18 PROCESS COSTING
Chapter Summary
Costing systems provide information that is used for a large variety of business decisions including planning production of goods and services, pricing products, and controlling associated costs of production. Thus the choice of an appropriate costing system is a key underlying foundation for good decision-making. Process costing is a method for accumulating the direct and indirect costs of a production process and averaging those costs over the identical units produced by that process. As discussed in the previous chapter, job-order costing is shown to be a reasonable approach to assigning manufacturing costs to distinct units of production such as buildings, batches of furniture, financial audits, etc. When the units produced are all of a similar type, the complexity of job costing is unnecessary and process cost systems are an efficient alternative.
Process costing serves two related purposes. First, it measures the cost of goods manufactured on both a total and per-unit basis. This information is used in valuing inventories and in recording the cost of goods sold. But process costing also provides management with information about the per-unit cost of performing each step in the production process. This information is useful in evaluating the efficiency of production departments and often draws attention to potential cost savings.
Learning Objectives
1. Distinguish production procedures that match with process costing from those that correspond with job order costing.
2. Account for the physical flows and related cost flows when using process costing.
3. Demonstrate how to calculate equivalent units.
4. Use the costs of resources consumed to calculate the cost per equivalent unit of production.
5. Use the cost per equivalent unit to assign costs to the work complegted during the period.
6. Create a process costing production report and use the report for decision making.
Brief topical outline
A Production of goods and services and costing systems – see Case in Point (page 777)
B Process costing – see Case in Point (page 777)
1 Tracking the physical flow and related production costs
a Understanding physical flows
b Understanding cost flows
c Accounting for material, labor, and applied overhead
d Costs flow from one process to the next
2 Process costing and equivalent units
3 Cost per equivalent unit – see Management Strategy and Your Turn (page 783)
4 Flow of costs in process costing: a two-department example
a The production cost report and using unit costs
b Production cost report for process costing - see Your Turn (page 787)
5 Evaluating departmental efficiency
C Concluding remarks – see A Second Look (page 788)
Topical coverage and suggested assignment
(To Be Completed Prior to Class)
Class Meetings on Chapter / Topical Outline Coverage / Discussion Questions / Exercises / Problems / Cases / Internet
1 / A - B / 1, 2, 4, 5, 6 / 1, 2 / 1, 2
2 / B / 11, 12, 13, 14 / 3, 4, 5 / 4, 5 / 2
3 / B / 15, 16 / 6, 7, 9 / 6 / 1
4 / B – C / 22, 23, 24 / 11, 12 / 7, 8 / 3
Comments and observations
Teaching objectives for Chapter 18
In this chapter, the concepts of product costing is illustrated for a process cost accounting systems. Our primary objectives in presenting a process cost accounting systems are to:
1 Distinguish between job order and process cost accounting systems in terms of the circumstances that make a particular type of system appropriate.
2 Emphasize that in situations of continuous production of homogeneous products, identifiable "jobs" do not exist. Therefore, manufacturing costs are accumulated by time periods. In addition, costs generally are accumulated separately for each production department or process to enable managers to evaluate the efficiency of different departments.
3 Explain the use of a separate Work-in-Process Inventory account to accumulate material, labor, and overhead costs for each process or processing department.
4 Explain the flow of costs through the Work-in-Process Inventory accounts.
5 Explain the meaning of equivalent units and demonstrate their use in determining unit costs.
6 Briefly discuss how unit cost information is used to value inventories and cost of goods sold, set selling prices, and evaluate departmental efficiency.
New features in Chapter 18
Our treatment of process costing, however, has undergone a significant revision, receiving an entire chapter’s coverage. The concept of equivalent units receives considerable coverage in the chapter. New exercises and problems have been added to the assignment material to support the new treatment of process costing. A demonstration Problem supports the expanded treatment of process costing.
General comments
We find that the introduction of the "flow" of manufacturing costs in Chapter 16 greatly enhances students' abilities to understand the determination and use of unit costs as discussed in Chapter 18.
The newly revised coverage of process costing reflects the traditional treatment of this system. The FIFO approach is used exclusively and no mention is made of weighted average costs. We utilize Exercise 4 or 7 to establish a solid understanding of equivalent units before turning to the development of product costs. Problem 5 provides a comprehensive review of the process costing system. It is reasonably similar to the new Demonstration Problem and should pose no difficulty. Problem 2 has been included to emphasize the simplifications offered by assuming that work-in-process inventories are negligible. This assumption is justifiable in a just-in-time setting, and the problem nicely illustrates the potential for simplification in system design.
An aside In some instances real-world cost accounting systems have become simpler than our treatment suggests. Harley-Davidson no longer records direct labor as a separate cost element. Direct labor costs are included with total plant overhead. Furthermore, overhead is not added to inventory as in-process parts are produced. Instead, overhead is applied only when a finished unit is completed. For additional examples of accounting simplification see William Turk, "Management Accounting Revitalized: The Harley-Davidson Experience," The Journal of Cost Management, Winter 1990.
Supplementary Exercises
Business Week Exercise
Read "Is a Low-Fiber Dupont More Appetizing?”, Business Week, September 8, 2003. Most everyone knows DuPont for its familiar synthetics – Lycra and other fibers that have become ubiquitous in carpets and clothes. Why would a corporation like DuPont probably use process costing over job order costing.
Group Exercise
Visit websites for several large corporations. Based on the type of products manufactured, decided whether job order costing or a process costing system would be more appropriate for each company.
CHAPTER 18 NAME #
10-MINUTE QUIZ A SECTION
Indicate the best answer for each question in the space provided.
