Process Cost Systems

Chapter 19 Process Cost Systems Accounting, 21st Edition Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

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Objectives Objectives 1. Distinguish between job order costing and After studying this After studying this process costing systems. chapter, you should chapter, you 2. Explain and illustrate theshould physical flows and be able to: be able cost flows for a processto: manufacturer. 3. Calculate and interpret the accounting for completed and partially completed units under the fifo method. 4. Prepare a cost of production report.

Objectives Objectives 5. Prepare journal entries for transactions of a process manufacturer. 6. Use cost of production reports for decision making. 7. Contrast just-in-time processing with conventional manufacturing practices.

Comparing Comparing Job Job Order Order Costing Costing and and Process Process Costing Costing Job Order Cost System Work in Process Account

Factory Direct overhead labor Direct materials Factory Direct overhead labor Direct materials

Job Cost Sheets Dept. A and Dept. B

to to Finished Finished Goods Goods

Comparing Comparing Job Job Order Order Costing Costing and and Process Process Costing Costing Process Cost System Work in Process Account Direct materials

Work in Process Account

DEPT. A

DEPT. B

Factory Direct Overhead Labor

Factory Direct Overhead Labor

to to Finished Finished Goods Goods

Comparing Comparing Job Job Order Order Costing Costing and and Process Process Costing Costing Both systems:  determine a product cost by measuring the amount of direct materials and direct labor used and allocating overhead costs.  allocate overhead using a predetermined overhead rate (or activity-based costing).  maintain perpetual inventory records with subsidiary ledgers for Materials, Work in Process, and Finished Goods.

Physical Physical Flows Flows for for aa Process Process Manufacturer Manufacturer

Scrap Metal Materials Melting Department

Casting Department

Physical Physical Flows Flows for for aa Process Process Manufacturer Manufacturer Molten metal transferred from Melting Melting Department

Casting Department

To finished goods

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and indirect materials

Factory OH – Melting

WIP – Melting

WIP – Casting

DM

Factory OH – Casting

Finished Goods

Cost of Goods Sold

DM

Direct materials used in production

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and indirect materials

Factory OH – Melting

WIP – Melting DM DL

Factory OH – Casting Actual costs incurred

DL

WIP – Casting

Direct labor used in production

Finished Goods

Cost of Goods Sold

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials

WIP – Melting DM DL

Factory OH – Melting

Factory OH – Casting

Actual costs incurred

Actual costs incurred

IM

WIP – Casting

Finished Goods

Cost of Goods Sold

Indirect materials used in production

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials

Factory OH – Melting Actual costs incurred

FOA

FOA

WIP – Melting

WIP – Casting

DM DL FOA

Factory OH – Casting Actual costs incurred

Factory overhead applied

Finished Goods

Cost of Goods Sold

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials

Factory OH – Melting Actual costs incurred

TO/TI

FOA

WIP – Melting DM

TO

WIP – Casting TI

DL FOA

Factory OH – Casting Actual costs incurred

Finished Goods

Cost of Goods Sold

Cost transferred out/transferred in

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials

Factory OH – Melting Actual costs incurred

DL FOA

FOA

WIP – Melting DM

TO

WIP – Casting TI

DL

DL

FOA

FOA

Factory OH – Casting Actual costs incurred

Finished Goods

FOA

Direct labor used in production Factory overhead applied

Cost of Goods Sold

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials

Factory OH – Melting Actual costs incurred

TO/TI

FOA

WIP – Melting DM

WIP – Casting

TO

TI

DL

DL

FOA

FOA

Factory OH – Casting Actual costs incurred

TO

Finished Goods

FOA

TI

Cost of Goods Sold

Cost transferred out/transferred in

Cost Flows for a Process Manufacturer Materials Purchases of DM direct and IM indirect materials

Factory OH – Melting Actual costs incurred

FOA

WIP – Melting DM

TO

WIP – Casting TI

DL

DL

FOA

FOA

Factory OH – Casting Actual costs incurred

FOA

Finished Goods TI

Cost of goods sold

COGS

Cost of Goods Sold COGS

COGS

TO

Melting Department of McDermott Steel Inc. Inventory in process, July 1, 500 tons: Direct materials cost, 500 tons Conversion costs, 500 tons, 70% completed Total inventory in process, July 1 Direct materials cost for July, 1,000 tons Conversion costs for July Goods transferred to Casting in July, 1,100 tons Inventory in process, July 31, 400 tons, 25% complete as to conversion costs

$24,550 3,600 $28,150 50,000 9,690 ? ?

