process cost systems

Prepared by: C. Douglas Cloud Professor Emeritus of AccountingPepperdine University

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Process Cost Systems

Chapter 18Chapter 18Student VersionStudent VersionThese slides should be viewed using the presentation mode (left click your mouse on the icon).

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Learning Objective 1

Describe process cost systems.


Process Cost System

A process manufacturer produces products that are indistinguishable from each other using a continuous production process.

The cost accounting system used by process manufacturers is called the process cost system.

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Comparing Job Order and Process Cost Process cost systems are used to

manufacture homogeneous products. Examples are: Tennis balls Motor oil Candy bars Soft drinks

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Cost Flows for a Process Manufacturer

a. The cost of materials purchased is recorded in the materials account.

a. The cost of materials purchased is recorded in the materials account.

Materials

a. Purchased

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(continued)

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LO 1LO 1Cost Flows for a Process Manufacturer

b. The cost of direct materials used by the Mixing and Packaging departments is recorded in the work in process accounts for each department.

b. The cost of direct materials used by the Mixing and Packaging departments is recorded in the work in process accounts for each department.

Materials

a. Purchased

Work in Process– Mixing Department

b. Direct materials

Direct materials

Work in Process– Packaging Department

b. Direct materials

(continued)

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c. The cost of direct labor used by the Mixing and Packaging departments is recorded in the work in process accounts for each department.

c. The cost of direct labor used by the Mixing and Packaging departments is recorded in the work in process accounts for each department.


c. Direct labor


c. Direct labor

(continued)

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MaterialsFactory Overhead– Mixing Department

d. Indirect materials

Indirect materials

Factory Overhead– Packaging Department

d. Indirect materials


d. The cost of indirect materials is recorded in the factory overhead accounts for each department.

d. The cost of indirect materials is recorded in the factory overhead accounts for each department.

(continued)

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Factory Overhead– Mixing Department

d. Depreciation of factory machinery



d. Depreciation for each department is recorded, and its related accumulated depreciation account is credited.

d. Depreciation for each department is recorded, and its related accumulated depreciation account is credited.

d. Depreciation of factory machinery

(continued)

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d. Utilities



d. Other factory overhead costs, such as utilities and indirect labor, are recorded.

d. Other factory overhead costs, such as utilities and indirect labor, are recorded.

d. Utilities

(continued)

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d. Factory overhead incurred



d. In Exhibit 3 (in your textbook) these items are combined as factory overhead incurred.

d. In Exhibit 3 (in your textbook) these items are combined as factory overhead incurred.


(continued)

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b. Direct materials

c. Direct labor

e. Factory overhead applied


e. The factory overhead incurred in the Mixing Department is applied to the work in process account.

e. The factory overhead incurred in the Mixing Department is applied to the work in process account.

(continued)

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b. Direct materials

c. Direct labor



e. The factory overhead incurred in the Packaging Department is applied to the work in process account.

e. The factory overhead incurred in the Packaging Department is applied to the work in process account.

(continued)

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b. Direct materials

c. Direct labor


f. The cost of units completed in the Mixing Department is transferred to the Packaging Department.

f. The cost of units completed in the Mixing Department is transferred to the Packaging Department.


b. Direct materials

c. Direct labor


f. Costs of units transferred out

f. Costs of units trans-ferred in

(continued)

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g. The cost of units completed in the Packaging Department is transferred to Finished Goods.

g. The cost of units completed in the Packaging Department is transferred to Finished Goods.

b. Direct materials

c. Direct labor


f. Costs of units trans-ferred in

Finished Goods

g. Costs of units transferred in

g. Costs of units transferred out


(continued)

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h. The cost of units sold is transferred to Cost of Goods Sold.

h. The cost of units sold is transferred to Cost of Goods Sold.

Finished Goods

g. Costs of units transferred in

Cost of Goods Sold

h. Cost of goods sold

h. Cost of goods sold

(continued)

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Prepare a cost of production report.


Cost of Production ReportLO 2LO 2

Preparing a cost of production report requires making a cost flow assumption.

Like merchandise inventory, costs can be assumed to flow through the manufacturing process using one of several methods.

In the following example, the first-in, first-out (FIFO) method is used because it is often the same as the physical flow of units.


Determine the Units to be Assigned Costs

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Step 1:Step 1:FD


Compute Equivalent Units of Production Whole units are the number of units

in production during a period, whether completed or not.

Equivalent units of production are the portion of whole units that are complete with respect to either materials or conversion (direct labor and factory overhead) costs.

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LO 2LO 2Compute Equivalent Units of Production

A 1,000-gallon batch (vat) of ice cream is only 40% complete in the mixing process on May 31. Thus, the batch is only 40% complete as to conversion costs.