1 The beginning inventory of Department No. 3 was zero. During May, 2,500 units were processed in the department. All 2,500 of these units were transferred to Department No. 4 in May at a total cost of $15,000. The unit cost of goods transferred to Department No. 4 in May was:
a $4.00. b $5.00. c $6.00. d $1.00.
2 In a given department, the beginning inventory of 6,000 units was 60% complete as to material, labor, and overhead. A total of 7,000 units were started and completed during the period, and the ending inventory of 8,000 units was 40% complete as to material, labor and overhead. The equivalent production for the period in units is:
a 13,400. c 15,400.
. b 12,600. d 17,400.
3 Department A started 2,000 units in February. They completed and transferred to Department B 2,100 units in February and on February 28 had 200 units remaining in Work-in-Process. The number of units in Work-in-Process on February 1 were
a 4,200. b 300. c 100. d 0.
4 The assembly department has 650 units in work-in-process at the beginning of November. By the end of November they had completed and transferred 2,700 units to the paint department. On November 30 there were 300 units remaining in work-in-process. How many units were started in production in the assembly department during November.
a 3,650. b 3,050. c 2,350. d 1,750.
CHAPTER 18 NAME #
10-MINUTE QUIZ B SECTION
Woods Chemical Company uses a process cost system with two departments: (a) a Mixing Department, and (b) a Packing Department. During May, its first month of operations, the company generated $160,000 in revenue by manufacturing and selling 800 cases of chemicals Related manufactured costs are as follows:
Mixing Packing
Department Department
Direct materials $24,000 $ 800
Direct labor 6,000 12,000
Manufacturing overhead 10,000 6,000
1 Refer to the above data. The unit cost of a case processed in the Mixing Department in May was:
a $200.
b $50.
c $30.
d Some other amount.
2 Refer to the above data. The unit cost of a case incurred by the Packing Department in May was:
a $30.
b $50.
c $23.50.
d Some other amount.
3 Refer to the above data. The total cost of all cases transferred to finished goods in May was:
a $64,000.
b $58,800.
c $52,400.
d Some other amount.
4 Refer to the above data. The gross profit (sales minus cost of goods sold) on chemicals sold in May was:
a $54,000.
b $60,000.
c $101,200.
d Some other amount.
5 Refer to the above data. The unit cost of a case charged to cost of goods sold in May was:
a $50.
b $23.50.
c 73.50.
d Some other amount.
CHAPTER 18 NAME #
10-MINUTE QUIZ C SECTION
Tangy Mustard uses a process cost system with two departments: (a) a Mixing Department, and (b) a Bottling Department. During May, Tangy generated $120,000 in revenue by producing 60,000 gallons (10,000 cases) of mustard. The company reduces its work in process inventories to zero each month. Manufacturing costs for May are as follows:
Mixing Bottling
Department Department
Direct materials $7,500 $2,500
Direct labor 2,300 1,450
Manufacturing overhead 5,200 3,550
1 Refer to the above data. The unit cost per gallon of mustard processed by the Mixing Department in May was $______.
2 Refer to the above data. The unit cost per case of mustard incurred by the Bottling Department in May was $______.
3 Refer to the above data. The total cost of the 10,000 cases transferred to finished goods in May was $______.
4 Refer to the above data. Assume that 9,500 cases of mustard were sold in May. Under the LIFO method of inventory valuation, the amount charged to cost of goods sold in May was $______.
______5 Refer to the above data. Assume that $4,000 of finished goods were on hand at
May 1. Under the LIFO method of inventory valuation, finished goods
inventory at May 31 was $______if 9,500 cases of mustard were sold in
May.
CHAPTER 18 NAME #
10-MINUTE QUIZ D SECTION
Household Chemical Company uses a process cost system with two departments: (a) a Mixing Department, and (b) a Finishing Department. During January, its first month of operations, the company generated $90,000 in revenue by manufacturing and selling 400 cases of chemicals. Related manufactured costs are as follows:
Mixing Finishing
Department Department
Direct materials $12,000 $ 400
Direct labor 3,000 6,000
Manufacturing overhead 5,000 3,000
1 Refer to the above data. The unit cost a case processed in the Mixing Department in January was:
a $200. c $30.
b $20. d $50.
2 Refer to the above data. The unit cost of a case incurred by the Finishing Department in January was:
a $30. c $10.
b $23.50. d $22.50.
3 Refer to the above data. The total cost of a case transferred to finished goods in January was:
a $29,400. c $26,200.
b $20,000. d Some other amount.
4 Refer to the above data. The gross profit (sales minus cost of goods sold) on chemicals sold in January was:
a $27,000. c $50,400.
b $30,000. d $60,600.
5 Refer to the above data. The unit cost of a case charged to cost of goods sold in January was:
a $50. c $25.
b $73.50 d $225.
SOLUTIONS TO CHAPTER 18 10-MINUTE QUIZZES
QUIZ A QUIZ B
1 C 1 B
2 B 2 C
3 B 3 B
4 C 4 C
5 C
QUIZ C
1
($7,500 + $2,300 + $5,200)/60,000 gallons = $0.25
2
($2,500 + $1,450 + $3,550)/10,000 cases = $.75
3
($0.25 x 6 gallons/case) + $.75 = $2.25 x 10,000 = $22,500
4
9,500 cases x $2.25 = $21,375
5
$4,000 + (500 cases x $2.25) = $5,125
QUIZ D
1 D
2 B
3 A
4 D
5 B
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Financial and Managerial Accounting: The Basis for Business Decisions, 13e 43