Process Cost Systems

1. 0 20 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 and partially 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 20-1 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 20-1 Comparing Job Order and Process Cost Systems Both systems: (Continued)

6. 0 20-1 Both systems: Maintain perpetual materials, work in process, and finished goods inventory records. Use product cost data for decision making. (Concluded)

7. 0 20-1 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 20-1 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 20-1 9 (Continued)

10. 0 20-1 10 (Concluded)

11. 0 20-1 Process cost systems are used to manufacture homogeneous products. Examples are: • Tennis balls • Motor oil • Candy bars • Soft drinks

12. 0 20-1 In contrast, job cost systems are used to manufacture unique products or provide unique services. Examples are: • Custom-built homes • Landscape design services • Custom cabinets • Airplanes (767)

13. Example Exercise 20-1 0 20-1 Which of the following industries would normally use job order costing systems and which would normally use process costing systems? Home construction Computer chips Beverages Cookies Military aircraft Video game design and production 13

14. Follow My Example 20-1 0 20-1 Home construction Job Order Beverages Process Military aircraft Job Order Computer chips Process Cookies Process Video game design and production Job Order 14 For Practice: PE20-1A, PE20-1B

15. 0 20-1 15

16. DM (b) Direct Materials 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DM DM DM Debit Materials and credit Accounts Payable when materials are purchased. 16

17. 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DM DM DM DL (c) Direct Labor—Mixing 17

18. 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DM DM DM IM Factory OH – Packaging Factory OH – Mixing (d) Factory overhead incurred (d) Factory overhead incurred IM (d) Indirect materials 18

19. FOA (d) Factory overhead incurred (d) Factory overhead incurred 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DM DM DM IM Factory OH – Packaging Factory OH – Mixing FOA FOA (e) Factory overhead applied—Mixing 19

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

21. (d) Factory overhead incurred (d) Factory overhead incurred 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL (f) Costs trans-ferred out DM DM DM IM FOA CTI Factory OH – Packaging Factory OH – Mixing FOA DL (g) Direct labor in Packaging 21

22. (d) Factory overhead incurred (d) Factory overhead incurred 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL (f) Costs trans-ferred out DM DM DM IM FOA CTI FOA Factory OH – Packaging Factory OH – Mixing FOA FOA FOA (h) Factory overhead applied—Packaging 22

23. (d) Factory overhead incurred (d) Factory overhead incurred 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL (f) Costs trans-ferred out (i) Costs trans-ferred out 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

24. (d) Factory overhead incurred (d) Factory overhead incurred 0 20-1 Exhibit 3 Cost Flows for a Process Manufacturer WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL (f) Costs trans-ferred out (i) Costs trans-ferred out 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

25. 0 20-2 Objective 2 Prepare a cost of production report accounting for completed and partially completed units under the FIFO method.

26. 0 20-2 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

27. 0 20-2 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

28. 0 20-2 28

29. 0 20-2 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. *62,000 – 5,000

30. Example Exercise 20-2 0 20-2 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 Bottling 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? 30

31. Follow My Example 20-2 0 20-2 54,000 liters started and completed (58,000 completed – 4,000 beginning work in process), or (57,000 started – 3,000 WIP) 31 For Practice: PE20-2A, PE20-2B

32. 0 20-2 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.

33. Important: Note the word “Added” 0 20-2 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

34. 0 20-2 34

35. Example Exercise 20-3 0 20-2 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? 35

36. Follow My Example 20-3 *(58,000 – 4,000) 0 20-2 Percent Materials Equiva- Whole Added lent Unitsin PeriodUnits Inventory in process, beginning of period 4,000 0% 0 Started and completed during the period 54,000* 100% 54,000 Transferred out of Bottling (completed) 58,000 54,000 Inventory in process, end of period 3,000 100% 3,000 Total units to be assigned costs 61,000 57,000 36 For Practice: PE20-3A, PE20-3B

37. 0 20-2 Conversion Equivalent Units The direct labor and appliedfactory overhead are often combined as conversion costsbecause they are both usually incurred evenly throughout a process.

38. 0 20-2 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

39. 0 20-2 39

40. Example Exercise 20-4 0 20-2 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 conversion costs? 40

41. Follow My Example 20-4 *(58,000 – 4,000) 0 20-2 Percent Conversion Equiva- Whole Completed lent Unitsin PeriodUnits Inventory in process, beginning of period 4,000 70% 2,800 Started and completed during the period 54,000* 100% 54,000 Transferred out of Bottling (completed) 58,000 56,800 Inventory in process, end of period 3,000 60% 1,800 Total units to be assigned costs 61,000 58,600 41 For Practice: PE20-4A, PE20-4B

42. 0 20-2 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)57,00057,000 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

43. $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 20-2 Direct Materials Equivalent Unit Cost Conversion Equivalent Unit Cost 43

44. Example Exercise 20-5 0 20-2 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. 44

45. Follow My Example 20-5 $22,800 57,000 liters Equivalent units of materials: = $0.40 per liter $8,790 58,600 liters Equivalent units of conversion: = $0.15 per liter 0 20-2 45 For Practice: PE20-5A, PE20-5B

46. 0 20-2 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

47. 0 20-2 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

48. 0 20-2 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

49. Example Exercise 20-6 0 20-2 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 MaterialsConversion Inventory in process, beginning of period 0 2,800 Started and completed during the period 54,00054,000 Transferred out of Bottling (completed) 54,000 56,800 Inventory in process, end of period 3,000 1,800 Total 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. 49

50. Follow My Example 20-6 0 20-2 Direct MaterialsConversionTotal Inventory in process, balance $ 1,860 Inventory in process, beginning of period 0 + 2,800 x $0.15 420 Started and completed during the period 54,000 x $0.40 + 54,000 x $0.15 29,700 Transferred out of Bottling (completed) $31,980 Inventory in process, end of period 3,000 x $0.40 + 1,800 x $0.15 1,470 Total units to be assigned costs $33,450 Completed and transferred out of production $31,980 Inventory in process, ending $ 1,470 50 For Practice: PE20-6A, PE20-6B