Process Cost Systems

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Learning Objective 1 Describe process cost systems.

Process Cost System A process manufacturer produces products that are indistinguishable from each other using a continuous production process. The cost accounting system used by process manufacturers is called the process cost system. LO 1

Comparing Job Order and Process Cost Process cost systems are used to manufacture homogeneous products. Examples are: Tennis balls Motor oil Candy bars Soft drinks LO 1

Cost Flows for a Process Manufacturer F D LO 1 Materials a. Purchased a. The cost of materials purchased is recorded in the materials account. (continued)

F D LO 1 Cost Flows for a Process Manufacturer Work in Process– Mixing Department Materials b. Direct materials a. Purchased Direct materials b. The cost of direct materials used by the Mixing and Packaging departments is recorded in the work in process accounts for each department. Work in Process– Packaging Department b. Direct materials (continued)

F D LO 1 Cost Flows for a Process Manufacturer Work in Process– Mixing Department c. Direct labor c. The cost of direct labor used by the Mixing and Packaging departments is recorded in the work in process accounts for each department. Work in Process– Packaging Department c. Direct labor (continued)

F D LO 1 Cost Flows for a Process Manufacturer Factory Overhead– Mixing Department Materials d. Indirect materials Indirect materials d. The cost of indirect materials is recorded in the factory overhead accounts for each department. Factory Overhead– Packaging Department d. Indirect materials (continued)

F D LO 1 Cost Flows for a Process Manufacturer Factory Overhead– Mixing Department d. Depreciation of factory machinery d. Depreciation for each department is recorded, and its related accumulated depreciation account is credited. Factory Overhead– Packaging Department d. Depreciation of factory machinery (continued)

F D LO 1 Cost Flows for a Process Manufacturer Factory Overhead– Mixing Department d. Utilities d. Other factory overhead costs, such as utilities and indirect labor, are recorded. Factory Overhead– Packaging Department d. Utilities (continued)

F D LO 1 Cost Flows for a Process Manufacturer Factory Overhead– Mixing Department d. Factory overhead incurred d. In Exhibit 3 (in your textbook) these items are combined as factory overhead incurred. Factory Overhead– Packaging Department d. Factory overhead incurred (continued)

F D LO 1 Cost Flows for a Process Manufacturer Work in Process– Mixing Department Factory Overhead– Mixing Department e. Factory overhead applied b. Direct materials c. Direct labor d. Factory overhead incurred e. Factory overhead applied e. The factory overhead incurred in the Mixing Department is applied to the work in process account. (continued)

F D LO 1 Cost Flows for a Process Manufacturer Work in Process– Packaging Department Factory Overhead– Packaging Department e. Factory overhead applied b. Direct materials c. Direct labor d. Factory overhead incurred e. Factory overhead applied e. The factory overhead incurred in the Packaging Department is applied to the work in process account. (continued)

F D LO 1 Cost Flows for a Process Manufacturer Work in Process– Mixing Department Work in Process– Packaging Department b. Direct materials c. Direct labor b. Direct materials c. Direct labor f. Costs of units transferred out e. Factory overhead applied e. Factory overhead applied f. Costs of units trans-ferred in f. The cost of units completed in the Mixing Department is transferred to the Packaging Department. (continued)

F D LO 1 Cost Flows for a Process Manufacturer Work in Process– Packaging Department Finished Goods b. Direct materials c. Direct labor g. Costs of units transferred out g. Costs of units transferred in e. Factory overhead applied g. The cost of units completed in the Packaging Department is transferred to Finished Goods. f. Costs of units trans-ferred in (continued)

F D LO 1 Cost Flows for a Process Manufacturer Finished Goods Cost of Goods Sold g. Costs of units transferred in h. Cost of goods sold h. Cost of goods sold h. The cost of units sold is transferred to Cost of Goods Sold. (continued)

Learning Objective 2 Prepare a cost of production report.

Preparing a cost of production report requires making a cost flow assumption. Like merchandise inventory, costs can be assumed to flow through the manufacturing process using one of several methods. In the following example, the first-in, first-out (FIFO)method is used because it is often the same as the physical flow of units. LO 2 Cost of Production Report

Determine the Units to be Assigned Costs F D LO 2 Step 1:

Compute Equivalent Units of Production Whole units are the number of units in production during a period, whether completed or not. Equivalent unitsof production are the portion of whole units that are complete with respect to either materials or conversion (direct labor and factory overhead) costs. LO 2

Compute Equivalent Units of Production F D LO 2 Step 2: Conversion Costs A 1,000-gallon batch (vat) of ice cream is only 40% complete in the mixing process on May 31. Thus, the batch is only 40% complete as to conversion costs.

