Chapter 4: Process Costing Flashcards
Conversion Costs
Combination of Direct Labour and Manufacturing Overhead costs
Examples of companies who use process costing
Reynolds Aluminum, Scott Paper, General Mills, Petro-Canada, Coppertone, and Kelloggs
When a department receives goods from the preceding department it will need to show the amount of cost transferred as a _______________________.
Separate cost entry
Process costing
Procedure that management accountants have developed to allocate each input type’s charged cost to completed units and to in-process units
Similarities between job-order and process costing:
1) The two systems have a common purpose, which is to assign materials, labour, and overhead costs to products and to provide a mechanism for computing unit costs
2) The two system maintain and use the same basic accounts, including manufacturing overhead, raw materials, work in process, and finished goods, and the flow of costs through the accounts is basically the same in both systems
Differences between job-order and process costing
1) The flow of units in a process costing system is more or less continuous
2) These units are indistinguishable from one another
3) each order is just one of many that are filled from continuous flow of virtually identical units from the production line, unlike in a job-order setting, where each unit is unique
Note: Process costing situation
Although each unit of product will absorb an input in the same way as another unit, the inputs themselves need not be applied during production at the same time (stage of production) or at the same rate
Example from the note
During production, at a given stage of the process, the in-process units may have 80% materials added, while only 60% of labour plus overhead has been applied to those units.
Therefore the cost per unit has to be determined separately for each type of input (direct material cost per unit, conversion cost per unit)
In a job-order shop:
The cost object is the job; at any given stage in production process of a job, exactly the same percentage of completion will have occurred for every type of input
The costs of inputs are assembled first into a total and then unitized
Production report
A report that summarizes all activity in a department’s work-in-process account during a period and that contains three parts: a quantity schedule and a computation of equivalent units, a computation of total and unit costs, and a cost reconciliation.
The _____ is not used in process costing because the focus of this method is on departments
Job cost sheet
The ___________ is the key document in a process costing system
Department production report
Major differences between Job-costing and Process
Can be found exhibit 4-3
Cost accumulation is a __________ process in costing system than in a job-order costing system
Simpler
Processing department
Any location in an organization where work is performed on a product and where materials, labour, or overhead costs are added to the product.
Transferred-in costs
The costs attached to products that have been received from a prior processing department.
This cost will continue to build as it comes from departments (like a snowball rolling down a hill)
Looking at the first processing department, department A, the journal entry for placing materials in production is: (accounts)
This is based on taking materials out of the storeroom using a material requisition form
Work in process - Department A 74,000
Raw Materials 74,000
If other materials are subsequently added in department B, the account entry is: (accounts)
Work in process - Department B XXXX
Raw Materials XXXX
Labour cost tracking in process costing (accounts)
Only necessary to track labor costs incurred in each department opposed to tracing it to specific jobs
Work in process - Department A XXXX
Salaries and Wages Payable XXXX
Overhead costs tracking in process costing (accounts)
** Predetermined overhead rates are usually used to apply overhead costs to departments (or processes), each department receives a portion of the total overhead based on this rate)
Work in process - Department A XXXX
Manufacturing Overhead Applied XXXX
Journal entry used to transfer the costs of the processed units from department A to department B
After processing is completed in one department, the units are transferred to the next department for further processing
Work in process - Department B (graphics) XXXX
Work in Process - department A XXXX
After processing has been completed in department E, the last department, the cost of the completed units are transferred to the finished goods inventory accounts (Accounts)
This company used 5 different departments, hence the use of E, however if a company had only 3 departments it would become C
Finished Goods EEEEE
Work in Process - department E EEEEE
Finally, when a customers order is filled and units are sold, the cost of units is transferred to cost of goods sold (COGS)
Cost of goods sold FFFF
Finished Goods FFFF
Production environments that use a process costing system for deterring product costs are typically highly ____________.
Capital intensive
Labour is usually a small proportion of total manufacturing costs
Conversion cost (equation)
Direct labour cost + manufacturing overhead cost.
Overhead will still come from using ocverhead allocation rate
