Process Costing Lecture Notes

Introduction

• Chapter 5: Process Costing
  • Difference between process costing and job order costing.
  • Process costing: Used for large volumes of similar products (e.g., ice cream, candy).
  • Job order costing: Used for smaller quantities, custom jobs (e.g., kitchen remodels).

Process Costing System

• Cost Assignment

  • In process costing, costs are assigned to each department rather than to individual products or jobs.

• Cost Flow in Process Costing

  • Manufacturing costs (direct materials, direct labor, manufacturing overhead) are assigned to departments.
  • Costs are considered work in process by each department.
  • Units move from one department to the next until completion.
  • Completed units are transferred to finished goods inventory and then to cost of goods sold when sold.

Journal Entries Examples

• Example 1: Raw Materials Requisition (July 31)

  • Assembly Dept: $24,000
  • Finishing Dept: $20,200
  • Credit Raw Materials Inventory: $44,200

• Example 2: Factory Labor Assignment (July 31)

  • Assembly Dept: $31,000
  • Finishing Dept: $5,300
  • Credit Factory Labor: $36,300

• Example 3: Manufacturing Overhead Application (July 31)

  • Assembly Dept: $6,000 (200 hrs @ $30/hr)
  • Finishing Dept: $4,500 (300 hrs @ $15/hr)
  • Credit Manufacturing Overhead: $10,500

• Example 4: Raw Materials Purchase & Labor Costs (July 1 & 31)

  • Purchase: $20,500 of raw materials on account.
  • Factory Labor: $45,700
  • Allocation:
    • Assembly Dept: Raw Materials $15,000, Labor $25,700
    • Finishing Dept: Raw Materials $5,500, Labor $20,000
  • Manufacturing Overhead (130% of Labor):
    • Assembly Dept: $33,410
    • Finishing Dept: $26,000

• Example 5: Transfer of Units (August 31)

  • Assembly Dept to Finishing Dept: $13,300

• Example 6: Transfer to Finished Goods (August 31)

  • Finishing Dept to Finished Goods: $35,700

• Example 7: Sale of Finished Goods (September 3)

  • Sale on Account: $45,000
  • Cost of Goods Sold: $15,250
  • Gross Profit: $29,750

Equivalent Units

• Definition: Measures work done during the period in fully completed units.
• Calculation:
  • Units completed and transferred out + units of ending work in process.
• Examples:
  • 8 glasses half full = 4 full glasses.
  • 4 tables 50% complete = 2 full tables.

Conclusion

• Equivalent units are crucial in determining costs in process costing systems as not all units are fully completed at the end of the period.

End of Lesson