Process Cost Systems

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Process Process Cost Cost

SystemsSystems

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1. Explain and illustrate the characteristics and cost flows for a process manufacturer.

2. Prepare a cost of production report accounting for completed units under the Fifo method.

After studying this chapter, you should be able to:

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3. Prepare journal entries for transactions of a process manufacturer.

4. Use cost of production reports for decision making.

5. Contrast just-in-time processing with conventional manufacturing practices.

After studying this chapter, you should be able to:

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Explain and illustrate the characteristics and cost flows for a process

manufacturer.

Objective 1Objective 1Objective 1Objective 1

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Both systems:

Comparing Job Order and Process Cost Systems

1. Accumulate product costs.

2. Categorize manufacturing costs into direct material, direct labor, and factory overhead.

3. Allocate costs to products.

(Continued)

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Both systems:

4. Maintain perpetual materials, work in process, and finished goods inventory records.

5. Use product cost data for decision making.

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Primary differences:

1. Manufacturing costs are accumulated to departments, rather than jobs.

2. Manufacturing costs are allocated to products based on units of production.

3. Manufacturing costs are accumulated and transferred between departments.

(Continued)

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Primary differences:

4. Work in process inventory consists of partially completed production within a department, rather than the sum of job cost sheets of partially completed jobs.

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Process cost systems are used to manufacture homogeneous products. Examples are:

Tennis balls Motor oil Candy bars Soft drinks

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In contrast, job cost systems are used to manufacture unique products or provide unique services. Examples are:

Custom-built homes Landscape design services Customer cabinets Airplanes (767)

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Example Exercise 3-1

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Which of the following industries would normally use job order costing systems and which would normally use process costing systems?

Home construction Computer chipsBeverages CookiesMilitary aircraft Video game design

and production

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For Practice: PE3-1A, PE3-1B

Follow My Example 3-1

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Home construction Job OrderBeverages ProcessMilitary aircraft Job OrderComputer chips ProcessCookies ProcessVideo game design and

production Job Order

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Materials WIP – Mixing

(a) Purchases DMDM

WIP – Packaging

DMDM (b) Direct Materials

Exhibit 3 Cost Flows for a Process Manufacturer

DMDMDMDM

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DMDM(a) Purchases

DMDM

DMDM

WIP – Packaging

(c) Direct Labor—Mixing


DLDL

DMDM

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DMDM(a) Purchases DMDM

Factory OH – Packaging

WIP – Packaging


DLDL

IMIM

(d) Factory overhead incurred


Factory OH – Mixing

DMDM

IMIM (d) Indirect materials

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WIP – Packaging

DLDL

IMIM


FOAFOA

FOAFOA

(e) Factory overhead applied—MixingFOAFOA



DMDM

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WIP – Packaging

DLDL

IMIM


FOAFOA

FOAFOA



(f) Costs trans-ferred out

(f) Costs transferred inCTICTI

CTICTI

DMDM

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WIP – Packaging

DLDL

IMIM


FOAFOA

FOAFOA




(g) Direct labor in Packaging

CTICTI

DLDL

DLDL

DMDM

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WIP – Packaging

DLDL

IMIM


FOAFOA

FOAFOA




CTICTI

DLDL

DMDM

FOAFOA

(h) Factory overhead applied—PackagingFOAFOA

FOAFOA

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WIP – Packaging

DLDL

IMIM


FOAFOA

FOAFOA




CTICTI

DLDL

DMDM

FOAFOA

(i) Costs trans-ferred out

Finished Goods

FOAFOA

(i) Cost transferred in from WIP—PackagingCTICTI

CTICTI

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WIP – Packaging

DLDL

IMIM


FOAFOA

FOAFOA




CTICTI

DLDL

DMDM

FOAFOA

(i) Costs trans-ferred out

Finished Goods

FOAFOA

(j) Cost transferred to Cost of Goods SoldCGSCGS

CTICTI

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Cost of Goods Sold

CGSCGS

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Prepare a cost of production report accounting for completed

and partially completed units under the FIFO method.


