DOC

CHAPTER 5 Process Cost Accounting

By Tina Grant,2014-11-18 09:24
5 views 0
CHAPTER 5 Process Cost Accounting

CHAPTER 5 PROCESS COST ACCOUNTING

    GENERAL PROCEDURES

    Review Summary

     1. Process costing is used when goods of a similar nature are manufactured in a continuous production

    operation. Costs are accumulated by department and divided by units produced to obtain the

    departmental average cost per unit. In a process cost system, materials and labor costs are

    charged to the departments in which they are incurred. Indirect materials and indirect labor that

    cannot be identified with a specific department are charged to Factory Overhead. Actual

    overhead costs are collected in a control account in the general ledger that is supported by a

    subsidiary ledger consisting of factory overhead analysis sheets showing the detailed allocation

    of costs to the various departments. Predetermined overhead rates are used in process costing to

    apply factory overhead to departments.

     2. The primary problem in process costing is the allocation of production costs between the units

    finished during the period and the units still in process at the end of the period. Under the

    average cost method of assigning costs to inventories, the cost of the work in process at the

    beginning of the period is added to the production costs for the current period, and the total is

    divided by the equivalent production to determine the average unit cost. Equivalent production

    is the number of whole units that could have been completed given the production costs

    incurred. To determine equivalent units using the average cost method, the stage of completion

    of units in process at the end of the period must be ascertained. Equivalent units for a period

    may be computed as follows under the average cost method:

     Units completed this period + (Units in Ending WIP x % of completion this period)

     3. In cases where there is no beginning work in process inventory, the equivalent units of

    production can be divided into the total production costs for the period to obtain the average

    cost per unit:

     Total production cost / Equivalent units of production

     The inventory costs can then be allocated between Work in Process and Finished Goods as

    follows:

    Units transferred Cost of finished goods = × Average cost per to finished goods unit

     Cost of work Number of units in Average cost = × % of completion × in process ending work in process per unit

     When production costs are not incurred evenly throughout the production process, the amount

    of materials, labor, and overhead have to be evaluated separately in estimating the stage of

    completion.

     4. A cost of production summary accumulates the materials, labor, and factory overhead costs

    for which a department is accountable. It contains the calculation of equivalent production for

    the period that consists of the units finished during the month plus the equivalent units of work

    in process. It also includes the computations for the unit costs for material, labor, and factory

    overhead that are obtained by dividing the equivalent production into the respective production

    costs for each element. Last, it summarizes the disposition of the production costs to either the

    cost of goods finished during the period or the cost of work in process at the end of the period. 46

Chapter Five Name ________________________________________

     The total costs to be accounted for during the period must equal the total production costs

    accounted for during the period.

     5. A production report submitted by the departmental supervisor to the cost accountant lists the

    number of units in process at the beginning of the month, the number of units finished during

    the month, the number of units in process at the end of the month, and the estimated stage of

    completion of the ending work-in-process inventory. After receiving the production report, the cost

    accountant prepares the cost of production summary by first collecting the period’s production

    costs from summaries of materials requisitions, payroll, and factory overhead analysis sheets.

    The units in process are then converted to equivalent units. The cost of production summary

    can be completed with the computation of the unit costs and the ending inventory costs. After

    preparing the cost of production summary, the accountant can debit Finished Goods and credit

    Work in Process for the cost of the goods finished during the period, and the statement of cost

    of goods manufactured can be prepared.

     6. If there is beginning work-in-process inventory, the accountant considers not only the current

    month’s cost of material, labor, and factory overhead in determining the unit costs for the month

    but also the cost of each element carried over from the prior month. When there are two

    departments, the costs accumulated in the first department for those units completed and

    transferred are transferred to the next department. Although still in process, the transferred

    units and their related costs are treated as completed production in the first department and as

    raw materials added at the beginning of the process in the second department. The calculation

    of unit cost for the month in the second department considers only those costs incurred in that

    department and the equivalent units produced in the department. The transferred-in costs and

    units from the first department are not included in the computation. In determining the cost

    transferred to finished goods and the cost of the ending work in process, however, the prior

    department costs must be considered.

