Horngren’s Financial & Managerial

Accounting: The Managerial Chapters

Seventh Edition Sixth edition

ir. drs. Houke Holswilder

h.b.j.j.holswilder@pl.hanze.nl

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved
About this course
• Continuation of Finance from last block
• Focus on budgeting and figuring out how much stuff costs
• Chapter 1 and 7 (self-study, intro to MAC and budgeting)
• Week 1/2: Chapter 3 (process costing)
• Week 3/4: Chapter 8 (budgeting)
• Week 5/6: no class
• Week 7: exam prep

• Solutions to a bunch of exercises (including many that we do not

discuss in class) are on Blackboard
Week 1& 2 MAC
• Introducation to MAC (chapter 1)
• Process Costing (chapter 3)
Process Costing Weighted Average Method (week 1)
Process Costing mixed method (week 2)
Learning Objective
• How can we figure out how much 1 unit (of anything) produced by a
firm costs?
• How to deal with different production lines / processes?
• How to account for products that are in process (i.e. partially completed)?

• Learn about process costing (ch. 3), and how to apply it

• Weighted average method – week 1
• Mixed method – week 2
• Start with classifying costs (ch. 1)
Manufacturing Companies
• Manufacturing companies have three kinds of inventory:
• Raw Materials Inventory (RM) includes materials used to make a product.
• Work-in-Process Inventory (WIP) includes goods that are in the manufacturing
process but are not yet complete.
• Finished Goods Inventory (FG) includes completed goods that have not yet been
sold.
Direct and Indirect Costs
• A direct cost is a cost that can be easily and cost-effectively traced to a cost
object.
• A cost object is anything for which managers want a separate measurement
of cost. Example?
• Costs that cannot be easily or cost-effectively traced directly to a cost object are
indirect costs.
Manufacturing Costs (1 of 2)
• Direct materials (DM) are raw materials used in production.
• Direct labor (DL) is labor of employees working on the products.
• Manufacturing overhead (MOH) is the indirect product costs associated with
production, including:
• Indirect materials
• Indirect labor
• Factory costs for rent, utilities, insurance, etc.
Prime and Conversion Costs
• Prime costs combine the direct costs of direct materials and
direct labor.
• Conversion costs combine direct labor with manufacturing
overhead.

Exhibit 1-6 Prime and Conversion Costs

CC = DL+MOH
Exhibit 1-7 Period Versus Product Costs
Horngren’s Financial & Managerial
Accounting: The Managerial Chapters
Seventh Edition

Chapter 3
Process Costing

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 3)
3.1 Describe the flow of costs
through a process costing system
3.2 Calculate equivalent units of
production for direct materials
and conversion costs
3.3 Prepare a production cost
report for the first department
using the weighted-average
method
Learning Objective 3.1
Describe the flow of costs
through a process costing
system
Flow of Costs Through a Process Costing System (1 of 3)

Exhibit 3-2 Puzzle Me Manufacturing Operations

Flow of Costs Through a Process Costing
System (2 of 3)
Suppose the company’s production costs incurred to make
50,000 puzzles and the costs per puzzle are as follows:

Process
Learning Objective 3.2
Calculate equivalent units of
production for direct materials
and conversion costs
What Are Equivalent Units of Production,
and How Are They Calculated? (1 of 2)
• Companies may have products still in process at the end of the accounting period.
• The total production costs incurred in each process must be split between the
following:
• The units that have been completed in that process and transferred to the
next process. A
• The units not completed and remaining in Work-in-Process Inventory. B
Equivalent Units of Production (1 of 3)
• Equivalent units of production (EUP)
• Measures the amount of materials added to or work done on partially
completed units during a period
• Expressed in terms of fully complete units of output

• We furthermore distinguish between direct material costs and

conversion costs
• For some partially completed products, the direct material costs may already
be 100% incurred  product is complete from the perspective of material
costs
Equivalent Units of Production (3 of 3)
• Puzzle Me has 10,000 units in ending Work-in-Process Inventory that are
100% complete with respect to direct materials cost and 25% completed
with respect to conversion costs.
• The equivalent units in ending Work-in-Process Inventory in terms of direct
materials:

10,000units  100%complete  10,000EUP for DirectMaterials

• The equivalent units in ending Work-in-Process Inventory in terms of

conversion costs:

