Chapter 5Chapter 5

Process Cost Accounting Process Cost Accounting General ProceduresGeneral Procedures

Learning ObjectivesLearning ObjectivesLO1LO1 Recognize the differences between job Recognize the differences between job

order and process cost accounting order and process cost accounting systems.systems.

LO2LO2 Compute unit costs in a process cost Compute unit costs in a process cost system.system.

LO3LO3 Assign costs to inventories, using Assign costs to inventories, using equivalent units of production with the equivalent units of production with the average cost method.average cost method.

LO4LO4 Prepare a cost of production summary Prepare a cost of production summary and and journal entries for one department with journal entries for one department with no no beginning inventory.beginning inventory.

Learning ObjectivesLearning Objectives

LO5LO5 Prepare a cost of production Prepare a cost of production summary summary and journal entries for one and journal entries for one department department with beginning inventory.with beginning inventory.

LO6LO6 Prepare a cost of production Prepare a cost of production summary summary and journal entries for multiple and journal entries for multiple

departments with no beginning departments with no beginning inventory.inventory.

Learning ObjectivesLearning Objectives

LO7LO7 Prepare a cost of production Prepare a cost of production summary summary and journal entries for multiple and journal entries for multiple

departments with beginning departments with beginning inventory.inventory.

LO8LO8 Prepare a cost of production Prepare a cost of production summary summary with a change in the prior with a change in the prior department’s unit transfer cost.department’s unit transfer cost.

Job Order vs. Process Job Order vs. Process CostingCosting

Job order cost systemJob order cost system is appropriate when is appropriate when products are products are manufactured on a manufactured on a special order basis.special order basis.

Process cost systemProcess cost system is is appropriate when similar appropriate when similar goods are manufactured goods are manufactured in a continuous or mass in a continuous or mass production operation.production operation.

Materials and Labor Materials and Labor CostsCosts

The focus of a process system is the factory The focus of a process system is the factory cost centercost center..

In a process cost system, the costs of In a process cost system, the costs of materials and labor are charged directly to the materials and labor are charged directly to the department where they are incurred.department where they are incurred.

Indirect materials that cannot be directly Indirect materials that cannot be directly associated with a particular department are associated with a particular department are charged to factory overhead.charged to factory overhead.

Factory Overhead CostsFactory Overhead Costs Overhead costs are accumulated from the Overhead costs are accumulated from the

various journals in the same manner as in a job various journals in the same manner as in a job order cost system.order cost system.

The applicable factory overhead from a service The applicable factory overhead from a service department is distributed to the production department is distributed to the production departments.departments.

The use of predetermined rates is common in a The use of predetermined rates is common in a process cost system, but overhead is applied to process cost system, but overhead is applied to departments rather than to jobs.departments rather than to jobs.

Product Costs in a Product Costs in a Process Cost SystemProcess Cost System

The total cost of each item produced is the combined The total cost of each item produced is the combined unit costs from the individual departments.unit costs from the individual departments.

Costs are recorded by department according to the Costs are recorded by department according to the following procedures:following procedures: Service department costs are allocated to the Service department costs are allocated to the

production departments.production departments. Costs from prior departments are carried over to Costs from prior departments are carried over to

successive departments.successive departments. Costs of materials and labor directly identifiable Costs of materials and labor directly identifiable

with a department, as well as applied overhead, with a department, as well as applied overhead, are charged to that department.are charged to that department.

Costing InventoriesCosting Inventories The primary problem in inventory costing is The primary problem in inventory costing is

the allocation of total costs between units the allocation of total costs between units finished during the period and units still in finished during the period and units still in process at the end of the period.process at the end of the period.

The calculation of the degree of completion The calculation of the degree of completion of unfinished work in process presents one of unfinished work in process presents one of the most important and difficult of the most important and difficult challenges in process costing.challenges in process costing.

Work in Process Inventories Work in Process Inventories - Stages of Completion- Stages of Completion

1.1. Units started in a prior period and Units started in a prior period and completed during the current period.completed during the current period.

2.2. Units started and finished during the Units started and finished during the current period.current period.

3.3. Units started during the current period Units started during the current period but not finished by the end of the but not finished by the end of the period.period.

Allocating Total CostAllocating Total Cost Total cost must be allocated between:Total cost must be allocated between:

Units finished during the periodUnits finished during the period Units still in process at the end of the Units still in process at the end of the

periodperiod Procedures for assigning costs to Procedures for assigning costs to

inventories:inventories: Average cost methodAverage cost method First-in, first-out (FIFO) methodFirst-in, first-out (FIFO) method

Information Needed for Information Needed for Inventory ValuationInventory Valuation

Accumulate costs for which the Accumulate costs for which the department is accountable.department is accountable.

Calculate the equivalent production for Calculate the equivalent production for the period.the period.

Compute the unit cost for the period.Compute the unit cost for the period. Summarize the disposition of the Summarize the disposition of the

production costs.production costs.

Production ReportProduction Report At the end of the period, the department At the end of the period, the department

manager submits a report showing the manager submits a report showing the following:following:

1.1. Number of units in the beginning work Number of units in the beginning work in process.in process.

2.2. Number of units completed.Number of units completed.3.3. Number of units in the work in process Number of units in the work in process

and their estimated stage of and their estimated stage of completion.completion.

