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Process Cost Systems

0. 18. Process Cost Systems. 0. After studying this chapter, you should be able to:. Explain and illustrate the characteristics and cost flows for a process manufacturer. Prepare a cost of production report accounting for completed units under the Fifo method. 0.

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Process Cost Systems

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  1. 0 18 Process Cost Systems

  2. 0 After studying this chapter, you should be able to: Explain and illustrate the characteristics and cost flows for a process manufacturer. Prepare a cost of production report accounting for completed units under the Fifo method.

  3. 0 After studying this chapter, you should be able to: Prepare journal entries for transactions of a process manufacturer. Use cost of production reports for decision making. Contrast just-in-time processing with conventional manufacturing practices.

  4. 0 18-1 Objective 1 Explain and illustrate the characteristics and cost flows for a process manufacturer.

  5. Accumulate product costs. Categorize manufacturing costs into direct material, direct labor, and factory overhead. Allocate costs to products. 0 18-1 Comparing Job Order and Process Cost Systems Both systems: (Continued)

  6. 0 18-1 Both systems: Maintain perpetual materials, work in process, and finished goods inventory records. Use product cost data for decision making.

  7. 0 18-1 Primary differences: Manufacturing costs are accumulated to departments, rather than jobs. Manufacturing costs are allocated to products based on units of production. Manufacturing costs are accumulated and transferred between departments. (Continued)

  8. 0 18-1 Primary differences: Work in process inventory consists of partially completed production within a department, rather than the sum of job cost sheets of partially completed jobs. (Concluded)

  9. 0 18-1 9 (Continued)

  10. 0 18-1 10 (Concluded)

  11. 0 18-1 15

  12. DM (b) Direct Materials 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Purchases DM DM DM 16

  13. 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL (a) Purchases DM DM DM DM (c) Direct Labor—Mixing 17

  14. 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL (a) Purchases DM DM DM IM Factory OH – Packaging Factory OH – Mixing (d) Factory overhead incurred (d) Factory overhead incurred IM (d) Indirect materials 18

  15. FOA (d) Factory overhead incurred (d) Factory overhead incurred 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL (a) Purchases DM DM DM IM Factory OH – Packaging Factory OH – Mixing FOA FOA (e) Factory overhead applied—Mixing 19

  16. (d) Factory overhead incurred (d) Factory overhead incurred 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL (f) Costs trans-ferred out (a) Purchases DM DM DM IM FOA CTI Factory OH – Packaging Factory OH – Mixing FOA CTI (f) Costs transferred in 20

  17. (d) Factory overhead incurred (d) Factory overhead incurred 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL DL (f) Costs trans-ferred out (a) Purchases DM DM DM IM FOA CTI Factory OH – Packaging Factory OH – Mixing FOA DL (g) Direct labor in Packaging 21

  18. (d) Factory overhead incurred (d) Factory overhead incurred 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL DL (f) Costs trans-ferred out (a) Purchases DM DM DM IM FOA CTI FOA Factory OH – Packaging Factory OH – Mixing FOA FOA FOA (h) Factory overhead applied—Packaging 22

  19. (d) Factory overhead incurred (d) Factory overhead incurred 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL DL (f) Costs trans-ferred out (i) Costs trans-ferred out (a) Purchases DM DM DM IM FOA CTI FOA Factory OH – Packaging Factory OH – Mixing Finished Goods FOA FOA CTI CTI (i) Cost transferred in from WIP—Packaging 23

  20. (d) Factory overhead incurred (d) Factory overhead incurred 0 18-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing DL DL (f) Costs trans-ferred out (i) Costs trans-ferred out (a) Purchases DM DM DM IM FOA CTI FOA Factory OH – Packaging Factory OH – Mixing Finished Goods FOA FOA CTI CGS Cost of Goods Sold CGS CGS (j) Cost transferred to Cost of Goods Sold 24

  21. 0 18-2 Objective 2 Prepare a cost of production report accounting for completed and partially completed units under the FIFO method.

  22. 0 18-2 Mixing Department of Frozen Delight Inventory in process, July 1, 5,000 gallons Direct materials cost, 5,000 gallons $ 5,000 Conversion costs, 5,000 gallons, 70% completed 1,225 Total inventory in process, July 1 $ 6,225 Direct materials cost for July, 60,000 gallons $66,000 Direct labor for July 10,500 Factory overhead applied for July 7,275 83,775 Total production costs to account for $90,000 Goods 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 ? 26

  23. 0 18-2 Step 1: Determine the Units to Be Assigned Costs Total gallons charged to production: In process July 1 5,000 gallons Received from materials storage 60,000 gallons Total units accounted for by the Mixing Department 65,000 gallons

  24. 0 18-2 28

  25. 0 18-2 Total Units to Be Assigned Costs • Inventory in process, July 1, completed in July 5,000 gal. • Started and completed in July 57,000 gal. • Transferred out to the Packaging Department in July 62,000 gal. • Inventory in process, July 31 3,000 gal. • Total gallons to be assigned costs 65,000 gal.