10,000units  25%complete  2,500EUP for ConversionCost

Learning Objective 3.3
Prepare a production cost
report for the first department
using the weighted-average
method
How Is a Production Cost Report Prepared
for the First Department? (2 of 3)
• A production cost report shows the calculations for the physical flows and the
cost flows of the products.
• Preparing this report involves four steps:
1. Summarize the flow of physical units
2. Compute output in terms of equivalent units of production
3. Compute the cost per equivalent unit of production
4. Assign costs to units completed and units in process
How Is a Production Cost Report Prepared
for the First Department? (3 of 3)
• Two unique terms are used on the production cost report:
• To account for includes the amount in process at the beginning of the period
plus the amount started or added during the period.
• Accounted for shows what happened to the amounts to account for. They are
either still in process B or completed A and transferred out.
Production Cost Report—First Process—
Assembly Department (1 of 12)
The Assembly Department applies
glue to the cardboard and then
presses a picture onto the cardboard.
Operations for this department
include two inputs:
• The direct materials (glue and
cardboard) are added at the
beginning of the process.
• The conversion costs (i.e. the costs
of converting the raw materials into
something else) are added more
evenly throughout the process.
Production Cost Report—First Process—
Assembly Department (1 of 12)
40,000 units were completed in July
-8,000 of which were already started
-42,000 started in July

How many are in process at the end

of July?
Units started this month + units
started previously – units completed
Production Cost Report—First Process—
Assembly Department (2 of 12)
Step 1: Summarize the Flow of Physical Units
The physical units are the actual units that the company will account for
during the period. The Assembly Department had 8,000 units in process
on July 1 and started 42,000 units during the month.

To account for = Beginning Balance + Amount Started =

8,000+42,000=50,000

Accounted for = Transferred out + In Process = 40,000+10,000=50,000

Production Cost Report—First Process—Assembly Department
(3 of 12)

Exhibit 3-6 Production Cost Report—Assembly Department—Physical Units

A
B
Production Cost Report—First Process—
Assembly Department (1 of 12)
Production Cost Report—First Process—Assembly Department
(4 of 12)

Step 2: Compute Output in Terms of Equivalent Units of

Production
The Assembly Department adds all direct materials at the
beginning of the process.
Equivalent Units of Production for Direct Materials:

A
B
Production Cost Report—First Process—
Assembly Department (5 of 12)
Step 2: Compute Output in Terms of Equivalent Units of
Production
The Assembly Department incurs conversion costs evenly
throughout the process.
Equivalent Units of Production for Conversion Costs:
Production Cost Report—First Process—Assembly Department
(6 of 12)

Exhibit 3-7 Production Cost Report—Assembly Department—EUP

E3-25

Materials are added at the beginning of the process; conversion costs are incurred throughout the
process: the ending inventory is 60% complete. The company uses Weighted Average method.

Figure out the values for (a)-(i).

 E3-25

• Note: (a) and (c) must be equal

• (b), (d), and (g) must be equal
• (e) is valued at 100%
• (h) is valued at 60% ()
Exhibit 3-8 Production Cost Report—Assembly Department—Weighted-Average Method

Step 1

Step 2
A
B

Step 3

Step 4
A
B
Exhibit 18A-8 Production Cost Report—Assembly Department—Weighted-Average Method

A
B

Step 3

Step 4
A
B
Exhibit 18A-8 Production Cost Report—Assembly Department—Weighted-Average Method

A
B

Step 3

Step 4
A
B
 E3-25

Materials are added at the

beginning of the process.
Conversion costs are
incurred throughout the
process: the ending
inventory is 60%
complete.
The company uses WA
method.
E3-25 solution

2,200 x $ 4.90 = 10,780

2,200 x $ 3.70 = 8,140
E3-25 solution

500 x $ 4.90 = 2,450

300 x $ 3.70 = 1,110
P18-33A Preparing a production cost report, beginning WIP, no costs transferred in

Learning Objectives 2, 3, 5

Roan Paper Co. produces the paper used by wallpaper manufacturers. Roan’s four-stage process
includes mixing, cooking, rolling, and cutting. On March 1, the Mixing Department had 300 rolls of
paper in process. During March, the Mixing Department completed the mixing process for those 300
rolls and also started and completed the mixing process for an additional 4,200 rolls of paper. The
department started but did not finish the mixing process for an additional 500 rolls, which were 20%
complete with respect to both direct materials and conversion work at the end of March. Direct
materials and conversion costs are incurred evenly throughout the mixing process. The Mixing
Department compiled the following data for March:
Direct Direct Manufacturing Total
Materials Labor Overhead Costs
Allocated
Beginning inventory, Mar. 1 $ 350 $ 245 $ 200 $ 795
Costs added during March 4,940 3,000 3,225 11,165
Total costs $ 5,290 $ 3,245 $ 3,425 $ 11,960

Requirements
1. Prepare a production cost report for the Mixing Department for March. The company uses the
weighted-average method.
Steps
1. Units to account for
2. Units accounted for  calculate EUP for DM and CC
3. Costs to account for
4. Costs accounted for
Units:
Units to account for Physical Units
Beginning work-in-process 300
Step 1:
Started in production 4,700
Total units to account for 5,000

