Process Cost Accounting & Cost-Volume-Profit Analysis
This module focuses on measuring costs in process production companies. We explain process production, describe how to assign costs to processes, and compute and analyze cost per equivalent unit. Discuss two of the three topics:
What is meant by equivalent units of production, and why are they important when a process costing system is used?
What are the four steps in accounting for production activity in a period?
Job order costing and process costing are two major costing systems used in manufacturing. Briefly contrast the characteristics of these two systems.
Process Cost Accounting & Cost-Volume-Profit Analysis
This module focuses on measuring costs in process production companies. We explain process production, describe how to assign costs to processes, and compute and analyze cost per equivalent unit. Discuss two of the three topics:
What is meant by equivalent units of production, and why are they important when a process costing system is used?
What are the four steps in accounting for production activity in a period?
Job order costing and process costing are two major costing systems used in manufacturing. Briefly contrast the characteristics of these two systems.
Related questions
Weighted Average Process Costing: | |||||||
Minot Processing Company manufactures one product on acontinuous basis in two departments, Processing and Finishing. Allmaterials are added at the beginning of work on the product in theProcessing Department. During December 2009, the following eventsoccurred in the Processing Department: | |||||||
Units started | 16,000 units | ||||||
Units completed and transferred to Finishing Department | 15,000 units | ||||||
Costs assigned to processing:Raw materials (one unit of rawmaterials for each unit of product started) | $142,900.00 | ||||||
Manufacturing supplies used | 18,000 | ||||||
Direct labor costs incurred | 51,000 | ||||||
Supervisors' salaries | 12,000 | ||||||
Other production labor costs | 14,000 | ||||||
Depreciation on equipment | 6,000 | ||||||
Other production costs | 18,000 | ||||||
Additional information follows: | |||||||
Minot uses weighted average costing and applies manufacturingoverhead to Work-in-Process at the rate of 100 percent of directlabor cost. | |||||||
Ending inventory in the Processing Department consists of 3,000units that are one-third converted. | |||||||
Beginning inventory contained 2,000 units, one-half converted,with a cost of $34,500 ($24,500 for materials and $10,000 forconversion). | |||||||
(a) Prepare a cost of production report for theProcessing Department for December. | |||||||
| Minot Processing Company: Processing Department Cost of Production Report For the Month Ending December 31, 2009 | |||||||
Summary of units in process: | |||||||
Beginning | |||||||
Units started | |||||||
In process | |||||||
Completed | |||||||
Ending | |||||||
Equivalent units in process: | Materials | Conversion | Total | ||||
Units completed | |||||||
Plus equivalent units in ending inventory | |||||||
Equivalent units in process | |||||||
| Total cost to be accounted for and cost per equivalent unit in process: | |||||||
Beginning work-in-process | $ | $ | $ | ||||
Current costs | |||||||
Total cost in process | $ | $ | $ | ||||
Equivalent units in process | + | + | |||||
Cost per equivalent unit in process | $ | $ | $ | ||||
Accounting for total costs: | |||||||
Transferred out | $ | ||||||
Ending work-in-process: | |||||||
Materials | $ | ||||||
Conversion | |||||||
Total cost accounted for | $ | ||||||
(b) Prepare an analysis of all changes inWork-in-Process. | |||||||
Work-in-process: | |||||||
Beginning | $ | ||||||
Current manufacturing costs: | |||||||
Direct materials | $ | ||||||
Direct labor | |||||||
Applied overhead | |||||||
Total | $ | ||||||
Cost of goods manufactured | |||||||
Ending | $ | ||||||
AirComp Corporation produces component parts for the aircraftindustry. In prior years, they maintained a job-costing systemconsisting of direct materials and direct labor cost andmanufacturing overhead. Manufacturing overhead was allocated toproduction jobs using a single-indirect cost allocation rate, whichwas $115 per direct labor hour.
For 20x1, the Company decided to change the method of allocatingmanufacturing overhead to production jobs from the single-indirectcost allocation approach to the activity-based costing (âABCâ)indirect cost allocation approach. For purposes of developing theABC allocation rates, AirCompâs cost accounting team prepared thefollowing analysis:
Activity | Cost Driver | Allocation Rate |
Material handling | Parts handled | $0.40 |
Lathe work | No. of lathe turns | $0.20 |
Milling | Machine hours | $20.00 |
Grinding | No. of parts ground | $0.80 |
Testing | No. of units tested | $15.00 |
For 20x1, AirCompâs cost accountant team prepared the followinganalysis of the direct costs and indirect cost activities for Job100 and Job 200, the only production jobs in process for theperiod:
Job 100 | Job 200 | |
Direct materials cost | $9,700 | $59,900 |
Direct labor cost | $750 | $11,250 |
No. of direct manufacturing labor hours | 25 | 375 |
No. of parts ground | 500 | 2,000 |
No. of lathe turns | 20,000 | 60,000 |
Machine hours | 150 | 1,050 |
No. of units produced during period (all are tested) | 10 | 200 |
Required
1.For each job, determine total per unit cost using direct laborhours to allocate manufacturing overhead to each job.