     7. If finished goods have been completed in a department but not yet transferred at the end of the

    month, they are accounted for as ―goods completed and on hand‖ and priced out at the full unit

    cost. For financial statement purposes, the goods still are considered to be work in process

    because they are complete as to the department but not as to the factory. Often the cost from

    prior departments will change from one month to the next, and these costs will have to be

    averaged on a subsequent department’s cost of production summary for the purpose of

    assigning total costs.

     47

    Part I

    Instructions: Indicate your answer in the Answers column by writing a ―T‖ for True or an ―F‖ for False.

    Answers

     1. Job order costing is appropriate when goods are manufactured in a continuous

    or mass production operation. .................................................................. _________

     2. The focal point of process costing is the job. ............................................ _________

     3. The main difference between job order and process costing is the manner in

    which costs are accumulated. ................................................................... _________

     4. A process cost system requires less clerical effort than a job order cost system

    because costs are charged to departments rather than to individual jobs. ... _________

     5. In a process cost system, overhead is applied on the basis of products rather

    than departments. .................................................................................... _________

     6. To compute average unit cost, the cost of the work in process at the beginning

    of the period is added to the production costs for the period, and the total is

    divided by total equivalent production. ..................................................... _________

     7. The calculation of equivalent production under the average cost method

    requires the restatement of goods in process at the end of the period in terms of

    completed units........................................................................................ _________

     8. The primary purpose of process costing is to determine the cost of units

    finished and transferred out of a department during the period and the cost of

    the units in work in process at the beginning of the period. ....................... _________

     9. In computing equivalent production under average costing, the number of units in

    ending work in process is multiplied by the percentage of their completion and

    then added to the units finished this period................................................ _________

     10. A cost of production summary presents the necessary information for inventory

    valuation and serves as the source for summary journal entries. ................ _________

     11. The cost accountant prepares the cost of production summary by first

    collecting the period’s production costs from summaries of material

    requisitions, payroll, and factory overhead analysis sheets. ....................... _________

     12. When the cost of production summary is completed, the total costs to be

    accounted for should be equal to the total production costs accounted for. ....... _________

     13. In computing unit cost for the month when there is beginning inventory, the

    cost of the beginning inventory is added to the monthly production costs before

    dividing by equivalent production. ............................................................ _________

     14. In computing the unit cost of production in a department subsequent to the first,

    the transferred-in costs and units from the prior department are included in the

    computation............................................................................................. _________

     15. If at the end of the period, goods are completed and on hand in the first

    department of a production process that requires two departments, they would be

    included as finished goods for financial statement purposes. ......................... _________ 48

Chapter Five Name ________________________________________

    Part II

    Instructions: In the Answers column, place the letter from the list below that identifies the term that best matches the statement. No letter should be used more than once.

     a. Average cost method f. Cost of production summary

     b. Production report g. Process cost system

     c. Cost center h. Transferred-in cost

     d. Work in process i. Stage of completion

     e. Equivalent production j. Job order cost system

    Answers

    _____ 1. This cost system is appropriate when products are manufactured on a special-order

    basis.

    _____ 2. This is a unit of activity within the factory to which costs may be assigned practically

    and equitably.

    _____ 3. Under this method of process costing, the cost of the beginning work in process is added

    to the production cost for the current period in the unit cost calculation. _____ 4. This is the number of units that could have been completed during a period using the

    production costs incurred during the period.

    _____ 5. This represents the fraction or percentage of materials, labor, and overhead costs of a

    completed unit that has been applied during the period to goods that have not been

    completed.

    _____ 6. This is submitted by the department head indicating the number of units in process at

    the beginning of the period, the number of units completed during the period, and the

    number of units in process at the end of the period and their stage of completion. _____ 7. The cost of units received from a prior department.

    _____ 8. This cost system is appropriate when goods of a similar or homogeneous nature are

    manufactured in a continuous or mass production operation.

    _____ 9. This presents the necessary information for inventory valuation and can also serve as

    the source for summary journal entries.

    _____ 10. This is what units finished but still on hand in a department at the end of the period are

    considered for financial statement purposes.

     49

    Part III

    Instructions: In the Answers column, place the letter of the choice that most correctly completes each item.

