Chapter Chapter 1919
Process Cost SystemsProcess Cost Systems
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
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1. Distinguish between job order costing and process costing systems.
2. Explain and illustrate the physical flows 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.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
5. Prepare journal entries for transactions of a process manufacturer.
ObjectivesObjectivesObjectivesObjectives
6. Use cost of production reports for decision making.
7. Contrast just-in-time processing with conventional manufacturing practices.
Job Order Cost System
Job CostSheets
Dept. A and Dept. B
Comparing Job Order Comparing Job Order Costing and Process CostingCosting and Process Costing
Comparing Job Order Comparing Job Order Costing and Process CostingCosting and Process Costing
Direct materialsDirect materialsDirect materialsDirect materialsFactory overheadFactory overheadFactory overheadFactory overheadDirect laborDirect laborDirect laborDirect labor
Work in Process Work in Process AccountAccount to Finished to Finished
GoodsGoodsto Finished to Finished
GoodsGoods
Process Cost System
DirectDirect materialsmaterials
Work in Process Work in Process AccountAccount
Work in Process Work in Process AccountAccount
DEPT. A DEPT. B
Factory Factory OverheadOverhead
Direct Direct LaborLabor
Factory Factory OverheadOverhead
Direct Direct LaborLabor
to Finished to Finished GoodsGoods
to Finished to Finished GoodsGoods
Comparing Job Order Comparing Job Order Costing and Process CostingCosting and Process Costing
Comparing Job Order Comparing Job Order Costing and Process CostingCosting and Process Costing
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.
Both systems:Both systems:
Comparing Job Order Comparing Job Order Costing and Process CostingCosting and Process Costing
Comparing Job Order Comparing Job Order Costing and Process CostingCosting and Process Costing
Physical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer
Scrap Metal
Materials
MeltingMeltingDepartmentDepartment
CastingCastingDepartmentDepartment
Molten metal
transferred from
Melting
To finished goods
CastingCastingDepartmentDepartment
MeltingMeltingDepartmentDepartment
Physical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer
Materials WIP – Melting
Factory OH – Melting
DMDMPurchases of direct and
indirect materials
Direct materials used in productionDMDM
DMDM
Finished Goods
Cost of Goods Sold
Factory OH – Casting
WIP – Casting
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Materials WIP – Melting
DMDM
DLDL
DMDM
Direct labor used in productionDLDL
Purchases of direct and
indirect materials
Finished Goods
Cost of Goods Sold
Factory OH – Casting
Actualcosts
incurred
WIP – Casting
Factory OH – Melting
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Materials WIP – Melting
Finished Goods
WIP – Casting
Cost of Goods Sold
DMDM
DLDL
DMDM
Indirect materials used in productionIMIM
Purchases of direct and
indirect materials
IMIM
Factory OH – CastingFactory OH – Melting
Actualcosts
incurred
Actualcosts
incurred
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Materials WIP – Melting
Finished Goods
WIP – Casting
Cost of Goods Sold
DMDM
DLDL
DMDM
Factory overhead appliedFOAFOA
Purchases of direct and
indirect materials
IMIM
Factory OH – Casting
Actualcosts
incurred
FOAFOA Actualcosts
incurred
FOAFOA
Factory OH – Melting
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Materials WIP – Melting
Finished Goods
WIP – Casting
Cost of Goods Sold
DMDM
DLDL
DMDM
Cost transferred out/transferred inTO/TITO/TI
Purchases of direct and
indirect materials
IMIM
Factory OH – Casting
Actualcosts
incurred
FOAFOA Actualcosts
incurred
FOAFOA
TOTO TITI
Factory OH – Melting
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Materials WIP – Melting
Finished Goods
WIP – Casting
Cost of Goods Sold
DMDM
DLDL
DMDMPurchases of direct and
indirect materials
IMIM
Factory OH – Casting
Actualcosts
incurred
FOAFOA Actualcosts
incurred
FOAFOA
TOTO TITI
DLDL
Factory overhead appliedFOAFOA
Direct labor used in productionDLDL
FOAFOA
FOAFOA
Factory OH – Melting
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Materials WIP – Melting
Finished Goods
WIP – Casting
Cost of Goods Sold
DMDM
DLDL
DMDMPurchases of direct and
indirect materials
IMIM
Factory OH – Casting
Actualcosts
incurred
FOAFOA Actualcosts
incurred
FOAFOA
TOTO TITI
DLDL
FOAFOA
FOAFOA
Cost transferred out/transferred inTO/TITO/TI
TOTO
TITI
Factory OH – Melting
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer
Materials WIP – Melting
Finished Goods
WIP – Casting
Cost of Goods Sold
DMDM
DLDL
DMDMPurchases of direct and
indirect materials
IMIM
Factory OH – Casting
Actualcosts
incurred
FOAFOA Actualcosts
incurred
FOAFOA
TOTO TITI
DLDL
FOAFOA
FOAFOA
Cost of goods soldCOGSCOGS
TOTO
TITI COGSCOGS
COGSCOGS
Factory OH – Melting
Melting Department of McDermott Steel Inc.