Cost of Production Summary-Cost of Production Summary-One DepartmentOne Department

The reporting of production and The reporting of production and related costs in each department related costs in each department involves the following:involves the following:1.1. Accumulating costs for which the Accumulating costs for which the

department is accountable.department is accountable.2.2. Calculating equivalent production for Calculating equivalent production for

the period.the period.3.3. Computing the unit cost for the period.Computing the unit cost for the period.4.4. Summarizing the disposition of the Summarizing the disposition of the

production costs.production costs.

Journal Entries for One Journal Entries for One DepartmentDepartment

Recording Factory OperationsRecording Factory Operations Work in ProcessWork in Process xxxx

MaterialsMaterials xxxx Work in ProcessWork in Process xxxx

PayrollPayroll xxxx Work in ProcessWork in Process xxxx

Factory OverheadFactory Overhead xxxx Factory OverheadFactory Overhead xxxx

Various AccountsVarious Accounts xxxx

Recording Cost of Goods CompletedRecording Cost of Goods Completed Finished GoodsFinished Goods xxxx

Work in ProcessWork in Process xxxx

Cost of Production Cost of Production Summary-Multiple Summary-Multiple DepartmentsDepartments

When there is more than one department, it is When there is more than one department, it is necessary to keep separate control accounts in necessary to keep separate control accounts in the general ledger for recording the costs of the general ledger for recording the costs of operating each department.operating each department.

A cost of production summary must be A cost of production summary must be prepared for each department along with prepared for each department along with separate journal entries to record the separate journal entries to record the operations of each department and the transfer operations of each department and the transfer of costs.of costs.

Cost of Production Cost of Production Summary-Multiple Summary-Multiple Departments (cont.)Departments (cont.)

Costs accumulated in each department Costs accumulated in each department are transferred to the next department in are transferred to the next department in the production cycle.the production cycle.

The transferred units and their related The transferred units and their related costs are treated as completed units in costs are treated as completed units in the one department and as raw materials the one department and as raw materials in the next department.in the next department.

Cost of Production Cost of Production Summary-Multiple Summary-Multiple Departments (cont.)Departments (cont.)

The transferred-in costs and units from the prior The transferred-in costs and units from the prior department are not included in the calculation of department are not included in the calculation of unit cost and equivalent units on the next unit cost and equivalent units on the next department’s cost of production summary.department’s cost of production summary.

If there is still another department, the first If there is still another department, the first department’s costs must be considered in department’s costs must be considered in transferring cost to the next department.transferring cost to the next department.

The first department’s costs are also considered The first department’s costs are also considered in the costing of the ending work in process in the costing of the ending work in process inventory in the second department.inventory in the second department.

Journal Entries for Journal Entries for Multiple DepartmentsMultiple Departments

Record Direct MaterialsRecord Direct Materials Work in Process – BlankingWork in Process – Blanking xxxx Work in Process – FormingWork in Process – Forming xxxx Work in Process – FinishingWork in Process – Finishing xxxx Factory OverheadFactory Overhead xxxx

MaterialsMaterials xx xx

Record Direct LaborRecord Direct Labor Work in Process – BlankingWork in Process – Blanking xxxx Work in Process – FormingWork in Process – Forming xxxx Work in Process – FinishingWork in Process – Finishing xxxx Factory OverheadFactory Overhead xxxx

PayrollPayroll xx xx

Record Factory OverheadRecord Factory Overhead Work in Process – BlankingWork in Process – Blanking xxxx Work in Process – FormingWork in Process – Forming xxxx Work in Process – FinishingWork in Process – Finishing xxxx

Factory Overhead - BlankingFactory Overhead - Blanking xx xx Factory Overhead – FormingFactory Overhead – Forming xx xx Factory Overhead – FinishingFactory Overhead – Finishing xx xx

Factory OverheadFactory Overhead xxxx Various AccountsVarious Accounts

xx xx Factory Overhead – BlankingFactory Overhead – Blanking xxxx Factory Overhead – FormingFactory Overhead – Forming xxxx Factory Overhead – FinishingFactory Overhead – Finishing xxxx

Factory OverheadFactory Overhead xx xx

Transfers to Various DepartmentsTransfers to Various Departments Work in Process – FormingWork in Process – Forming xxxx

Work in Process – BlankingWork in Process – Blanking xx xx Work in Process – FinishingWork in Process – Finishing xxxx

Work in Process – FormingWork in Process – Forming xx xx Finished GoodsFinished Goods xxxx

Work in Process – FinishingWork in Process – Finishing xx xx

BLANKING BLANKING FORMING FORMING FINISHING FINISHING Department Department DepartmentDepartment Department Department

Finished Goods Not Finished Goods Not TransferredTransferred

Finished goods in a department may not be Finished goods in a department may not be transferred until the following period.transferred until the following period.

These units should be treated as completed These units should be treated as completed and priced out at the full unit price.and priced out at the full unit price.

Their costs should be left in the work in Their costs should be left in the work in process account for financial statement process account for financial statement purposes.purposes.

Change in Prior Change in Prior Department’s Unit Transfer Department’s Unit Transfer CostsCosts

A prior department’s transfers from two A prior department’s transfers from two different periods will often have different different periods will often have different unit costs each month.unit costs each month.

The previous department costs must be The previous department costs must be averaged as a separate grouping so that averaged as a separate grouping so that these transferred-in costs can be properly these transferred-in costs can be properly allocated to the products being produced allocated to the products being produced in the department.in the department.