2.For each job, determine total per unit cost using anactivity-based costing approach to allocate manufacturing overheadcost to job.
3.Compare the per unit cost figures for each job computed instep a. and step b., above. Why do the new ABC approach differ fromthe single-indirect cost allocation systems differ in the amount ofthe per unit indirect cost allocated to each job (i.e. what was theimplications of the cost allocation method change on the amount ofper unit cost allocated to each job and what factors caused theobserved changes).
4.How might AirComp Corporation use the information from ABCallocation approach to better manage its business, i.e. what arethe advantages of using an activity-based costing approach?
All questions have to do with cost accounting systems,more in particular, process cost systems.
Complete each of the following statements by writing theappropriate words or amounts in the answers blanks.
1-5. Identify whether the process cost or job order cost systemwould be more appropriate for each of the followingbusinesses:
1. accounting firm 1. ____
2. breakfast cereal manufacturer 2. ____
3. ship construction 3. ____
4. pharmaceuticals company 4. ____
5. computer chip manufacturer 5. ____
6. The number of units that could have been completed within agiven accounting period with respect to direct materials andconversion costs is the 6. ____
7. Direct labor and factory overhead are referred to as 7.____
8â9. Oslo Manufacturing incurred $72,000 of direct materialscosts, direct labor costs of $24,500, and factory overhead of$20,500. If 1,000 direct materials equivalent units and 900conversion equivalent units were manufactured, then:
8. The equivalent unit cost for direct materials is 8. $____
9. The equivalent unit cost for conversion is 9. $____
10. The periodic report prepared for each processing department,summarizing (1) the units for which the department is responsibleand their disposition and (2) the costs charged the department andtheir allocation, is termed the 10. ____
11. The method of inventory costing that assumes the unitproduct costs should be determined separately for each period inthe order in which the costs were incurred is 11. ____
12â15. In a process cost system, the cost of goods completed andthe ending inventory valuation are determined by using thefollowing four steps:
12. ____
13. ____
14. ____
15. ____
16â17. The transferred costs of completed production inDepartment A using a process cost system include:
16. ____
17. ____
18â20. The three categories of units to be assigned cost for anaccounting period in a process cost system are:
18. ____
19. ____
20. ____
21â24. Department W had 8,000 units in work in process that were30% converted at the beginning of the period at a cost of $16,400.During the period, 15,000 units of direct materials were added at acost of $48,000, 16,000 units were completed, and 7,000 units were40% completed. The first-in, first-out cost method is used and allmaterials are added at the beginning of the process. Direct laborwas $30,000, and factory overhead was $54,000 during theperiod.
21. The number of equivalent units of conversion for the period was21. ____
22. The total conversion costs for the period were 22. $____
23. The conversion cost of the units started and completed duringthe period was 23. $____
24. The conversion cost of the 7,000 units in process at the end ofthe period was 24. $____
Indicate the titles of the accounts to be debited and creditedin recording the selected transactions given below by inserting theletter or letters of the account titles listed in the appropriatecolumns. (Do not record the amounts.)
ACCOUNTS
A. Accounts Payable E. FactoryOverheadâDepartment A I. Sales
B. Accounts Receivable F.Factory OverheadâDepartment B J. Wages Payable
C. Cash G. Finished GoodsK. Work in ProcessâDepartment A
D. Cost of Goods Sold H.Materials L. Work inProcessâDepartment B
TRANSACTIONS | Debit | Credit | ||
0. Paid cash for wages owed, $47,000............................................................. | J | 0. ____ | C | 0. ____ |
1-2. Materials requisitioned for use in Department A,$36,000, of which $31,500 entered directly into the product..................................................... |
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3-4. Labor in Department A, $13,000, was used directlyin the manufacture of the product..................................................................................................... |
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5-6. Factory overhead applied to production inDepartment A, $6 per machine hour..................................................................................................... |
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| 7-8. Goods finished in Department A and transferred toDepartment B, $79,000............................................................................................................... |
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9-10. Goodsfinished in Department B and transferred to finished goods,$114,000............................................................................................................. |
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11-12. Cost of finishedgoods sold, $126,374......................................................... | 11. ____ | 12. ____ |