Inventory in process, July 1, 500 tons:Direct materials cost, 500 tons $24,550Conversion costs, 500 tons, 70% completed 3,600Total inventory in process, July 1 $28,150
Direct materials cost for July, 1,000 tons 50,000Conversion costs for July 9,690Goods transferred to Casting in July, 1,100 tons ?Inventory in process, July 31, 400 tons, 25%
complete as to conversion costs ?
Step 1: Determine the Units to be Assigned CostsStep 1: Determine the Units to be Assigned Costs
BeginningBeginningInventoryInventory500 Tons500 Tons
Work in Process – Melting
StartedStarted1,000 Tons1,000 Tons
BeginningBeginningInventoryInventory500 Tons500 Tons
Work in Process – Melting
StartedStarted1,000 Tons1,000 Tons
Transferred1,100 Tons
In a perpetual inventory system,
outflows are recorded as they occur.
In a perpetual inventory system,
outflows are recorded as they occur.
Step 1: Determine the Units to be Assigned CostsStep 1: Determine the Units to be Assigned Costs
BeginningBeginningInventoryInventory500 Tons500 Tons
Work in Process – Melting
StartedStarted1,000 Tons1,000 Tons
Transferred1,100 Tons
EndingInventory400 Tons
Step 1: Determine the Units to be Assigned CostsStep 1: Determine the Units to be Assigned Costs
Beginning InventoryBeginning Inventory 500 Tons 500 Tons11
BeginningBeginningInventoryInventory500 Tons500 Tons
Work in Process – Melting
StartedStarted1,000 Tons1,000 Tons
Transferred1,100 Tons
EndingInventory400 Tons
Step 1: Determine the Units to be Assigned CostsStep 1: Determine the Units to be Assigned Costs
Beginning Inventory Beginning Inventory 500 Tons500 Tons11
Started & Completed ? Tons+
22
BeginningBeginningInventoryInventory500 Tons500 Tons
Work in Process – Melting
StartedStarted1,000 Tons1,000 Tons
Transferred1,100 Tons
EndingInventory400 Tons
Step 1: Determine the Units to be Assigned CostsStep 1: Determine the Units to be Assigned Costs
Beginning Inventory Beginning Inventory 500 Tons500 Tons11
Started & Completed 600 Tons+
22
BeginningBeginningInventoryInventory500 Tons500 Tons
Work in Process – Melting
StartedStarted1,000 Tons1,000 Tons
Transferred1,100 Tons
EndingInventory400 Tons
Beginning InventoryBeginning Inventory 500 Tons 500 Tons11
Started & Completed 600 Tons+
22
=Transferred OutTransferred Out 1,100 Tons1,100 Tons
+ Ending Inventory 400 Tons33
Total units 1,500 Tons=
Step 1: Determine the Units to be Assigned CostsStep 1: Determine the Units to be Assigned Costs
Total tons to be Total tons to be assigned costsassigned costs
The equivalent units of production are the number of
units that could have been completed within a given
accounting period.