-300 in process at the start and completed 4,700 started

-4,200 started and finished 4,500 completed
-500 started, but not completed 500 in process
Units:
Units to account for Physical Units
Beginning work-in-process 300
Step 1:
Started in production 4,700
Total units to account for 5,000

-300 in process at the start and completed 4,700 started

-4,200 started and finished 4,500 completed
-500 started, but not completed 500 in process
Units accounted for Physical units Equivalent units: Equivalent units:
Direct materials Conversion costs
Completed and 4,500 4,500 4,500
transferred out

Step 2: Ending work-in- 500

process
Total units accounted 5,000
for

Incomplete are at 20% for both DM and CC:

Units:
Units to account for Physical Units
Beginning work-in-process 300
Step 1:
Started in production 4,700
Total units to account for 5,000

-300 in process at the start and completed 4,700 started

-4,200 started and finished 4,500 completed
-500 started, but not completed 500 in process
Units accounted for Physical units Equivalent units: Equivalent units:
Direct materials Conversion costs
Completed and 4,500 4,500 4,500
transferred out

Step 2: Ending work-in- 500 100 100

process
Total units accounted 5,000 4,600 4,600
for
Costs:
Costs to account Direct materials Conversion costs Total costs
for
Beginning work-in- $350 $795
process
Step 3:
Costs added during $4,940 $11,165
period
Total costs to $5,290 $11,960
account for
Divided by: Total
EUP
Costs per
equivalent unit
Costs:
Costs to account Direct materials Conversion costs Total costs
for
Beginning work-in- $350 $445 $795
process
Step 3:
Costs added during $4,940 $6,225 $11,165
period
Total costs to $5,290 $6,670 $11,960
account for
Divided by: Total
EUP
Costs per
equivalent unit
Costs:
Costs to account for Direct materials Conversion costs Total costs
Beginning work-in-process $350 $445 $795
Costs added during period $4,940 $6,225 $11,165
Step 3:
Total costs to account for $5,290 $6,670 $11,960
Divided by: Total EUP
Costs per equivalent unit

Units accounted for Physical units Equivalent units: Equivalent units:

Direct materials Conversion costs
Total units accounted for 5,000 4,600 4,600
Costs:
Costs to account for Direct materials Conversion costs Total costs
Beginning work-in-process $350 $445 $795
Costs added during period $4,940 $6,225 $11,165
Step 3:
Total costs to account for $5,290 $6,670 $11,960
Divided by: Total EUP 4,600 4,600
Costs per equivalent unit $1.15 $1.45

Units accounted for Physical units Equivalent units: Equivalent units:

Direct materials Conversion costs
Total units accounted for 5,000 4,600 4,600
Costs:
Units accounted for Physical units Equivalent units: Equivalent units:
Direct materials Conversion costs
Completed and transferred out 4,500 4,500 4,500
Ending work-in-process 500 100 100
Total units accounted for 5,000 4,600 4,600

Costs to account for Direct materials Conversion costs Total costs

Costs per equivalent unit $1.15 $1.45

Costs accounted for Direct materials Conversion costs Total costs

Completed and
transferred out
Step 4:
Ending work-in-process
Total costs accounted for
Costs:
Units accounted for Physical units Equivalent units: Equivalent units:
Direct materials Conversion costs
Completed and transferred out 4,500 4,500 4,500
Ending work-in-process 500 100 100
Total units accounted for 5,000 4,600 4,600

Costs to account for Direct materials Conversion costs Total costs

Costs per equivalent unit $1.15 $1.45

Costs accounted for Direct materials Conversion costs Total costs

Completed and
transferred out
Step 4:
Ending work-in-process
Total costs accounted for
Costs:
Units accounted for Physical units Equivalent units: Equivalent units:
Direct materials Conversion costs
Completed and transferred out 4,500 4,500 4,500
Ending work-in-process 500 100 100
Total units accounted for 5,000 4,600 4,600

Costs to account for Direct materials Conversion costs Total costs

Costs per equivalent unit $1.15 $1.45

Costs accounted for Direct materials Conversion costs Total costs

Completed and
transferred out
Step 4:
Ending work-in-process
Total costs accounted for
Costs:
Units accounted for Physical units Equivalent units: Equivalent units:
Direct materials Conversion costs
Completed and transferred out 4,500 4,500 4,500
Ending work-in-process 500 100 100
Total units accounted for 5,000 4,600 4,600

Costs to account for Direct materials Conversion costs Total costs

Costs per equivalent unit $1.15 $1.45

Costs accounted for Direct materials Conversion costs Total costs

Completed and
transferred out
Step 4:
Ending work-in-process
Total costs accounted for $5,290 $6,670 $11,960
Questions?
• If not, see you all next week!