  26. 0 18-2 Step 2: Calculate Equivalent Units of Production 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.

  27. Important: Note the word “Added” 0 18-2 Frozen Delight’s Equivalent Units Computation for Materials in July Percent Equivalent Total Materials Units for Whole Added Direct Units 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 65,000 60,000 33

  28. 0 18-2 34

  29. 0 18-2 Conversion Equivalent Units The direct labor and appliedfactory overhead are often combined as conversion costsbecause they are both usually incurred evenly throughout a process.

  30. 0 18-2 Percent Total Conversion Equivalent Whole Completed Units for Units in July Conversion Inventory in process, July 1 (70% complete) 5,000 30% 1,500 Started and completed in July (62,000 – 5,000) 57,000 100% 57,000 Transferred out to Packaging Dept. 62,000 — 58,500 Inventory in process, July 31 (25% complete) 3,000 25% 750 Total gallons to be assigned cost 65,000 59,250 38

  31. 0 18-2 39

  32. 0 18-2 Step 3: Determine the Cost per Equivalent Unit Equivalent Units from Step 2 Direct MaterialsConversion Inventory in process, July 1 0 1,500 Started and completed in July (62,000 – 5,000)57,00054,000 Transferred out of Packaging Dept. In July 57,000 58,500 Inventory in process, July 31 3,000 750 Total gallons to be assigned costs 60,000 59,250 42

  33. $1.10 per equivalent unit of direct materials $66,000 direct materials cost = 60,000 direct materials equivalent units $0.30 per equivalent unit of con- version $17,775 conversion cost 59,250 conversion equivalent units = 0 18-2 Direct Materials Equivalent Unit Cost Conversion Equivalent Unit Cost 43

  34. 0 18-2 Step 4: Allocate Costs to Transferred and Partially Completed Units Direct Conver- Materials sion Total Costs Costs Costs Inventory in process, July 1, balance $6,225 Equivalent units for completing the July 1 in-process inventory 0 1,500 Equivalent unit cost x $1.10x $0.30 Cost of completed July 1 in- process inventory 0 $450 450 Cost of July 1 in-process inventory transferred to Packaging Department$6,675 46

  35. 0 18-2 Costs Associated With the Units Started and Completed Direct Materials Conversion Total Costs Costs Costs Units started and completed in July 57,000 57,000 Equivalent unit cost x $1.10x $0.30 Cost to complete the units started and completed inJuly$62,700 $17,100 $79,800 47

  36. 0 18-2 Costs Associated With the Partially Completed Units in the Ending Inventory Direct Materials Conversion Total Costs Costs Costs Equivalent units in ending inventory 3,000 750 Equivalent unit cost x $1.10x $0.30 Cost to ending inventory $ 3,300 $ 225 $3,525 48

  37. 0 18-2 Cost of Production Report A cost of production report is normally prepared for each processing department at periodic intervals.

  38. 0 18-2 Cost of Production Report for Frozen Delight’s Mining Department—FIFO 52 (Continued)

  39. 0 18-2 Cost of Production Report for Frozen Delight’s Mixing Department—FIFO 53 (Concluded)

  40. 0 18-2 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.

  41. 0 18-3 Objective 3 Prepare journal entries for transactions of a process manufacturer.

  42. 0 18-3 Journal Entries for Frozen Delight a. Materials, including milk, cream, sugar, packaging, and indirect materials, were purchased on account, $88,000. Materials 88,000 Accounts Payable 88,000

  43. 0 18-3 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.

  44. 0 18-3 b. Work in Process—Mixing 66,000 Work in Process—Packaging 8,000 Factory Overhead—Mixing 4,125 Factory Overhead—Packaging 3,000 Materials 81,125

  45. 0 18-3 c. Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively. Work in Process—Mixing 10,500 Work in Process—Packaging 12,000 Wages Payable 22,500

  46. 0 18-3 d. Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively. Factory Overhead—Mixing 3,350 Factory Overhead—Packaging 1,000 Accumulated Depreciation— Equipment 4,350

  47. 0 18-3 e. The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively. Work in Process—Mixing 7,275 Work in Process—Packaging 3,500 Factory Overhead— Mixing 7,275 Factory Overhead— Packaging 3,500

  48. 0 18-3 f. The amount of costs transferred from the Mixing Department to the Packaging Department was $86,475 per the cost of production report in Exhibit 7. Work in Process—Packaging 86,475 Work in Process—Mixing 86,475

  49. 0 18-3 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 106,000 Work in Process— Packaging 106,000

  50. 0 18-3 h. The cost of goods sold out of the finished goods inventory was $107,000. Cost of Goods Sold 107,000 Finished Goods—Ice Cream 107,000

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