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1,000 Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1,000 Tons

Transferred 1,100 Tons

In In aa perpetual perpetual inventory inventory system, system, outflows outflows are are recorded recorded as as they they occur. occur.

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1,000 Tons

Transferred 1,100 Tons Ending Inventory 400 Tons

1 Beginning Inventory 500 Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1,000 Tons

Transferred 1,100 Tons Ending Inventory 400 Tons

1 Beginning Inventory 500 Tons

+

2 Started & Completed ? Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1,000 Tons

Transferred 1,100 Tons Ending Inventory 400 Tons

1 Beginning Inventory 500 Tons

+

2 Started & Completed 600 Tons

Step 1: Determine the Units to be Assigned Costs Work in Process – Melting Beginning Inventory 500 Tons Started 1,000 Tons

Transferred 1,100 Tons Ending Inventory 400 Tons

1 Beginning Inventory 500 Tons

+

2 Started & Completed 600 Tons

=

Transferred Out

+

3 Ending Inventory

Total tons to be assigned costs

Total units

=

1,100 Tons 400 Tons 1,500 Tons

The The equivalent equivalent units units of of production production are are the the number number of of units units that that could could have have been been completed completed within within aa given given accounting accounting period. period.

Step 2: Calculate equivalent units of production

Step 2: Calculate Equivalent Units of Production

Materials Equivalent Units Inventory in process, July 1 Started and completed in July Transferred out to Casting Dept. Inventory in process, July 31 Total tons to be assigned cost

Total Percent Equivalent Units Added Units 500 600 1,100 400 1,500

0% 100% 100%

0 600 600 400 1,000

Step 2: Calculate Equivalent Units of Production JULY 1 500 tons beginning inventory

1,000 Equivalent Units

JULY 31

Note: Started and completed

EU of 600 tons started and completed materials 100% materials added in June No materials EU of 600 materials equivalent units Inventory in 100% materials added in July added to beginning process, July 1 400 tons ending inventory inventory for July

500

Inventory in process, July 31

EU of materials 100% materials added in July

400

Step 2: Calculate Equivalent Units of Production Conversion Equivalent Units Inventory in process, July 1 Started and completed in July Transferred out to Casting Dept. Inventory in process, July 31 Total tons to be assigned cost

Total Percent Equivalent Units Added Units 500 600 1,100 400 1,500

30% 100% 25%

150 600 750 100 850

Step 2: Calculate Equivalent Units of Production JULY 1

850 Equivalent Units

JULY 31

500 tons beginning inventory

350 EU

150

EU 70% completed for 30% conversion in June completed for conversion Inventory in in July

process, July 1

600 tons started and completed

600 EU

Inventory in process, July 31 (75% to be completed for conversion in August)

100% completed for conversion in July 400 tons ending inventory

100

25% completed for EU conversion in July

300 EU

Step 3: Determine the Cost per Equivalent Unit Equivalent Units Direct Materials Inventory in process, July 1 Started and completed in July (1,100 – 500) Transferred out to Casting Dept. in July Inventory in process, July 31 Total tons to be assigned cost

Conversion

0

150

600

600

600 400 1,000

750 100 850

Step 3: Determine the Cost per Equivalent Unit Work in Process – Melting Beginning Inventory $28,150 Materials

$50,000 Conversion Costs

Direct Materials Equivalent Unit Cost $50,000 direct materials cost 1,000 direct materials equivalent units

=

$50.00 per EU of DM

Conversion Equivalent Unit Cost

$9,690 $9,690 conversion cost 850 conversion equivalent units

=

$11.40 per EU of conversion

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Inventory in process, July 1 beginning balance Equivalent units for completing the July in-process inventory Equivalent unit cost Cost of completed July 1 inprocess inventory Cost of July 1 in-process inventory transferred to Casting Department

$28,150 0 x $50.00

150 x $11.40

$0

$1,710

1,710 $29,860

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Units started and completed in July Equivalent unit cost Cost to complete the units started and completed in July

600 x$50.00 $30,000

600 x$11.40 $6,840 $36,840

Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Materials Conversion Total Costs Costs Costs Equivalent units in ending inventory Equivalent unit cost Cost of ending inventory

400 x$50.00 $20,000

100 x$11.40 $ 1,140 $21,140

Step 4: Allocate Costs to Transferred and Partially Completed Units Work in Process – Melting