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 ProductionStep 2: Calculate Equivalent Units of Production
Materials Equivalent UnitsMaterials Equivalent UnitsTotal Percent EquivalentUnits Added Units
Inventory in process, July 1 500 0% 0Started and completed in July 600 100% 600Transferred out to Casting Dept. 1,100 600Inventory in process, July 31 400 100% 400Total tons to be assigned cost 1,500 1,000
Step 2: Calculate Equivalent Units of ProductionStep 2: Calculate Equivalent Units of Production
500 EU of materials
500 tons beginning inventory
100% materials added in June
JULY 1
600 EU of materials
600 tons started and completed
100% materials added in July
JULY 31
400 EU of materials
400 tons ending inventory
100% materials added in July
1,000 Equivalent Units
Inventory in process, July 1
Note: Started and completed
Inventory in process, July 31
No materials equivalent units
added to beginning inventory for July
Step 2: Calculate Equivalent Units of ProductionStep 2: Calculate Equivalent Units of Production
Conversion Equivalent UnitsConversion Equivalent Units
Inventory in process, July 1 500 30% 150Started and completed in July 600 100% 600Transferred out to Casting Dept. 1,100 750Inventory in process, July 31 400 25% 100Total tons to be assigned cost 1,500 850
Total Percent EquivalentUnits Added Units
350 EU
70% completed for conversion in June
JULY 1
600 EU
600 tons started and completed
100% completed for conversion in July
JULY 31
100 EU
25% completed for conversion in July
850 Equivalent Units
Inventory in process, July 1
Step 2: Calculate Equivalent Units of ProductionStep 2: Calculate Equivalent Units of Production
150EU
300 EU
Inventory in process, July 31 (75% to be completed for conversion in
August)
30% completed
for conversion
in July
500 tons beginning inventory
400 tons ending inventory
Step 3: Determine the Cost per Equivalent UnitStep 3: Determine the Cost per Equivalent Unit
Equivalent Units Direct Materials Conversion
Inventory in process, July 1 0 150
Started and completed in July (1,100 – 500) 600 600
Transferred out to Casting Dept.in July 600 750
Inventory in process, July 31 400 100
Total tons to be assigned cost 1,000 850
BeginningInventory$28,150
Work in Process – Melting
Materials$50,000
ConversionCosts
$9,690 Conversion Equivalent Unit CostConversion Equivalent Unit Cost
Direct Materials Equivalent Unit CostDirect Materials Equivalent Unit Cost
$11.40 per EU of con-version
=
$50,000 direct materials cost1,000 direct materials equivalent units
$9,690 conversion cost
850 conversion equivalent units
Step 3: Determine the Cost per Equivalent UnitStep 3: Determine the Cost per Equivalent Unit
$50.00 per EU of DM
=
Inventory in process, July 1 beginning balance $28,150
Equivalent units for completing the July in-process inventory 0 150
Equivalent unit cost x $50.00 x $11.40Cost of completed July 1 in-
process inventory $0 $1,710 1,710Cost of July 1 in-process
inventory transferred to Casting Department $29,860
Step 4: Allocate Costs to Transferred and Step 4: Allocate Costs to Transferred and Partially Completed UnitsPartially Completed Units
Direct Materials Conversion TotalCosts Costs Costs
Units started and completedin July 600 600
Equivalent unit cost x$50.00 x$11.40Cost to complete the units
started and completed inJuly $30,000 $6,840 $36,840
Direct Materials Conversion TotalCosts Costs Costs
Step 4: Allocate Costs to Transferred and Step 4: Allocate Costs to Transferred and Partially Completed UnitsPartially Completed Units
Equivalent units in endinginventory 400 100
Equivalent unit cost x$50.00 x$11.40Cost of ending inventory $20,000 $ 1,140 $21,140
Direct Materials Conversion TotalCosts Costs Costs
Step 4: Allocate Costs to Transferred and Step 4: Allocate Costs to Transferred and Partially Completed UnitsPartially Completed Units
BeginningInventory$28,150
MaterialsCosts
$50,000
Started andCompleted
$36,840
BeginningInventory$29,860
Work in Process – Melting
Total CostsCharged$87,840
EndingInventory$21,140
ConversionCosts$9,690
Total CostsAssigned$87,840
M 600 x 100% x $50.00 = $30,000C 600 x 100% x $11.40 = 6,840
$36,840
M 400 x 100% x $50.00 = $20,000C 400 x 25% x $11.40 = 1,140
$21,140
Beginning cost $28,150M 500 x 0% x $50.00 = 0C 500 x 30% x $11.40 = 1,710
$29,860
Total Costs Assigned $87,840
Costs
Step 4: Allocate Costs to Transferred and Step 4: Allocate Costs to Transferred and Partially Completed UnitsPartially Completed Units
A cost of production report is prepared for each processing
department at periodical intervals.