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Inventory in process, July 1, 5,000 gallonsDirect materials cost, 5,000 gallons $ 5,000Conversion costs, 5,000 gallons, 70% completed 1,225Total inventory in process, July 1 $ 6,225

Direct materials cost for July, 60,000 gallons $66,000Direct labor for July 10,500Factory overhead applied for July 7,275 83,775Total production costs to account for $90,000Goods transferred to Packaging in July (including

units in process on July 1), 62,000 gallons ?Inventory in process, July 31, 3,000 gallons, 25%

complete as to conversion costs ?

3-2Mixing Department of Frozen Delight

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Step 1: Determine the Units to Be Assigned Costs

Total gallons charged to production:In process July 1 5,000 gallonsReceived from materials storage 60,000 gallonsTotal units accounted for by the

Mixing Department 65,000 gallons

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Total Units to Be Assigned Costs

A. Inventory in process, July 1, completed

in July5,000 gal.

B. Started and completed in July57,000 gal.

Transferred out to the Packaging

Department in July62,000 gal.

C. Inventory in process, July 31 3,000 gal.

Total gallons to be assigned costs65,000 gal.

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3-2

The Rocky Springs Beverage Company has two departments, Blending and Bottling. The Bottling Department received 57,000 liters from the Blending Department. During the period, the Blending Department completed 58,000 liters, including 4,000 liters of work in process at the beginning of the period. The ending work in process was 3,000 liters. How many liters were started and completed during the period?

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54,000 liters started and completed (58,000 completed – 4,000 beginning work in process)

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Step 2: Calculate Equivalent Units of Production

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Whole units are the number of units in production during a period, whether

completed or not. Equivalent units of production are the number of units that were completed with respect to either materials or conversion costs within a given accounting period.

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Frozen Delight’s Equivalent Units Computation for Materials in July

Percent Equivalent

Total Materials Units for

Whole Added DirectUnits in July Materials

Inventory in process, July 1 5,000 0%0

Started and completed in July (62,000 – 5,000) 57,000 100% 57,000

Transferred out to Packaging Dept. 62,000 —57,000

Inventory in process, July 31 3,000 100% 3,000

Total gallons to be assigned cost 65,00060,000

Important: Note the word

“Added”

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3-2

The Bottling Department of Rocky Springs Beverage Company had 4,000 liters in beginning work in process inventory (30% complete). During the period, 58,000 liters were completed. The ending work in process inventory was 3,000 liters (60% complete). What are the total equivalent units for direct materials if materials are added at the beginning of the process?

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Inventory in process, beginning of period 4,000 0% 0

Started and completed during theperiod 54,000 100% 54,000

Transferred out of Bottling(completed) 58,000 54,000

Inventory in process, end of period 3,000 100% 3,000Total units to be assigned costs 61,000 57,000

PercentMaterials Equiva-

Whole Added lentUnits in July Units

Answer: 57,000 equivalent units

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Conversion Equivalent Units

The direct labor and applied factory overhead are often combined as conversion

costs because they are both usually incurred evenly throughout a process.

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PercentTotal Conversion EquivalentWhole Completed Units forUnits in July Conversion

Inventory in process, July 1(70% complete) 5,000

30% 1,500Started and completed in July

(62,000 – 5,000) 57,000100% 57,000

Transferred out to Packaging Dept. 62,000 —58,500

Inventory in process, July 31(25% complete) 3,000

25% 750Total gallons to be assigned cost 65,000

59,250

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The Bottling Department of Rocky Springs Beverage Company had 4,000 liters in beginning work in process inventory (30% complete). During the period, 58,000 liters were completed. The ending work in process inventory was 3,000 liters (60% complete). What are the total equivalent units for direct materials if materials are added at the beginning of the process?

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Inventory in process, beginning of period 4,000 70% 2,800

Started and completed during theperiod 54,000 100% 54,000

Transferred out of Bottling(completed) 58,000 56,800

Inventory in process, end of period 3,000 60% 1,800Total units to be assigned costs 61,000 58,600

PercentConversion Equiva-

Whole Completed lentUnits in Period Units

*(58,000 – 4,000)

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Step 3: Determine the Cost per Equivalent Unit

Inventory in process, July 1 0 1,500Started and completed in July

(62,000 – 5,000) 57,000 57,000Transferred out of Packaging Dept.

