Process Cost Systems

1. 20 Process Cost Systems Student Version

2. 1 Describe process cost systems. 20-2

3. 1 Process Cost System A process manufacturer produces products that are indistinguishable from each other using a continuous production process. The process system used by process manufacturers is called the process cost system.

4. 1 Process cost systems are used to manufacture homogeneous products. Examples are: • Tennis balls • Motor oil • Candy bars • Soft drinks

5. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials Debit Materials and credit Accounts Payable when direct and indirect materials are purchased. (a) The cost of materials are purchased and recorded in materials. (continued)

6. Exhibit 3 DM (b) Direct Materials 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DM DM DM (b) The cost of direct materials used by the Mixing and Packaging department are recorded in the work in process account for each department. (continued)

7. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL DM DM DM (c) The cost of direct labor used by the Mixing and Packaging departments is recorded in process accounts for each department. DL (c) Direct Labor—Mixing (continued)

8. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL DM DM DM (d) The cost of factory overhead incurred for indirect materials and other factory overhead, such as depreciation, is recorded in the factory overhead accounts for each department. (continued)

9. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL DM DM DM IM Factory OH – Mixing Factory OH – Packaging (d) Factory overhead incurred (d) Factory overhead incurred IM (d) Indirect materials (continued)

10. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL DM DM DM IM (e) The factory overhead incurred in the Mixing and Packaging departments is applied to the work in process accounts for each department. Factory OH – Mixing Factory OH – Packaging (d) Factory overhead incurred (d) Factory overhead incurred (continued)

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

12. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (a) Direct and indirect materials DL DL DM DM DM FOA FOA IM (f) The cost of units completed in the Mixing Department is transferred to the Packaging Department. Factory OH – Mixing Factory OH – Packaging (d) Factory overhead incurred (d) Factory overhead incurred FOA FOA (continued)

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

14. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (f) Costs trans-ferred out (a) Direct and indirect materials DL DL DM DM DM FOA FOA IM CTI (g) The cost of units completed in the Packaging Department is transferred to Finished Goods. Factory OH – Mixing Factory OH – Packaging (d) Factory overhead incurred (d) Factory overhead incurred FOA FOA (continued)

15. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (f)Costs trans-ferred out (i)Costs trans-ferred out (a) Direct and indirect materials DL DL DM DM DM FOA FOA IM CTI Factory OH – Mixing Factory OH – Packaging (d) Factory overhead incurred (d) Factory overhead incurred Finished Goods FOA FOA CTI CTI (i)Cost transferred in from WIP—Packaging (continued)

16. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (continued) WIP – Packaging Materials WIP – Mixing (f) Costs trans-ferred out (i) Costs trans-ferred out (a) Direct and indirect materials DL DL DM DM DM FOA FOA IM CTI Factory OH – Mixing Factory OH – Packaging (h) The cost of units sold is transferred to Cost of Goods Sold. (d) Factory overhead incurred (d) Factory overhead incurred Finished Goods FOA FOA CTI (continued)

17. Exhibit 3 1 Cost Flows for a Process Manufacturer—Frozen Delight (concluded) WIP – Packaging Materials WIP – Mixing (f) Costs trans-ferred out (i) Costs trans-ferred out (a) Direct and indirect materials DL DL DM DM DM FOA FOA IM CTI Factory OH – Mixing Factory OH – Packaging (d) Factory overhead incurred (d) Factory overhead incurred Finished Goods FOA FOA CTI CGS Cost of Goods Sold (j) Cost transferred to Cost of Goods Sold CGS CGS

18. 2 Prepare a cost of production report. 20-18

19. 2 Production Report—Mixing Department 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 ?

20. 2 Step 1: Determine the Units to Be Assigned Costs Total units (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

21. 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

22. 2 Step 2: Compute 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 portion of whole units that are complete with respect to either materials or conversion (direct labor and factory overhead) costs.

23. Important: Note the word “Added” 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

24. 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 Department in July 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

25. Total Conversion Costs for the Period Total Equivalent Units of Conversion Costs Conversion Cost per Equivalent Unit = 2 Cost per Equivalent Unit Total Direct Materials Cost for the Period Total Equivalent Units of Direct Materials Direct Materials Cost per Equivalent Unit =

26. 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 to 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

27. Conversion Cost per Equivalent Unit $0.30 per gallon $17,775 conversion costs = 59,250 gallons 2 Direct Materials Cost per Equivalent Unit $1.10 per gallon $66,000 direct materials costs = 60,000 direct materials equivalent units

28. 2 Step 4: Allocate Costs to Units Transferred Out 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 × $1.10× $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

29. 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 × $1.10× $0.30 Cost to complete the units started and completed in July $62,700 $17,100 $79,800

30. 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 × $1.10× $0.30 Cost to ending inventory $ 3,300 $ 225 $3,525

31. Total Gallons Costs Inventory in process, July 1, completed in July 5,000 gallons $ 6,675 Started and completed in July 57,000 79,800 Transferred out to the Packaging Department in July 62,000 gallons $86,475 Inventory in process, July 31 3,000 3,525 Total 65,000 gallons $90,000 2 Summary

32. Exhibit 7 2 Cost of Production Report for Frozen Delight’s Mixing Department—FIFO Step 1 Step 2

33. Exhibit 7 2 Cost of Production Report for Frozen Delight’s Mixing Department—FIFO (continued) Step 3 Step 4

34. 3 Journalize entries for transactions using a process cost system. 20-34

35. 3 Journal Entries for Frozen Delight a. Purchased materials, including milk, cream, sugar, packaging, and indirect materials on account, $88,000.

36. 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 $3,000, respectively.

37. 3 c. Direct labor in the Mixing and Packaging departments was $10,500 and $12,000, respectively.

38. 3 d. Equipment depreciation for the Mixing and Packaging departments was $3,350 and $1,000, respectively.

39. 3 e. The factory overhead applied to Mixing and Packaging was $7,275 and $3,500, respectively.

40. 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.

41. 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.

42. 3 h. The cost of goods sold out of the finished goods inventory of $107,000.

43. 3 Ending Inventories for Frozen Delight July 31 Materials $ 6,875 Work in Process—Mixing Dept. 3,525 Work in Process—Packaging Department 7,725 Finished Goods 4,000 Total inventories $22,125

44. 5 Compare just-in-time processing with traditional manufacturing processing. 20-44

45. 5 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.