A cost of production report is prepared for each processing
department at periodical intervals.
Cost of Production ReportCost of Production ReportCost of Production ReportCost 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.A cost of production report also is used to control costs.
UnitsUnits
Step 1 Step 2
Units charged to production:Inventory in process, July 1 500Received from materials 1,000Total units accounted for 1,500
Units to be assigned cost:Inventory in process, July 1
(70% complete) 500 0 150Started and completed in July 600 600 600Transferred to Casting Dept. 1,100 600 750Inventory in process, July 31
(25% complete) 400 400 100Total units to be assigned cost 1,500 1,000 850
Whole Direct Units Materials Conversion
Equivalent Units
Cost of Production ReportCost of Production Report—Melting Department—Melting Department
CostsCosts Direct Materials Conversion Total CostsCosts
Step 3
Unit costs:Total costs for July in
Melting Department $50,000 $9,690Total equivalent units
(from Slide 43) ÷ 1,000 ÷ 850Cost per equivalent unit $ 50.00 $11.40
Cost of Production ReportCost of Production Report—Melting Department—Melting Department
CostsCosts Direct Conversion Total Materials Costs Costs
Step 4
Costs charged to production:Inventory in process, July 1 $28,150Cost incurred in July 59,690Total costs accounted for $87,840
Costs allocated to completed andpartially completed unitsInventory in process, July 1 $28,150To complete inventory of July 1 $ 0 $1,710 1,710Started and completed in July 30,000 6,840 36,840Transferred to Casting Dept. $66,700Inventory in process, July 31 $20,000 $1,140 21,140Total costs assigned $87,840
Cost of Production ReportCost of Production Report—Melting Department—Melting Department
Journal Entries for a Process Cost SystemJournal Entries for a Process Cost SystemJournal Entries for a Process Cost SystemJournal Entries for a Process Cost System
Materials 62,000Accounts Payable 62,000
Work in Process–Melting 50,000Factory Overhead–Melting 4,000Factory Overhead–Casting 3,000
Materials 57,000
Work in Process–Melting 5,000Work in Process–Casting 4,500
Wages Payable 9,500
Factory Overhead–Melting 1,000Factory Overhead–Casting 7,000
Accumulated Depreciation 8,000
a. Materials purchased on account.
b. Direct and indirect materials requisitioned.
c. Direct laborused.
d. Depreciation expenses.
Transaction Journal Entry Debit Credit
Work in Process–Melting 4,690Work in Process–Casting 9,640
Factory Overhead–Melting 4,690Factory Overhead–Casting 9,640
Work in Process–Casting 66,700Work in Process–Melting 66,700
e. Factory overhead applied.
f. Costs transferred to Casting Department
g. Casting Department transferred to Finished Goods
h. Goods sold.
Journal Entries for a Process Cost SystemJournal Entries for a Process Cost SystemJournal Entries for a Process Cost SystemJournal Entries for a Process Cost System
Finished Goods 78,600Work in Process–Casting 78,600
Cost of Goods Sold 73,700Finished Goods 73,700
Transaction Journal Entry Debit Credit
Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-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-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)
Cutting Cutting Dept.Dept.
Traditional Production LineTraditional Production Line
DrillinDrilling Dept.g Dept.
Sanding Sanding Dept.Dept.
Staining Staining Dept.Dept.
Varnishing Varnishing Dept.Dept.
Upholstery Upholstery Dept.Dept.
Assembly Assembly Dept.Dept.
Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)Just-in-Time Processing (JIT)
Just-in-Time Production LineJust-in-Time Production Line
Work Center OneWork Center OneCutting drilling
and sanding
Work Center TwoWork Center TwoStaining and varnishing
Work Center ThreeWork Center ThreeUpholstery and
assembly
The EndThe End
Chapter 19Chapter 19