In July 57,000 58,500Inventory in process, July 31 3,000 750Total gallons to be assigned costs 60,000 59,250

DirectMaterials Conversion

Equivalent Units from Step 2

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Conversion Equivalent Unit CostConversion Equivalent Unit Cost

Direct Materials Equivalent Unit CostDirect Materials Equivalent Unit Cost

$0.30 per equivalent unit of con-version

=$17,775 conversion cost

59,250 conversion equivalent units

$66,000 direct materials cost60,000 direct materials equivalent units

$1.10 per equivalent unit of direct materials

=

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3-2

The cost of direct materials transferred into the Bottling Department of Rocky Springs Beverage Company is $22,800. The conversion cost for the period in the Bottling Department is $8,790. The total equivalent units for direct materials and conversion are 57,000 and 58,600 liters, respectively. Determine the direct materials and conversion cost per equivalent unit.

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Equivalent units of materials:$22,800

57,000 liters= $0.40 per liter

Equivalent units of conversion:$8,790

58,600 liters= $0.15 per liter

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Inventory in process, July 1, balance $6,225Equivalent units for completing the July 1 in-process inventory 0 1,500Equivalent unit cost x $1.10 x $0.30Cost of completed July 1 in-process inventory 0 $450 450Cost of July 1 in-process inventory

transferred to Packaging Department $6,675

Direct Conver-Materials sion Total

Costs Costs Costs

Step 4: Allocate Costs to Transferred and Partially Completed Units

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Units started and completedin July 57,000 57,000

Equivalent unit cost x $1.10 x $0.30Cost to complete the units

started and completed inJuly $62,700 $17,100 $79,800

Direct Materials Conversion TotalCosts Costs Costs

Costs Associated With the Units Started and Completed

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Equivalent units in endinginventory 3,000 750

Equivalent unit cost x $1.10 x $0.30Cost to ending inventory $ 3,300 $ 225 $3,525

Direct Materials Conversion TotalCosts Costs Costs

Costs Associated With the Partially Completed Units in the Ending Inventory

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Example Exercise3-63-2

The cost per equivalent unit of direct materials and conversion in the Bottling Department of Rocky Springs Beverage Company is $0.40 and $0.15, respectively. The equivalent units to be assigned cost are as follows:

Direct Materials Conversion

Inventory in process, beginning ofperiod 0 2,800

Started and completed during the period 54,000 54,000Transferred out of Bottling (completed) 54,000 56,800Inventory in process, end of period 3,000 1,800Total units to be assigned costs 57,000 58,600

The beginning work in process inventory had a cost of $1,860. Determine the cost of completed and transferred out production, and the ending work in process inventory.

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Inventory in process, balance $ 1,860Inventory in process,

beginning of period 0 + 2,800 x $0.15 420Started and completed

during the period 54,000 x $0.40 + 54,000 x $0.15 29,700Transferred out of Bottling

(completed) $31,980Inventory in process, end of

period 3,000 x $0.40 + 1,800 x $0.15 1,470Total units to be assigned costs $33,450

DirectMaterials Conversion Total

Completed and transferred out of production $31,980Inventory in process, ending $ 1,470

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Cost of Production Report

A cost of production report is normally prepared

for each processing department at periodic

intervals.

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Cost of Production Report for Frozen Delight’s Mining Department—FIFO

(Continued)

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Cost of Production Report for Frozen Delight’s Mining Department—FIFO

(Concluded)

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The cost of production report provides the following production quantity and cost data: The units for which the department is

accountable and the disposition of those units.

The production costs incurred by the department and the allocation of those costs between completed and partially completed units.

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Frozen Delight Cost per Equivalent Unit

Direct material cost per equivalent unit (June):

$5,0005,000 equivalent units of materials

$1.00 per equivalent unit=

Conversion cost per equivalent unit (June):

$1,225(5,000 x 70%) equivalent units of

conversion cost

$0.35 per equivalent unit

=

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Prepare journal entries for transactions of a

process manufacturer.


