Module 6: Process Cost Systems
ACG 2071Created by M. Mari
Fall 2007-1
Process Cost Is the mass production of products in a continuous
flow of steps Products pass through a series of sequential
processes Each process is identified a separate production,
department, workstation, or work center. With the exception of the first process or
department, each receives the output from the prior department as a partially processed product.
Depending on the nature of the process, a company applies direct labor, overhead, and additional direct materials to move the product toward completion
Process Cost Accounting Assigns direct materials, direct labor, and
overhead to specific processes. Costs are allocated by department rather than
jobs Manufacturing costs are allocated to products
based on units of production Manufacturing costs are accumulated and
transferred by department The total costs associated with each process are
then divided by the number of units passing through that process to determine the cost per equivalent units for that process
Cost Flows
MaterialsRaw
Mixing
Bottling
Packing
First –In, First Out Method Assume that the product moves in
order throughout the production process
Determine units to be assigned costs Units in beginning work in process Units started and completed during
period Units in ending work in process
FIFO Method Calculate Equivalent Units of
Production Process manufacturers often have
some partially processed materials remaining at the end of the period
EUP Number of units that could have been
completed within a given accounting period
Example 1 A company processes their
production in two departments. Beginning inventory was 500 units that were 70% completed, 1,100 units transferred out to the next department and ending inventory consisted of 400 units 25% completed.
Example 1Actual Units % EUP
Beg. Inv. 500 30% 150
Started & Completed
Transferred in 1,100 Units in Beg. Inv - 500
600
100% 600
Ending Inv. 400 25% 100
Total 850
Example 3 A company process their
production in two departments. The beginning inventory was 4,000 units 50% completed, transferred into the department 5,000 units and an ending inventory of 2,000 units 40% completed.
Example 3Actual Units % EUP
Beg. Inventory
4,000 50% 2,000
Started & Completed
Transferred in 5,000Ending inventory 2,000
3,000
100% 3,000
Ending Inventory
2,000 40% 800
Total 5,800
Determine cost per equivalent unit Material cost = based on actualactual
units transferred into the department Assume at beginning of the period
Conversion costs Direct labor + Factory overhead Based on EUPBased on EUP
Example 4 Using the production units given in
Example 1, assume that direct material costs are $50,000. Factory overhead is $3,000 and direct labor is $6,690. Work in process account has a balance of $28,150 at the beginning of the month which is from this month’s beginning inventory. Complete the chart
Example 1Actual Units % EUP
Beg. Inv. 500 30% 150
Started & Completed
Transferred in 1,100 Units in Beg. Inv - 500
600
100% 600
Ending Inv. 400 25% 100
Total 850
Example 4 Direct materials per actual unit
Actual units are the units that are added this period. They are the units started and completed and the units in ending
inventory. Ending inventory 400 units Started and Completed 600
Total actual units 1,000 Direct materials per actual units = Direct material costs Actual units
= $50,000 1,000 units
= $50 per actual unit placed into production this period.
Started and completed units = 600 X $50 = $30,000 Ending inventory units = 400 X $50 = $20,000
Example 4
Actual Units
% EUP Material Conversion Costs
Total
Beg. Inv. 500 30 150
Started & Completed
600 100 600 600X $50 = $30,000
End. Inv. 400 25 100 400 x $50 = $20,000
850
Example contdConversion costs = Direct labor + Factory overhead
$6,690 + $3,000 = $9,690Are divided by Total EUP
Conversion costs per EUP = Total conversion costs
Total EUP
$6,690850
= $11.40 per EUP
Example 4Actual % EUP Mtrl Conversion
CostsTotal
Beg. Inv. 500 30 150 $11.40 X 150 = $1,710
Started & Completed
600 100 600 $30,000
$11.40 x 600= $6,840
End. Inv. 400 25 100 $20,000
$11.40 x 100 = $1,140
850 $9,690
Example Contd Prior month’s beginning inventory
costs Must be accounted for Included in the column for materials $28,150 as stated in example.
Example 4
Actual
Units
% EUP Material Conversion Costs
Total
Beg. Inv.
500 30 150 $28,150 $1,710 $29,860
Started & Completed
600 100 600 $30,000 $6,840 $36,840
End. Inv. 400 25 100 $20,000 $1,140 $21,140
850 $6,690
Questions What is the total cost of units
completed this period? How many actual units are in
ending inventory this period? How many actual units are in next
month’s beginning inventory?
Questions What is conversion costs per unit? What is the amount of work done
on this month’s beginning inventory?
What is the amount of work to be done next month on beginning inventory?
Blank chartActual % EUP Mtrl CC Total
Beg inv
S & C
End Inv
