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Principles of Accounting, Volume 2: Managerial Accounting

5.5 Prepare Journal Entries for a Process Costing System

Principles of Accounting, Volume 2: Managerial Accounting5.5 Prepare Journal Entries for a Process Costing System
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  1. Preface
  2. 1 Accounting as a Tool for Managers
    1. Why It Matters
    2. 1.1 Define Managerial Accounting and Identify the Three Primary Responsibilities of Management
    3. 1.2 Distinguish between Financial and Managerial Accounting
    4. 1.3 Explain the Primary Roles and Skills Required of Managerial Accountants
    5. 1.4 Describe the Role of the Institute of Management Accountants and the Use of Ethical Standards
    6. 1.5 Describe Trends in Today’s Business Environment and Analyze Their Impact on Accounting
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Thought Provokers
  3. 2 Building Blocks of Managerial Accounting
    1. Why It Matters
    2. 2.1 Distinguish between Merchandising, Manufacturing, and Service Organizations
    3. 2.2 Identify and Apply Basic Cost Behavior Patterns
    4. 2.3 Estimate a Variable and Fixed Cost Equation and Predict Future Costs
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Cost-Volume-Profit Analysis
    1. Why It Matters
    2. 3.1 Explain Contribution Margin and Calculate Contribution Margin per Unit, Contribution Margin Ratio, and Total Contribution Margin
    3. 3.2 Calculate a Break-Even Point in Units and Dollars
    4. 3.3 Perform Break-Even Sensitivity Analysis for a Single Product Under Changing Business Situations
    5. 3.4 Perform Break-Even Sensitivity Analysis for a Multi-Product Environment Under Changing Business Situations
    6. 3.5 Calculate and Interpret a Company’s Margin of Safety and Operating Leverage
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  5. 4 Job Order Costing
    1. Why It Matters
    2. 4.1 Distinguish between Job Order Costing and Process Costing
    3. 4.2 Describe and Identify the Three Major Components of Product Costs under Job Order Costing
    4. 4.3 Use the Job Order Costing Method to Trace the Flow of Product Costs through the Inventory Accounts
    5. 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production
    6. 4.5 Compute the Cost of a Job Using Job Order Costing
    7. 4.6 Determine and Dispose of Underapplied or Overapplied Overhead
    8. 4.7 Prepare Journal Entries for a Job Order Cost System
    9. 4.8 Explain How a Job Order Cost System Applies to a Nonmanufacturing Environment
    10. Key Terms
    11. Summary
    12. Multiple Choice
    13. Questions
    14. Exercise Set A
    15. Exercise Set B
    16. Problem Set A
    17. Problem Set B
    18. Thought Provokers
  6. 5 Process Costing
    1. Why It Matters
    2. 5.1 Compare and Contrast Job Order Costing and Process Costing
    3. 5.2 Explain and Identify Conversion Costs
    4. 5.3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage
    5. 5.4 Explain and Compute Equivalent Units and Total Cost of Production in a Subsequent Processing Stage
    6. 5.5 Prepare Journal Entries for a Process Costing System
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  7. 6 Activity-Based, Variable, and Absorption Costing
    1. Why It Matters
    2. 6.1 Calculate Predetermined Overhead and Total Cost under the Traditional Allocation Method
    3. 6.2 Describe and Identify Cost Drivers
    4. 6.3 Calculate Activity-Based Product Costs
    5. 6.4 Compare and Contrast Traditional and Activity-Based Costing Systems
    6. 6.5 Compare and Contrast Variable and Absorption Costing
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  8. 7 Budgeting
    1. Why It Matters
    2. 7.1 Describe How and Why Managers Use Budgets
    3. 7.2 Prepare Operating Budgets
    4. 7.3 Prepare Financial Budgets
    5. 7.4 Prepare Flexible Budgets
    6. 7.5 Explain How Budgets Are Used to Evaluate Goals
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Standard Costs and Variances
    1. Why It Matters
    2. 8.1 Explain How and Why a Standard Cost Is Developed
    3. 8.2 Compute and Evaluate Materials Variances
    4. 8.3 Compute and Evaluate Labor Variances
    5. 8.4 Compute and Evaluate Overhead Variances
    6. 8.5 Describe How Companies Use Variance Analysis
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  10. 9 Responsibility Accounting and Decentralization
    1. Why It Matters
    2. 9.1 Differentiate between Centralized and Decentralized Management
    3. 9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments
    4. 9.3 Describe the Types of Responsibility Centers
    5. 9.4 Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  11. 10 Short-Term Decision Making
    1. Why It Matters
    2. 10.1 Identify Relevant Information for Decision-Making
    3. 10.2 Evaluate and Determine Whether to Accept or Reject a Special Order
    4. 10.3 Evaluate and Determine Whether to Make or Buy a Component
    5. 10.4 Evaluate and Determine Whether to Keep or Discontinue a Segment or Product
    6. 10.5 Evaluate and Determine Whether to Sell or Process Further
    7. 10.6 Evaluate and Determine How to Make Decisions When Resources Are Constrained
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  12. 11 Capital Budgeting Decisions
    1. Why It Matters
    2. 11.1 Describe Capital Investment Decisions and How They Are Applied
    3. 11.2 Evaluate the Payback and Accounting Rate of Return in Capital Investment Decisions
    4. 11.3 Explain the Time Value of Money and Calculate Present and Future Values of Lump Sums and Annuities
    5. 11.4 Use Discounted Cash Flow Models to Make Capital Investment Decisions
    6. 11.5 Compare and Contrast Non-Time Value-Based Methods and Time Value-Based Methods in Capital Investment Decisions
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Balanced Scorecard and Other Performance Measures
    1. Why It Matters
    2. 12.1 Explain the Importance of Performance Measurement
    3. 12.2 Identify the Characteristics of an Effective Performance Measure
    4. 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added
    5. 12.4 Describe the Balanced Scorecard and Explain How It Is Used
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  14. 13 Sustainability Reporting
    1. Why It Matters
    2. 13.1 Describe Sustainability and the Way It Creates Business Value
    3. 13.2 Identify User Needs for Information
    4. 13.3 Discuss Examples of Major Sustainability Initiatives
    5. 13.4 Future Issues in Sustainability
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Thought Provokers
  15. Financial Statement Analysis
  16. Time Value of Money
  17. Suggested Resources
  18. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
  19. Index

