,000
Conversion costs
81,120
81,120
Cost of Ending Inventory
Conversion
Total
Current period costs:
60 × 540 Materials
32,400
Equivalent
units in Ending
Inventory
400
240
Direct materials
810,000
1,400 × 450
630,000
Cost
per Equivalent
× \$
450 × \$ 756,000
540
Conversion
costs Unit918,000 1,400 × 540
Cost of
Ending Inventory
\$ 180,000 + \$ 1,583,520
129,600 = \$ 309,600
Total
cost
1,893,120
Ending Balance
309,600
Work in Process Inventory (Bottling)
1,583,520
3- 28
Step 4: Reconcile the Total Cost of
Work in Process Inventory
Section 1 of the Production Report
CK Mondavi
Process Costing Production Report (FIFO Method)
Crushing, Fermenting, and Aging (CFA) Process
For the Quarter Ended March 31, 2013
Step 1
Physical
Units:
Units
Units to be accounted for:
Beginning inventory
200
Started this period
1,800
Step 2
Total
2,000
Equivalent Units
Direct
Units accounted for:
Materials Conversion
Beginning work in process
200
60
Completed
1,400
1,400
1,400
Ending inventory
400
400
240
Total
2,000
1,800
1,700
3- 29
Step 5: Prepare a Production Report
Section 2 of the Production Report
CK Mondavi
Process Costing Production Report (FIFO Method)
Crushing, Fermenting, and Aging (CFA) Process
For the Quarter Ended March 31, 2013
Step 3: Cost per equivalent unit
Costs:
Direct
Materials
Conversion
Current period costs
810,000
918,000
Equivalent units
÷
1,800 ÷
1,700
Cost per equivalent unit
\$
450
\$
540
Cost to be accounted for:
Step 4: Reconcile the total cost
Beginning work in process
\$ 84,000
\$ 81,120
Current period costs
810,000
918,000
Total costs
\$ 894,000
\$ 999,120
Cost accounted for:
Beginning inventory balance
\$ 84,000
\$ 81,120
Cost to complete beginning inv.
32,400
Started and completed
630,000
756,000
Ending inventory
180,000
129,600
Total costs
\$ 894,000
\$ 999,120
Total
\$ 1,728,000
\$
990
\$
165,120
1,728,000
\$ 1,893,120
\$
165,120
32,400
1,386,000
309,600
\$ 1,893,120
3- 30
Supplement 3B
Journal Entries for Process Costing
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
McGraw-Hill/Irwin
Learning Objective 3-S2
Prepare journal entries to record the
flow of manufacturing costs in a
process cost system.
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Journal Entries for Process Costing
Purchase of Raw Materials
Mondavi purchased \$900,000 of materials on account.
Issue of Raw Material into Production
Mondavi adds \$810,000 of grapes to production.
3- 33
Journal Entries for Process Costing
Recording Actual Labor Costs
Mondavi incurred \$108,000 actual labor costs:
3- 34
Journal Entries for Process Costing
Assume Mondavi applies \$450 in manufacturing overhead
to each barrel started in the CFA process. During the
most recent period.1,800 barrels were started, resulting
in \$810,000 in applied overhead (1,800 barrels X \$450 =
\$810,000).
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Journal Entries for Process Costing
Mondavi incurred \$800,000 in actual manufacturing
3- 36
Summary of Recorded Transactions
Raw Materials
Beg. Bal. = 0
Work in Process (CFA)
Beg. Bal. = 0
Pur. = 900,000 Iss. = 810,000
Direct Labor
DL = 108,000
Direct Mat. 810,000
DL = 108,000
MOH 810,000
Work in Process
Bottling
Manufacturing
Actual
800.000
Applied
810,000
3- 37
Journal Entries for Process Costing
Transfer from One Process to the Next
Assume 1,800 barrels of wine are through the CFA
process. At a cost of \$990 per barrel, accountants would
transfer \$1,782,000 (1,800 X \$990) from the Work in
Process Inventory (CFA) account to the Work in Process
Inventory (Bottling) account.
3- 38
Journal Entries for Process Costing
Record Cost of Goods Completed
When the product is through the last production process, the
total manufacturing cost is transferred out of the last Work in
Process Inventory account and into Finished Goods Inventory. In
our winery example, each bottle of wine completed accumulates
\$3.75 in total manufacturing cost. When 460,000 bottles are
completed, a total of \$1,725,000 (460,000 X \$3.75) is transferred
to Finished Goods Inventory.
3- 39
Journal Entries for Process Costing
Record Cost of Goods Sold and Sales Revenue
When the product is sold, its total manufacturing cost is
reported as cost of goods sold. If Mondavi sells 400,000
bottles, the total manufacturing cost of \$1,500,000 (400,000 X
\$3.75) would be transferred from Finished Goods Inventory to
Cost of Goods Sold. If the average sales price was \$8.00 per
bottle, the company would report \$3,200,000 (400,000 X
\$8.00) in sales revenue.
3- 40
Weighted-Average Vs. FIFO
Process Costing
3- 41
End of Chapter 3
3- 42
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