PROCESS COSTING
PROCESS COSTING VERSUS JOB COSTING
This will be our first video in the process cost series discussing the differences between top costing and process costing. Let us first talk about job costing. As we have talked before in job costing, we can have three different job costing accounts: Job 100, Job 101, Job 102; and each of those jobs will have a certain amount of product cost. Direct material, direct labor, and overhead are what make up our product cost. Once we have completed those jobs, they move into finished goods, we simply sell the job, and it becomes cost of goods sold. Now if you look at this into t-accounts, we see materials move to work in process. Labor (whether it be direct or indirect) are credited to wages payable and are applied to work in process. Remember, our materials and our labor are a direct cost—they are directly traceable to a job. Overhead is applied to work in process, the sum allocation rate we have created based on estimates in a cost driver. Then once the job is completed, it moves from work in process with a credit to finished goods with a debit. Then we sell the good, credit finished goods, debit cost of goods sold. So in job costing, we can’t have individual work in process account for every job, whereas in process costing we will have a work in process account for process that a product may have to go through. So remember, process costing is when we continually produce the exact same product over and over; for example, number two pencils. In this scenario, let’s say we are creating Jelly Belly jellybeans. So the first process the jelly bean has to go through is the center, we have to create the center of the product first. In the centers process, we are going to need a certain amount of direct materials, a certain amount of direct labor, and a certain amount of manufacturing overhead. Then once the center of the jelly belly is complete, the center is then transferred to the shells process. In the shells process we need additional materials, labor and overhead because it’s likely that we have different labor (different people) completing the shells process than were completing the centers process. So we have different labor, we probably have different types of materials and it may be in a different building altogether. Then once the shells have been added to the jelly belly, they must be packaged. The shelled JellyBellies would be moved to packaging, where we would likely need more materials, labor and overhead. Then once it goes through the final process, it is transferred into finished goods, where it waits to be sold, and once it is costed as costs of goods sold. If we look at this process in T accounts we find again where our materials move into each process as they’re needed. Labor moves into each process as it is needed and overhead is applied to each process as it is needed. Once the product gets through the final process, it moves into finished goods and waits to be sold, then it moves into cost of goods sold.
PROCESS COSTING & EQUIVALENT UNITS
This is the second video in our process costing series, we’ll actual be looking at the computation of equivalent units. So the three things we need to know when we’re using process costing, we’ll call these the building blocks of process costing: the first one is the fact that we’re not going to distinguish between all three product costs, which are direct materials, direct labor, and overhead. In process costing, we really separate the three into two categories, the first one being direct materials, the second category being conversion cost. And recall that conversion costs are made up of your direct labor and your manufacturing overhead. We’ll also need to know the idea of equivalent units, which we’re going to talk about here in a second, as well as the inventory flow assumption that we’re considering. We’re going to focus on the weighted average inventory flow assumption for a couple reasons. Number one, it is the easiest to use. Companies in the real world mainly use it. First in first out is a little more complicated, so it can be a little more costly…and the difference in the results between the two are very negligible. The only difference is how beginning inventory gets treated. So let’s first look at the computation of equivalent units. So here I’ve given us a timeline to look at and we can see that we’re looking at golf balls. And also, we need to know in process costing, typically we think of conversion cost as being added evenly throughout the process of the product. So as we can see here in blue, the conversion costs are added evenly throughout this process from beginning until the product is 100% complete. And if we look at materials, we have two different kinds of materials: rubber, which is added at the very beginning of the process; then we have packaging which is added at the very end of the process. And we notice that the golf balls are 80% complete, or 5,000 of them are 80% complete at the end of the period that we are discussing. So what we see here is that if rubber is added at the very beginning of the process, then they’re all completed as to rubber. Rubber won’t be added any more during the process. However, packaging isn’t added until the very end of the process, so what we can derive from this information is that we have 5,000 equivalent units as to rubber because rubber has been completely added at the very beginning of the process. Packaging, however, is not added until the end of the process. If we’re only 80% through the process, then none of the packaging has been added therefore we have no equivalent units as to packaging materials. And we need to also compute equivalent units as to conversion costs. Well if conversion costs are added evenly throughout the process and we have 5,000 golf balls that were started but not yet finished, and they’re 80% complete, then 80% of 5,000 golf balls…we’ve got an equivalent of 4,000 that have been completed with the amount of costs that have been added.
So let’s look at an example that isn’t really a product or job, but colleges and universities use the equivalent unit concept to describe the number of faculty as well as the number of students. The University of GA has about 2,000 full-time faculty and 400 part-time faculty. Assume the following:
1. A full-time faculty member teaches six courses per year.
2. 100 part-time faculty teach three courses per year
3. 300 part-time faculty teach two courses per year
What is the “full-time equivalent” faculty – the number of equivalent units of faculty?