Conversion CostsConversion CostsStep 2:Step 2:

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Conversion Equivalent Units

To compute equivalent units for conversion costs, it is necessary to know how direct labor and factory overhead enter the manufacturing process.

It is assumed that Frozen Delight incurs conversion costs evenly throughout its manufacturing process.

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Conversion Equivalent UnitsLO 2LO 2

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LO 2LO 2Determine the Cost per Equivalent Unit

Step 3:Step 3:

Direct Materials Cost per Equivalent Unit

Total Direct Materials Cost for the Period

Total Equivalent Units of Direct Materials=

Conversion Cost per Equivalent Unit

Total Conversion Costs for the Period

Total Equivalent Units of Conversion Costs

=



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$66,000

60,000 gallons=

$1.10 per gallonDirect Materials Cost per Equivalent Unit =

Direct MaterialsDirect Materials

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Conversion CostConversion Cost


$17,775

59,250 gallons=


$0.30 per gallon=



Total Equivalent Units of Conversion Costs

=

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Allocating Costs to Units

Product costs must be allocated to the units transferred out and the partially completed units on hand at the end of the period.

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Step 4:Step 4:


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The total production costs to be assigned for Frozen Delight in July are $90,000.

FD


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Group 1: Inventory in Process on July 1The 5,000 gallons of inventory in Group 1 were completed and transferred out to the Packaging Department in July. The cost is determined as follows:

FD


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Group 2: Started and Completed


The 57,000 units started and completed in July (Group 2) incurred all of their direct materials and conversion costs in July. The cost assigned to these 57,000 units is shown below.

FD


Group 2: Started and Completed


The total cost transferred to the Packaging Department in July of $86,475 is the sum of the beginning inventory cost and the costs of the units started and completed in July.

Group 1 Cost of July 1 in-process inventory $ 6,675Group 2 Cost of the units started and completed in July 79,800

Total costs transferred to Packaging Department in July $86,475

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FD


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Group 3: Inventory in Process on July 31


The 3,000 gallons in process on July 31 (Group 3) incurred all of their direct materials costs and 25% of their conversion costs in July for a total cost of $3,525.

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Group 3: Inventory in Process on July 31

Allocating Costs to UnitsLO 2LO 2

The total manufacturing costs for Frozen Delight in July were assigned as shown below. Note that amounts now appear where question marks appeared earlier.

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Journalize entries for transactions using a process

cost system.


LO 3LO 3Journal Entries for Frozen Delighta. Purchased materials, including milk, cream, sugar,

packaging, and indirect materials on account, $88,000.

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LO 3LO 3Journal Entries for Frozen Delight

b. The Mixing Department requisitioned milk, cream, and sugar, $66,000. Packaging materials of $8,000 were requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging departments were $4,125 and $3,000, respectively.

direct materialsdirect materialsindirect materialsindirect materials

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c. Incurred direct labor in the Mixing and Packaging departments of $10,500 and $12,000, respectively.


FD


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d. Recognized equipment depreciation for the Mixing and Packaging departments of $3,350 and $1,000, respectively.


FD


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e. Applied factory overhead to Mixing and Packaging departments of $7,275 and $3,500, respectively.

Journal Entries for Frozen Delight

FD


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f. Transferred costs of $86,475 from the Mixing Department to the Packaging Department per the cost of production report.


FD


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g. Transferred goods of $106,000 out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report (not illustrated).


FD


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h. Recorded cost of goods sold out of the finished goods inventory of $107,000.


FD


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Frozen Delight’s Cost Flows

The ending inventories for Frozen Delight are reported on the July 31 balance sheet as follows:

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Describe and illustrate the use

of cost of production reports

for decision making.


LO 4LO 4Using the Cost of Production ReportJune costs per equivalent unit of materials and conversion costs can be determined as follows:





$5,000

5,000 gallons=

$1.00 per gallonDirect Materials Cost per Equivalent Unit =

(continued)

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LO 4LO 4Using the Cost of Production Report



Total Equivalent Units of Conversion Costs=


$0.35 per gallon=

$1,225

(5,000 x 70%) gallons=


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Yield

In addition to unit costs, managers of process manufacturers are also concerned about yield trends. The yield is computed as follows:

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Yield =

Quantity of Material Output

Quantity of Material Input



Compare just-in-time processing with traditional manufacturing

processing.


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Just-In-Time (JIT) Processing

Just-in-time (JIT) processing is a management approach that focuses on reducing time and cost and eliminating poor quality. In a just-in-time system, processing functions are combined into manufacturing cells that perform several manufacturing steps.

Workers are cross-trained to perform more than one function. This provides flexibility and increases worker pride and involvement in the final product.

Prepared by: C. Douglas Cloud Professor Emeritus of AccountingPepperdine University


Process Cost Systems

The EndThe End

process cost systems

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