Chapter 17

Process Cost Systems

Financial and Managerial Accounting 8th 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.

Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

Objectives
1. Distinguish between jobthis costing After studying order and process costing systems. chapter, you should 2. Explain and illustrate to: physical flows be able the and cost flows for a process 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
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 Job Order Costing and Process Costing

Job Order Cost System
Work in Process Account to Finished Goods

Factorymaterials Direct labor Direct overhead

Job Cost Sheets Dept. A and Dept. B

Comparing Job Order Costing and Process Costing

Process Cost System
Work in Process Account Direct materials
DEPT. A

Work in Process Account

DEPT. B

to Finished Goods

Factory Direct Overhead Labor

Factory Direct Overhead Labor

Comparing Job Order Costing and Process 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 Flows for a Process Manufacturer

Scrap Metal Materials

Melting Department Casting Department

Physical Flows for a Process 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 WIP Melting
DM

WIP Casting

Factory OH Melting

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 WIP Melting
DM DL

WIP Casting

Factory OH Melting

Factory OH Casting Actual costs incurred

Finished Goods

Cost of Goods Sold

DL

Direct labor used in production

Cost Flows for a Process Manufacturer

Materials Purchases of DM direct and IM indirect materials WIP Melting
DM DL

WIP Casting

Factory OH Melting Actual costs incurred

Factory OH Casting Actual costs incurred

Finished Goods

Cost of Goods Sold

IM

Indirect materials used in production

Cost Flows for a Process Manufacturer

Materials Purchases of DM direct and IM indirect materials WIP Melting
DM DL FOA

WIP Casting

Factory OH Melting Actual costs incurred

FOA

Factory OH Casting Actual costs incurred

Finished Goods

Cost of Goods Sold

FOA

Factory overhead applied

Cost Flows for a Process Manufacturer

Materials Purchases of DM direct and IM indirect materials WIP Melting
DM DL FOA TO

WIP Casting
TI

Factory OH Melting Actual costs incurred

FOA

Factory OH Casting Actual costs incurred

Finished Goods

Cost of Goods Sold

TO/TI

Cost transferred out/transferred in

Cost Flows for a Process Manufacturer

Materials Purchases of DM direct and IM indirect materials WIP Melting
DM DL FOA TO

WIP Casting
TI DL FOA

Factory OH Melting Actual costs incurred

FOA

Factory OH Casting Actual costs incurred

FOA

Finished Goods

Cost of Goods Sold

DL FOA

Direct labor used in production Factory overhead applied

Cost Flows for a Process Manufacturer

Materials Purchases of DM direct and IM indirect materials WIP Melting
DM DL FOA TO

WIP Casting
TI DL FOA TO

Factory OH Melting Actual costs incurred

FOA

Factory OH Casting Actual costs incurred

FOA

Finished Goods
TI

Cost of Goods Sold

TO/TI

Cost transferred out/transferred in

Cost Flows for a Process Manufacturer

Materials Purchases of DM direct and IM indirect materials WIP Melting
DM DL FOA TO

WIP Casting
TI DL FOA TO

Factory OH Melting Actual costs incurred

FOA

Factory OH Casting Actual costs incurred

FOA

Finished Goods
TI COGS

Cost of Goods Sold

COGS

COGS

Cost of goods sold

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 a perpetual inventory system, outflows are recorded as they 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 1,100 Tons 400 Tons 1,500 Tons

+
3 Ending Inventory

Total tons to be assigned costs

=
Total units

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

Step 2: Calculate equivalent units of production

Step 2: Calculate Equivalent Units of Production

Total Percent Equivalent Units Added Units 500 600 1,100 400 1,500 0% 100% 100% 0 600 600 400 1,000

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

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 600 EU of materials equivalent units Inventory in 100% materials added in July added to beginning process, for 1 400 tons ending inventory inventoryJulyJuly

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

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

350 EU

150

600 tons started and completed

600 EU

process, July 1

100% completed for conversion in July 400 tons ending inventory

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

25% completed for EU conversion in July

100

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 0 600 600 400 1,000 Conversion 150 600 750 100 850

Step 3: Determine the Cost per Equivalent Unit

Work in Process Melting
Beginning Inventory $28,150 Materials

Direct Materials Equivalent Unit Cost

$50,000 direct materials cost 1,000 direct materials equivalent units

$50,000
Conversion Costs

$50.00 per EU of DM

Conversion Equivalent Unit Cost

$9,690 conversion cost 850 conversion equivalent units

$9,690

$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 $0 150 x $11.40 $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 $50.00 600 x $11.40

$ 30,000

$ 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
Beginning Inventory $28,150 Materials Costs $50,000 Conversion Costs $9,690 Total Costs Charged $87,840 Beginning Inventory $29,860 Started and Completed $36,840 Ending Inventory $21,140 Total Costs Assigned $87,840 Beginning cost M 500 x 0% x C 500 x 30% x M 600 x 100% x C 600 x 100% x M 400 x 100% x C 400 x 25% x

Costs
$28,150 $50.00 = 0 $11.40 = 1,710 $29,860 $50.00 = $30,000 $11.40 = 6,840 $36,840 $50.00 = $20,000 $11.40 = 1,140 $21,140

Total Costs Assigned

$87,840

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

Cost of Production 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 cost of production report also is used to control costs.

Cost of Production ReportMelting Department Report

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 500 1,000 1,500 Equivalent Units Direct Materials Conversion

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 ReportMelting Department Report

Costs Unit costs: Total costs for July in Melting Department Total equivalent units (from Slide 43) Cost per equivalent unit Costs
Direct Materials Conversion Total Costs

$50,000 1,000 $ 50.00

$9,690 850 $11.40

Step 3

Cost of Production ReportMelting Department Report

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 $1,140 Step 4

$20,000

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

Journal Entries for a Process Cost System

Transaction a. Materials purchased on account. b. Direct and indirect materials requisitioned. c. Direct labor used. Journal Entry Materials Accounts Payable Work in ProcessMelting Factory OverheadMelting Factory OverheadCasting Materials Work in ProcessMelting Work in ProcessCasting Wages Payable Factory OverheadMelting Factory OverheadCasting Accumulated Depreciation Debit 62,000 62,000 50,000 4,000 3,000 57,000 5,000 4,500 9,500 1,000 7,000 8,000 Credit

d. Depreciation expenses.

Journal Entries for a Process Cost System

Transaction e. Factory overhead applied. Journal Entry Work in ProcessMelting Work in ProcessCasting Factory OverheadMelting Factory OverheadCasting Work in ProcessCasting Work in ProcessMelting Finished Goods Work in ProcessCasting Debit 4,690 9,640 4,690 9,640 66,700 66,700 78,600 78,600 Credit

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

Cost of Goods Sold Finished Goods

73,700 73,700

Just-inJust-in-Time Processing (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-inJust-in-Time Processing (JIT)

Traditional Production Line

Cutting Dept.

Drillin g Dept.

Sanding Dept.

Staining Dept.

Assembly Dept.

Upholstery Dept.

Varnishing Dept.

Just-inJust-in-Time Processing (JIT)

Just-in-Time Production Line

Work Center One Cutting drilling and sanding

Work Center Two Staining and varnishing

Work Center Three Upholstery and assembly

Chapter 17 The End