PROCESS COSTING – STEPS 1 & 2
This is the third video in the process costing series. We will be looking at creation of scuba masks. Our scuba masks are actually going to go through two different processes. The first process is the shaping process, which will actually focus most of our time on. Then we will transfer to the second department, which is the insertion process. This particular video is going to focus on the first process, the shaping process. Like we discussed earlier, each process has materials, labor, and overhead that will be applied to the process. We will eventually have a shaped mask as our outcome. For this particular process in our shaping process, we can draw our timeline like we did before. We find that conversion cost, as we anticipate are spread evenly throughout production process. Direct materials in this department are added at the beginning of the process. We also find that 40,000 masks have been completed and transferred out by the end of the period, they are 100% complete and moved to the next process. However, 10,000 masks were started but not completed so they remain in ending work in process in our shaping process; they are 25% complete. Step 1 in the process costing scenario is we have to summarize the flow of physical units. The first thing in this step is to total our physical units to account for how many individual units were worked on, completed or not, and then we have to show how we accounted for them. What happened to those products? Are the finished, transferred out, or are they still in our work in process inventory? So if we look at our spreadsheet here, we find our flow of physical units, the units we need to account for. We had none in beginning inventory, then we started production 50,000 units, so we need to be able to account for all those units, 50,000 masks. So the way we accounted for them is we completed and transferred out 40,000 masks during the period. Plus, we still had 10,000 masks in ending work in process that were not completed. 50,000 masks have been accounted for. Step 2 of the process is to compute the output in terms of equivalent units. I have given us our timeline, conversion costs are added evenly throughout the process. Direct materials are added at the beginning. 40,000 are completed and transferred out, but we still have 10,000 in ending work in process. We need to compute equivalent units for what we have completed and transferred out as well as what’s still in work in process. If a unit is completed and out, it is 100% complete as to materials and conversion. Those 40,000 units are all equivalent units because they are completed units. As for the 10,000 in work in process however, they are only 25% complete as to conversion costs but they are 100% complete as to direct material because they were added at the beginning of the process. We can see under our direct materials, the 40,000 that were transferred out are all complete as to materials and all complete as to conversion. The 10,000 left in ending work in process are 100% complete as to direct materials, so we have 10,000 units in direct materials; but only 25% of that was completed as to conversion, so equivalent units as to conversion is only 2,500. So we have 50,000 equivalent units as to direct materials, but we have 42,500 equivalent units as to conversion costs. Now, what if instead of direct materials being added at the beginning of the process, they were added at the end of the process? How would that change your computation of direct materials? I would like for you to think about that, pause for a moment, and then we will look at the answer. In this situation, if direct materials are added at the end of the process, then we only have 40,000 units completed as to materials. Because those 10,000 that are still in work in process haven’t gotten to the point where direct materials are added so none of them are complete as to materials. We still have 2500 that are complete as to conversion. So we have 40,000 complete as to materials, and 42,500 completed as to conversion. Let’s look at a quick example.
The Frying Department at Crinkle Chips has 110,000 partially completed units in work in process at the end of March. All of the direct materials had been added to these units, but the units were only 68% of the way through the conversion process. In addition, 1,200,000 units had been completed and transferred out of the Frying Department to the Packaging Department during the month.
1. How many equivalent units of direct materials and equivalent units of conversion costs are associated with the 1,200,000 units completed and transferred out?
2. Compute the equivalent units of direct materials and the equivalent units of conversion costs associated with the 110,000 partially completed units still in ending work in process.
3. What are the total equivalent units of direct materials and total equivalent units of conversion costs for the month?
We need to set up our spreadsheet to where we have our units accounted for. We have 1.2 million units that are completed and transferred out, and we still have 110,000 still in work in process that are 68% through conversion process. The total units we have accounted for are 1,310,000 units. If we compute equivalent units for direct materials and conversion, we first find that all of the materials have been added to these units. They were added at some point in the process prior to 68% of the way through. So all of them are completed as to materials. 68% are completed as to conversion costs. The ones that are completed and transferred out are all equivalent units because they are completely through the process. The ending work in process is the one we really have to worry about. They are 100% complete as to direct materials, the entire 110,000. However, 68% through the conversion process. So 68% of 110,000 is 74,800. To compute the total equivalent units for direct materials is 1,310,000. And total equivalent units for conversion is 1,274,800.
PROCESS COSTING – STEPS 3, 4, & 5
We are continuing on with our process costing series. In this video we are going to continue on with the steps used in process costing. Now that we have accounted for our units and computed equivalent units, we can now summarize for the total costs to account. In this slide, you can see the shaping department costs that were incurred while working on those 50,000 masks that we accounted for in an earlier video. We have our beginning work in process costs, our direct materials costs, our conversion costs, and our total costs that we need to account for: $208,000. We have divided that out between materials and conversion in our spreadsheet. So our total costs that we need to account for being $208,000. Now if we use that number and pull it apart to the $140,000 in direct materials that we need to account for and the $68,000 in conversion costs to account for, pulling from that spreadsheet, taking the cost and dividing it by the total equivalent units that we computed in step 2. 50,000 equivalent units as to direct materials and 42,500 equivalent units as to conversion costs, we get a cost per equivalent unit of $2.80 for direct materials and $1.60 for conversion costs. Once we have computed cost per equivalent units, we can use this cost to assign total cost to units that are completed and transferred out as well as costs in our ending work in process. Here we have our equivalent units as to materials and conversion that were transferred out 40,000 units, multiplied times the cost per unit just calculated in step 4, gives us the cost assigned to the units that were completed and transferred out. Per direct materials $112,000 and per conversion $64,000. Now the ending work in process had 10,000 equivalent units as to materials multiplied by $2.80 gives us $28,000 assigned to units in ending work in process per materials. For conversion, only 25% of them were complete so 2,500 equivalent units as to conversion times the $1.60 per equivalent unit gives us $4,000 assigned to work in process as a conversion cost. Giving us total costs accounted for of $208,000. Let’s try an example:
Tristan Company produces its product using a single production process. For the month of August, the company determined its cost per equivalent unit to be as follows:
Direct materials Conversion Costs
Cost per equivalent unit $4.20 $2.75
During the month, Tristan completed and transferred out 410,000 units to finished goods inventory. At month end, 86,000 partially complete units remained in ending work in process inventory. These partially completed units were equal to 69,000 equivalent units of direct materials and 50,000 equivalent units of conversion costs.