    Answers

    _____ 1. For a process cost system, procedures must be designed to:

    a. Value inventory of work still in process

    b. Determine a unit cost for each department

    c. Accumulate materials, labor, and factory overhead costs by departments

    d. All of the above

    _____ 2. A cost of production report for a department shows all of the following except:

    a. Total and unit costs transferred from a preceding department

    b. The cost per job

    c. Unit costs added by the department

    d. Costs transferred to a successor department or to finished goods _____ 3. The beginning work-in-process inventory was 40 percent complete and the ending work-

    in-process inventory was 60 percent complete. The dollar amount of the production cost

    included in the ending work-in-process inventory (using the average cost method) is

    determined by multiplying the average unit costs by what percentage of the total units in

    the ending work-in-process inventory?

    a. 100 percent c. 50 percent

    b. 60 percent d. 40 percent

    _____ 4. An error was made in the computation of the percentage-of-completion of the current

    year’s ending work-in-process inventory. The error resulted in assigning a higher

    percentage-of-completion to each component of the inventory than actually was the case.

    What is the resultant effect of this error on:

    1. The computation of equivalent units in total?

    2. The computation of costs per equivalent unit?

    3. Costs assigned to cost of goods completed for the period?

     1 2 3

    a. Understate overstate overstate

    b. Understate understate overstate

    c. Overstate understate understate

    d. Overstate overstate understate

    _____ 5. Cruz Company had 10,000 units in work in process at January 1 that were 40 percent

    complete. During January, 30,000 units were completed. At January 31, 12,000 units

    remained in work in process and were 40 percent complete. Using the average cost

    method, the equivalent units for January were:

    a. 28,000 c. 37,200

    b. 34,800 d. 26,800

    _____ 6. Using the data given for (5) above, determine how many units were started during

    January:

    a. 20,000 c. 42,000

    b. 28,000 d. 32,000

50

Chapter Five Name ________________________________________

    _____ 7. What are the transferred-in costs as used in a process cost accounting system?

    a. Labor that is transferred from another department within the same plant instead of

    hiring temporary workers from the outside

    b. Costs of the product of a previous internal process that is subsequently used in a

    succeeding internal process

    c. Supervisory salaries that are transferred from an overhead cost center to a

    production cost center

    d. Ending work-in-process inventory of a previous process that will be used in a

    succeeding process

    _____ 8. An equivalent unit of material or conversion cost is equal to:

    a. The amount of material or conversion cost necessary to complete one unit of

    production

    b. A unit of work-in-process inventory

    c. The amount of material or conversion cost necessary to start a unit of production in

    work in process

    d. Fifty percent of the material or conversion cost of a unit of finished goods inventory _____ 9. Which of the following characteristics applies to process costing but not to job order

    costing?

    a. Identifiable batches of production

    b. Equivalent units of production

    c. Work-in-process inventories

    d. Factory overhead applied to production

    _____ 10. In the computation of manufacturing cost per equivalent unit, the weighted average

    method of process costing considers:

    a. Current costs only

    b. Current costs plus cost of beginning work-in-process inventory

    c. Current costs plus cost of ending work-in-process inventory

    d. Current costs less cost of beginning work-in-process inventory

    Part IV

    Journal entries using process costing.

    From the following list of accounts, record the account(s) to be debited and credited for each of the transactions below. Assume that these transactions occur in a company that utilizes a process cost accounting system.

    Accounts Accounts

    Cost of Goods Sold Payroll

    Factory Overhead Various Credits

    Factory OverheadMixing Accounts Payable

    Factory OverheadBlending Work in ProcessMixing

    Finished Goods Work in ProcessBlending

    Materials

     51

    Transaction Debit Credit

     1. Materials and supplies

    purchased on account ..

     2. Direct materials issued

    to both departments and

    supplies issued to the

    factory ........................

     3. Direct labor cost

    incurred in both

    departments and indirect

    labor in the factory ......

     4. Other factory costs

    incurred ......................

     5. Factory overhead

    distributed to both

    departments.................

     6. Factory overhead

    applied to production in

    both departments .........

     7. Units transferred from

    Mixing to Blending......

     8. Units completed in

    Blending and transferred

     ...................................

     9. Units sold (ignore

    recording the revenue on

    the sale) ......................

    52

Chapter Five Name ________________________________________

    Part V

    Cost of production summary using average costing.