Calculating the costs associated with the various processes within a process costing system is only a part of the accounting process. Journal entries are used to record and report the financial information relating to the transactions. The example that follows illustrates how the journal entries reflect the process costing system by recording the flow of goods and costs through the process costing environment.

Purchased Materials for Multiple Departments

Each department within Rock City Percussion has a separate work in process inventory account. Raw materials totaling $33,500 were ordered prior to being requisitioned by each department: $25,000 for the shaping department and $8,500 for the packaging department. The July 1 journal entry to record the purchases on account is:

Journal entry for July 1 debiting Materials Inventory and crediting Accounts Payable for 33,500. Explanation: To record purchase of raw materials.

Direct Materials Requisitioned by the Shaping and Packaging Departments and Indirect Material Used

During July, the shaping department requisitioned $10,179 in direct material. Similar to job order costing, indirect material costs are accumulated in the manufacturing overhead account. The overhead costs are applied to each department based on a predetermined overhead rate. In the example, assume that there was an indirect material cost for water of $400 in July that will be recorded as manufacturing overhead. The journal entry to record the requisition and usage of direct materials and overhead is:

Journal entry for July 1 debiting Work in Process Inventory: Shaping Department 10,179 and Manufacturing Overhead 400, and crediting Materials Inventory 10,579. Explanation: To record direct and indirect material cost for July in the Shaping Department.

During July, the packaging department requisitioned $2,000 in direct material and overhead costs for indirect material totaled $300 for the month of July. The journal entry to record the requisition and usage of materials is:

Journal entry for July 1 debiting Work in Process Inventory: Packaging Department 2,000 and Manufacturing Overhead 300, and crediting Materials Inventory 2,300. Explanation: To record direct and indirect material cost for July in the Packaging Department.

Direct Labor Paid by All Production Departments

During July, the shaping department incurred $15,000 in direct labor costs and $600 in indirect labor. The journal entry to record the labor costs is:

Journal entry for July 1 debiting Work in Process Inventory: Shaping Department 15,000 and Manufacturing Overhead 600, and crediting Wages Payable 15,600. Explanation: To record direct and indirect labor for July in the Shaping Department.

During July, the packaging department incurred $13,000 of direct labor costs and indirect labor of $1,000. The journal entry to record the labor costs is:

Journal entry for July 1 debiting Work in Process Inventory: Packaging Department 13,000 and Manufacturing Overhead 1,000, and crediting Wages Payable 14,000. Explanation: To record direct and indirect labor for July in the Packaging Department.

Applied Manufacturing Overhead to All Production Departments

Manufacturing overhead includes indirect material, indirect labor, and other types of manufacturing overhead. It is difficult, if not impossible, to trace manufacturing overhead to a specific product, and yet, the total cost per unit needs to include overhead in order to make management decisions.