Costs Beginning cost M 500 x 0% x C 500 x 30% x

$28,150 $50.00 = 0 $11.40 = 1,710 $29,860

Beginning Inventory $28,150

Beginning Inventory $29,860

Materials Costs $50,000

Started and Completed $36,840

M 600 x 100% x C 600 x 100% x

$50.00 = $30,000 $11.40 = 6,840 $36,840

Conversion Costs $9,690

Ending Inventory $21,140

M 400 x 100% x C 400 x 25% x

$50.00 = $20,000 $11.40 = 1,140 $21,140

Total Costs Charged $87,840

Total Costs Assigned $87,840

Total Costs Assigned

$87,840

A A cost cost of of production production report report isis prepared prepared for for each each processing processing department department at at periodical periodical intervals. intervals.

Cost Cost of of Production Production Report Report The cost of production report provides the following production quantity and cost data:  The units for which the department is accountable and the deposition of those units.  The production costs incurred by the department and the allocation of those costs between completed and partially completed units.

A A cost cost of of production production report report also also isis used used to to control control costs. costs.

Cost of Production Report—Melting Department Units Units charged to production: Inventory in process, July 1 Received from materials Total units accounted for Units to be assigned cost: Inventory in process, July 1 (70% complete) Started and completed in July Transferred to Casting Dept. Inventory in process, July 31 (25% complete) Total units to be assigned cost

Whole Units

Equivalent Units Direct Materials Conversion

500 1,000 1,500 500 600 1,100 400 1,500 Step 1

0 600 600

150 600 750

400 100 1,000 850 Step 2

Cost of Production Report—Melting Department Costs Unit costs: Total costs for July in Melting Department Total equivalent units (from Slide 43) Cost per equivalent unit

Costs Direct Materials Conversion

$50,000

$9,690

÷ 1,000 $ 50.00

÷ 850 $11.40

Step 3

Total Costs

Cost of Production Report—Melting Department Costs Costs charged to production: Inventory in process, July 1 Cost incurred in July Total costs accounted for Costs allocated to completed and partially completed units Inventory in process, July 1 To complete inventory of July 1 Started and completed in July Transferred to Casting Dept. Inventory in process, July 31 Total costs assigned

Direct Conversion Total Materials Costs Costs $28,150 59,690 $87,840

$

0 30,000

$1,710 6,840

$20,000

$1,140 Step 4

$28,150 1,710 36,840 $66,700 21,140 $87,840

Journal Journal Entries Entries for for aa Process Process Cost Cost System System Transaction

Journal Entry

Debit

a. Materials purchased on account.

Materials Accounts Payable

62,000

b. Direct and indirect materials requisitioned.

Work in Process–Melting Factory Overhead–Melting Factory Overhead–Casting Materials

50,000 4,000 3,000

c. Direct labor used.

Work in Process–Melting Work in Process–Casting Wages Payable

d. Depreciation expenses.

Credit 62,000

57,000 5,000 4,500

Factory Overhead–Melting 1,000 Factory Overhead–Casting 7,000 Accumulated Depreciation

9,500

8,000

Journal Journal Entries Entries for for aa Process Process Cost Cost System System Transaction e. Factory overhead applied.

f. Costs transferred to Casting Department g. Casting Department transferred to Finished Goods h. Goods sold.

Journal Entry

Debit

Work in Process–Melting 4,690 Work in Process–Casting 9,640 Factory Overhead–Melting 4,690 Factory Overhead–Casting 9,640 Work in Process–Casting 66,700 Work in Process–Melting 66,700

Finished Goods 78,600 Work in Process–Casting 78,600

Cost of Goods Sold Finished Goods

73,700 73,700

Credit

Just-in-Time Just-in-Time Processing Processing (JIT) (JIT)  JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality.  JIT organizes work cells that perform several manufacturing steps.  Workers are cross-trained to perform more than one task. This provides flexibility and worker pride and involvement in the final product.  Because products have limited movement between departments, the nonvalue-added cost of transporting products and parts is reduced.

Just-in-Time Just-in-Time Processing Processing (JIT) (JIT) Traditional Traditional Production Production Line Line

Cutting Dept.

Drillin g Dept.

Assembly Dept.

Sanding Dept.

Upholstery Dept.

Staining Dept.

Varnishing Dept.

Just-in-Time Just-in-Time Processing Processing (JIT) (JIT) Just-in-Time Just-in-Time Production Production Line Line Work Center One Cutting drilling and sanding

Work Center Two Staining and varnishing

Work Center Three Upholstery and assembly

Chapter 19 The The End End