    Cobb Manufacturing Company uses a process cost system and average costing. The following production data is for the month of June 2011.

    Production Costs

    Work in process, beginning of month:

     Materials .................................................................. $3,000

     Labor ....................................................................... 1,500

     Factory overhead ...................................................... 500 $ 5,000

    Costs incurred during month:

     Materials .................................................................. $50,000

     Labor ....................................................................... 30,000

     Factory overhead ...................................................... 20,000 100,000

     Total .................................................................. $105,000

    Production Report

     Units

    In process, beginning of month ............................................................. 1,000

    Finished and transferred during month .................................................. 18,000

    In process, end of month....................................................................... 4,000

    Stage of completion for materials, labor, and overhead (ending) ............ One-half

    Stage of completion for materials, labor, and overhead (beginning) ........ One-fourth

    Instructions: Complete the following cost of production summary for Cobb Manufacturing Company. Show computations in spaces provided and round unit costs to three decimal places.

    Cobb Manufacturing Company

    Cost of Production Summary

    For the Month Ended June 30, 2011

    Cost of work in process, beginning of month:

     Materials ............................................................... $

     Labor .....................................................................

     Factory overhead .................................................... $

    Cost of production for month:

     Materials ............................................................... $

     Labor .....................................................................

     Factory overhead ....................................................

    Total costs to be accounted for .................................... $

    Unit output for month:

     Finished during month ............................................

     Equivalent units of work in process, end of month

    (____________________) .................................

     Total equivalent production ................................

     53

Unit cost for month:

     Materials (____________________) ...................... $

     Labor (____________________) ...........................

     Factory overhead (____________________) ..........

     Total .................................................................. $

    Inventory costs:

     Cost of goods finished during month

    (____________________) ................................. $

     Cost of work in process, end of month:

     Materials (____________________) .................. $

     Labor (____________________) .......................

     Factory overhead (____________________) ......

    Total production costs accounted for ........................... $

    Part VI

    Cost of production summary using average costing with two departments.

Hilton Products manufactures one product in two departments on a continuous basis and uses the

    average method of process cost accounting. The following information was reported for the month of

    May 2011.

    Production Costs

     Machining Assembly

    Work in process, beginning of month:

     Cost in Machining ............................... 0 $ 27,000

     Materials ......................................... $ 4,000 $ 800

     Labor .............................................. 3,000 400

     Factory overhead ............................. 2,000 $ 9,000 600 1,800

     Cost incurred during month:

     Materials ......................................... $68,000 $44,000

     Labor .............................................. 51,000 22,000

     Factory overhead ............................. 34,000 153,000 33,000 99,000

     Total ........................................... $162,000 $125,560

    Production Report

     Machining Assembly

     (Units) (Units)

    In process, beginning of month ............................................ 1,000 1,000

    Finished and transferred during month ................................. 5,000 4,000 In process, end of month ..................................................... 2,000 2,000

    Stage of completion as to materials, labor, overhead ............ One-half One-half

54

    Chapter Five Name ________________________________________ Instructions: Prepare a cost of production summary for each department for the month. Show

    computations in the spaces provided.

    Hilton Products

    Cost of Production SummaryMachining

    For the Month Ended May 31, 2011

    Cost of work in process, beginning of month:

     Materials ............................................................... $

     Labor .....................................................................

     Factory overhead .................................................... $

    Cost of production for month:

     Materials ............................................................... $

     Labor .....................................................................

     Factory overhead ....................................................

    Total costs to be accounted for .................................... $

    Unit output for month:

     Finished and transferred to Assembly during month .

     Equivalent units of work in process, end of month

    (____________________) .................................

     Total equivalent production ................................

    Unit cost for month:

     Materials (____________________) ...................... $

     Labor (____________________) ...........................

     Factory overhead (____________________) ..........

     Total .................................................................. $

    Inventory costs:

     Cost of goods finished and transferred to Assembly

    during month (____________________) ............ $ Cost of work in process, end of month:

     Materials (____________________) ...................... $

     Labor (____________________) ...........................

     Factory overhead (____________________) ..........

    Total production costs accounted for ........................... $

     55

Report this document

For any questions or suggestions please email
cust-service@docsford.com