Overhead costs are accumulated in a manufacturing overhead account and applied to each department on the basis of a predetermined overhead rate. Properly allocating overhead to each department depends on finding an activity that provides a fair basis for the allocation. It needs to be an activity common to each department and influential in driving the cost of manufacturing overhead. In traditional costing systems, the most common activities used are machine hours, direct labor in dollars, or direct labor in hours. If the number of machine hours can be related to the manufacturing overhead, the overhead can be applied to each department based on the machine hours. The formula for overhead allocation is:

Overhead Allocation equals Estimated Overhead Costs ($) divided by Expected Annual Activity (machine hours).

Rock City Percussion determined that machine hours is the appropriate base to use when allocating overhead. The estimated annual overhead cost is $340,000 per year. It was also estimated that the total machine hours will be 34,000 hours, so the allocation rate is computed as:

Estimated Overhead Costs ($340,000) divided by Expected Annual Activity (34,000) equals $10 per machine hour.

The shaping department used 700 machine hours, and with an overhead application rate of $10 per direct labor hour, the journal entry to record the overhead allocation is:

Journal entry for July 1 debiting Work in Process Inventory: Shaping Department, and crediting Manufacturing Overhead 7,000. Explanation: To record overhead applied to the Shaping Department.

The finishing department used 910 machine hours, and with an overhead application rate of $10 per direct labor hour, the journal entry to record the overhead allocation is:

Journal entry for July 1 debiting Work in Process Inventory: Finishing Department and crediting Manufacturing Overhead 9,100. Explanation: To record overhead applied to the Finishing Department.

Transferred Costs of Finished Goods from the Shaping Department to the Packaging Department

When the units are transferred from the shaping department to the packaging department, they are transferred at $3.97 per unit, as calculated previously. The amount transferred from the shaping department is the same amount listed on the production cost report in Figure 5.6. The journal entry is:

Journal entry for July 1 debiting Work in Process Inventory: Finishing Department, and crediting work in Process Inventory: Shaping Department 29,775. Explanation: To record the weighted-average method of the cost of goods transferred from the shaping department to the packaging department.

Transferred Goods from the Packaging Department to Finished Goods

The computation of inventory for the packaging department is shown in Figure 5.7.

Costs to account for: Beginning WIP materials 1,600, Beginning WIP Conversion 6,580 Direct Material $2,000, Direct Labor 13,000, Applied Overhead 9,100, Transferred In materials 8,775, Transferred in conversion 21,000 equals Total Costs to Account for $62,055 Units to account for: Beginning WIP 750, Units started into production 7,500, Total units to account for 8,250. Step 1: Units to Assign Costs: Completed and transferred out 6,500, Ending WIP 1,750, Total units to account for 8,250. Step 2: Computing Equivalent Units of Production (WIP completion 40%); Total units, 100 percent Materials Unit, 40 percent Conversion Units, respectively: Completed and transferred out 6,600, 6,500, 6,500; Ending WIP 1,750, 1,750, 700; Total units to account for 8,250, 8,250, 7,200. Step 3: Determining Cost per Equivalent Unit; Costs to account for: Beginning WIP $8,180, 1,600, 6,580; Incurred during the period $26,100, 2,000, 22,100; Transferred in $29,775, 8,775, 21,000; Total costs to account for 62,055, 12,375, 49,680 Equivalent units –, 8250, 7,200; Cost per equivalent unit for dep’t 8.40, 1.50, 6.90. Step 4: Allocating the Costs to Units Transferred to Finished Goods and Partially Completed Units; Transferred out costs (6,500 units times $1.50) plus (6,500 units times $6.90) equals 54,600; End. WIP: materials (1,750 times $1.50) equals $2,625; End. WIP: conversion (700 times $6.90) equals $4,830; End WIP total $2,625 plus 4,830 equals 7,455; Costs to account for $62,055.
Figure 5.7 Inventory Computation for Packaging Department. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

The value of the inventory transferred to finished goods in the production cost report is the same as in the journal entry:

Journal entry for July 1 debiting Finished Goods Inventory and crediting Work in Process Inventory: Packaging Department for $54,600. Explanation: To transfer completed goods into Finished Goods.

Recording the Cost of Goods Sold Out of the Finished Goods Inventory

Each unit is a package of two drumsticks that cost $8.40 to make and sells for $24.99. There are two transactions when recording a sale. One entry is to transfer the inventory from finished goods inventory to cost of goods sold and is at the cost of the product. The second transaction is to record the sale at the sales price. The compound entry to record both transactions for the sale of 500 units on account is:

Journal entry July 1 debiting Cost of Goods Sold and crediting Finished Goods Inventory for $4,200. Explanation: To record the cost of sale of 500 units. Journal entry July 1 debiting Accounts Receivable and crediting Sales for 12,495. Explanation: To record the sale of 500 units.
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