Conversion Equivalent Units To compute equivalent units for conversion costs, it is necessary to know how direct labor and factory overhead enter the manufacturing process. It is assumed that Frozen Delight incurs conversion costs evenly throughout its manufacturing process. LO 2

F D LO 2 Conversion Equivalent Units

Determine the Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs Conversion Cost per Equivalent Unit = LO 2 Step 3: Direct Materials Cost per Equivalent Unit Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials =

Determine the Cost per Equivalent Unit F D LO 2

Determine the Cost per Equivalent Unit F D Direct Materials Cost per Equivalent Unit $66,000 60,000 gallons = Direct Materials Cost per Equivalent Unit $1.10 per gallon = LO 2 Direct Materials Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials Direct Materials Cost per Equivalent Unit =

F D Conversion Cost per Equivalent Unit Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs = Conversion Cost per Equivalent Unit $17,775 59,250 gallons = Conversion Cost per Equivalent Unit = $0.30 per gallon LO 2 Determine the Cost per Equivalent Unit Conversion Cost

Allocating Costs to Units Product costs must be allocated to the units transferred out and the partially completed units on hand at the end of the period. LO 2 Step 4:

Allocating Costs to Units F D LO 2 The total production costs to be assigned for Frozen Delight in July are $90,000.

Allocating Costs to Units F D LO 2 Group 1: Inventory in Process on July 1 The 5,000 gallons of inventory in Group 1 were completed and transferred out to the Packaging Department in July. The cost is determined as follows:

Allocating Costs to Units F D LO 2 Group 2: Started and Completed The 57,000 units started and completed in July (Group 2) incurred all of their direct materials and conversion costs in July. The cost assigned to these 57,000 units is shown below.

F D LO 2 Allocating Costs to Units Group 2: Started and Completed The total cost transferred to the Packaging Department in July of $86,475 is the sum of the beginning inventory cost and the costs of the units started and completed in July. Group 1 Cost of July 1 in-process inventory $ 6,675 Group 2 Cost of the units started and completed in July 79,800 Total costs transferred to Packaging Department in July $86,475

F D LO 2 Allocating Costs to Units Group 3: Inventory in Process on July 31 The 3,000 gallons in process on July 31 (Group 3) incurred all of their direct materials costs and 25% of their conversion costs in July for a total cost of $3,525.

F D LO 2 Allocating Costs to Units Group 3: Inventory in Process on July 31 The total manufacturing costs for Frozen Delight in July were assigned as shown below. Note that amounts now appear where question marks appeared earlier.

Learning Objective 3 Journalize entries for transactions using a process cost system.

Journal Entries for Frozen Delight F D LO 3 a.Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000.

F D LO 3 Journal Entries for Frozen Delight b.The Mixing Department requisitioned milk, cream, and sugar, $66,000. Packaging materials of $8,000 were requisitioned by the Packaging Department. Indirect materials for the Mixing and Packaging departments were $4,125 and $3,000, respectively. direct materials direct materials indirect materials indirect materials

F D LO 3 LO 3 Journal Entries for Frozen Delight c. Incurred direct labor in the Mixing and Packaging departments of $10,500 and $12,000, respectively.

F D LO 3 LO 3 LO 3 Journal Entries for Frozen Delight d. Recognized equipment depreciation for the Mixing and Packaging departments of $3,350 and $1,000, respectively.

F D LO 3 Journal Entries for Frozen Delight e. Applied factory overhead to Mixing and Packaging departments of $7,275 and $3,500, respectively.

F D LO 3 Journal Entries for Frozen Delight f.Transferred costs of $86,475 from the Mixing Department to the Packaging Department per the cost of production report.

F D LO 3 LO 3 Journal Entries for Frozen Delight g. Transferred goods of $106,000 out of the Packaging Department to Finished Goods according to the Packaging Department cost of production report (not illustrated).

F D LO 3 Journal Entries for Frozen Delight h.Recorded cost of goods sold out of the finished goods inventory of $107,000.

F D LO 3 Frozen Delight’s Cost Flows The ending inventories for Frozen Delight are reported on the July 31 balance sheet as follows:

Learning Objective 4 Describe and illustrate the use of cost of production reports for decision making.

F D Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials Direct Materials Cost per Equivalent Unit = Direct Materials Cost per Equivalent Unit $5,000 5,000 gallons = Direct Materials Cost per Equivalent Unit $1.00 per gallon = LO 4 Using the Cost of Production Report June costs per equivalent unit of materials and conversion costs can be determined as follows: (continued)

F D Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs Conversion Cost per Equivalent Unit = Conversion Cost per Equivalent Unit $1,225 (5,000 x 70%) gallons = Conversion Cost per Equivalent Unit = $0.35 per gallon LO 4 Using the Cost of Production Report

Yield In addition to unit costs, managers of process manufacturers are also concerned about yield trends. The yield is computed as follows: Quantity of Material Output Quantity of Material Input Yield = LO 4

Learning Objective 5 Compare just-in-time processing with traditional manufacturing processing.

Just-In-Time (JIT) Processing Just-in-time (JIT) processing is a management approach that focuses on reducing time and cost and eliminating poor quality. In a just-in-time system, processing functions are combined into manufacturing cells that perform several manufacturing steps. Workers are cross-trained to perform more than one function. This provides flexibility and increases worker pride and involvement in the final product. LO 5

Process Cost Systems