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Journal Entries for Frozen Delight

a. Materials, including milk, cream, sugar, packaging, and indirect materials, were purchased on account, $88,000.

Materials 88,000Accounts Payable 88,000

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b. Milk, cream, and sugar were requisitioned by the Mixing Department, $66,000. Another $8,000 of packaging materials was requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging Department were $4,125 and $3,350, respectively.

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b. Work in Process—Mixing 66,000Work in Process—Packaging 8,000Factory Overhead—Mixing 4,125Factory Overhead—Packaging 3,000

Materials 81,125

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c. Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively.

Work in Process—Mixing 10,500Work in Process—Packaging 12,000

Wages Payable 22,500

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d. Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively.

Factory Overhead—Mixing 3,350Factory Overhead—Packaging 1,000

Accumulated Depreciation— Equipment 4,350

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e. The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively.

Work in Process—Mixing 7,275Work in Process—Packaging 3,500

Factory Overhead— Mixing 7,275Factory Overhead— Packaging 3,500

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f. The amount of costs transferred from the Mixing Department to the Packaging Department was $86,750 per the cost of production report in Exhibit 7.

Work in Process—Packaging 86,475Work in Process—Mixing 86,475

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g. The goods transferred out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report was $106,000.

Finished Goods—Ice Cream 106,000Work in Process— Packaging 106,000

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

Cost of Goods Sold 107,000Finished Goods—Ice Cream 107,000

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Ending Inventories for Frozen Delight

July 31

Materials $ 6,875Work in Process—Mixing Dept. 3,525Work in Process—Packaging

Department 7,725Finished Goods 4,000Total inventories $22,125

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The cost of materials transferred into the Bottling Department of Rocky Springs Beverage Company is $22,800, with $20,000 from the Blending Department, plus an additional $2,800 from the materials storeroom. The conversion cost for the period in the Bottling Department is $8,790 ($3,790 factory overhead applied and $5,000 direct labor).

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The total costs transferred to Finished Goods for the period was $31,980. The Bottling Department had a beginning inventory of $1,860.

a. Journalize (1) the cost of transferred-in materials, (2) conversion costs, and (3) the costs transferred out to Finished Goods.

b. Determine the balance of Work in Process—Bottling at the end of the period.

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b. $1,470 ($1,860 + $22,800 + $8,790 – $31,980)

a. 1. Work in Process—Bottling 22,800Work in Process—Blending

20,000Materials

2,8002. Work in Process—Bottling 8,790

Factory Overhead—Bottling3,790

Wages Payable5,000

3. Finished Goods 31,980Work in Process—Bottling

31,980

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Use cost of production reports

for decision making.


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Cost of Production ReportsHolland Beverage Company—Blending Department

For the Months Ended April 30 and May 31, 2008April May

Direct materials $ 20,000 $ 40,600Direct labor 15,000 29,400Energy 8,000 20,000Repairs 4,000 8,000Tank cleaning 3,000 8,000Total $ 50,000 $ 106,000Units completed / 100,000 / 200,000Cost per unit $ 0.50 $ 0.53

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Per-Unit Expense Comparisons 3-4

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In addition to unit production cost trends, managers of process

manufacturers are also concerned about yield trends. Yield is the

ratio of materials output quantity to the input quantity.

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3-4

The cost of energy consumed in producing good units in the Bottling Department of Rocky Springs Beverage Company was $8,400 and $7,400 for March and April, respectively. The number of equivalent units produced in March and April was 70,000 and 74,000 liters, respectively. Evaluate the cost of energy between the two months.

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Energy cost per liter, March:$8,400

70,000 liters= $0.12

Energy cost per liter, April:$7,400

74,000 liters= $0.10

The cost of energy has appeared to improve by 2 cents per liter between March and April.

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Contrast just-in-time processing with

conventional manufacturing practices.


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JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality.

JIT organizes manufacturing 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 3-5

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Documents

Process Cost Systems