1. Determine the total cost that should be assigned to units completed and transferred out and units ending in work in process inventory
2. What was the total costs accounted for?
3. What was Tristan’s average cost of making one unit of its product?
The first thing we want to do is determine the cost that should be assigned to the units completed and transferred out. These units were 410,000 transferred to finished goods. The average cost of a unit is $4.20 for materials and $2.75 for conversion. We would take the total cost per unit times the total completed and we would find that the total cost assigned to units completed and transferred out is $2,849,500. To compute the total cost that should be assigned to units in ending work in process, we know we have 86,000 units in ending work in process, of those partially completed units 69,000 are equivalent as to direct materials and 50,000 are equivalent as to conversion. To find the cost assigned to this ending inventory, we would take direct materials cost $4.20 times equivalent units as to direct materials 69,000 plus $2.75 times equivalent units as to conversion cost 50,000 and that gives us our total cost of ending work in process of $427,300. Therefore the total cost that we have accounted for is the total cost of units completed and units in work in process is $3,276,800. Therefore, Tristan’s average cost per unit is the cost per equivalent unit of materials plus the cost per equivalent units of conversion cost giving us $6.95
PROCESS COSTING – JOURNAL ENTRIES WITH EXAMPLES
In this video of our process costing series, we are going to be looking at how to journalize entries involved with the process costing system. So in making journal entries in a process costing system, it is very similar to when we do job order costing except that the product cost or the manufacturing costs are assigned to processing departments rather than individual jobs. At the end of the month, a journal entry must be made to transfer the cost to the next processing department. For example, if we had direct materials requisition for use by department one, for job costing we would debit work in process and credit materials. Exact same thing in process costing, except we really want to identify the department that it is going to. If materials were requisitioned to the shaping department, we would put “Work in Process – Shaping” and we would credit our materials for the amount of materials being requisitioned. So it is very similar to job costing. When it comes to labor, time records show that $21,250 of direct labor was used in department 1 during October, this is the journal entry we would make. Normally under job costing, we would debit work in process for our labor and credit wages payable. Similar situation in process costing, except we want to identify the processing department that is being affected by this labor is this case it’s shaping. So we debit work in process inventory shaping, and credit wages payable. Manufacturing overhead is allocated to the department using the company’s predetermined overhead rate. Exactly what we would do for the job costing, the department’s overhead rate is $50 per machine hour and the department used 935 machine hours. We are specifically talking about the shaping department, so we would debit work in process inventory shaping, and credit manufacturing overhead for the amount being allocated to the department
PROCESS COSTING – SECOND DEPARTMENT
Up to this point, in our process costing series we have discussed process costing within one department. However, we need to discuss how costs flow from one department to the next. In our example we were talking about ski masks. We talked about how costs are in the shaping process—the first department—and how they are allocated to each unit produced. However, what happens when those costs are transferred to a second or future department? We have discussed the shaping process, now we will discuss how that cost comes down to the insertion process as well as additional materials, labor and overhead being applied to the second process, eventually giving us a completed product. Let’s look at our timeline for the insertion department. We have our transferred in costs from shaping, those 40,000 units from the shaping department that were completed and transferred out of shaping and transferred in to insertion. We again see how our conversion costs are added evenly throughout the production. We also see how 38,000 masks were completed and transferred out of the insertion department into finished goods. We can also see 7,000 masks that have been started but not completed that are remaining in ending work in process. Those units are 30% complete as to conversion, they are 0% complete as to direct materials because direct materials are added at the end of the insertion process. So if we look at output in terms of equivalent units, we find that completed and transferred out they were 100% complete as to materials and conversion. 38,000 completed as to materials and conversion. 7,000 units in ending work in process are 0 equivalent units as to materials and 2,100 units are equivalent as to conversion. Notice in the transferred in column, they are all equivalent units as to transferred in cost. What we need to know is the cost of being transferred in as a prior processing department, those costs are considered 100% complete as to transferred in costs because that is added at the beginning of the process. All units, whether completed or still in ending work in process are considered 100% complete as to transfer in costs.
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