Product Cost Process

8/3/2019 Product Cost Process

1/48

ChapterChapter1717

Process Cost SystemsProcess Cost Systems

Financial and Managerial Accounting

8th Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of Accounting

Pepperdine University

Copyright 2004 South-Western, a divisionof Thomson Learning. All rights reserved.

Task Force Image Galleryclip art included in this

electronic presentation is used with the permission ofNVTech Inc.


2/48

Some of the action has been automated,

so click the mouse when you see this

lightning bolt in the lower right-handcorner of the screen. You can point and

click anywhere on the screen.


3/48

1. Distinguish between job order costing

and process costing systems.

2. Explain and illustrate the physical flows

and cost flows for a process

manufacturer.

3. Calculate and interpret the accounting

for completed and partially completedunits under the fifo method.

4. Prepare a cost of production report.

ObjectivesObjectives

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:


4/48

5. Prepare journal entries for transactions

of a process manufacturer.

ObjectivesObjectives

6. Use cost of production reports fordecision making.

7. Contrast just-in-time processing with

conventional manufacturing practices.


5/48

Job Order Cost System

Job CostSheets

Dept. A and

Dept. B

Comparing Job OrderComparing Job Order

Costing and Process CostingCosting and Process Costing

Direct materialsDirect materials

Factory overheadFactory overhead

Direct laborDirect labor

Work in ProcessWork in Process

AccountAccount to Finishedto FinishedGoodsGoods


6/48

Process Cost System

DirectDirect

materialsmaterials


AccountAccount


AccountAccount

DEPT. A DEPT. B

FactoryFactory

OverheadOverhead

DirectDirect

LaborLabor

FactoryFactory

OverheadOverhead

DirectDirect

LaborLabor

to Finishedto Finished

GoodsGoods




7/48

determine aproduct costby measuring the amount

of direct materials and direct labor used andallocating overhead costs.

allocate overhead using apredetermined overheadrate (or activity-based costing).

maintain perpetual inventory records with subsidiaryledgers forMaterials, Work in Process, andFinished Goods.

Both systems:Both systems:




8/48

Physical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer

ScrapMetal

Materials

MeltingMelting

DepartmentDepartment

CastingCasting



9/48

Molten

metal

transferred

fromMelting

To finished goods

CastingCasting


MeltingMelting


Physical Flows for a Process ManufacturerPhysical Flows for a Process Manufacturer


10/48

Materials WIP Melting

Factory OH Melting

DMDMPurchases ofdirect and

indirectmaterials

Direct materials used in productionDMDM

DMDM

Finished Goods

Cost of Goods Sold

Factory OH Casting

WIP Casting

Cost Flows for a Process ManufacturerCost Flows for a Process Manufacturer


11/48


DMDM

DLDL

DMDM

Direct labor used in productionDLDL

Purchases ofdirect and

indirectmaterials

Finished Goods

Cost of Goods Sold

Factory OH Casting

Actualcosts

incurred

WIP Casting

Factory OH Melting



12/48


Finished Goods

WIP Casting

Cost of Goods Sold

DMDM

DLDL

DMDM

Indirect materials used in productionIMIM


indirectmaterials

IMIM

Factory OH CastingFactory OH Melting

Actualcosts

incurred

Actualcosts

incurred



13/48


Finished Goods

WIP Casting

Cost of Goods Sold

DMDM

DLDL

DMDM

Factory overhead appliedFOAFOA


indirectmaterials

IMIM

Factory OH Casting

Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

Factory OH Melting



14/48


Finished Goods

WIP Casting

Cost of Goods Sold

DMDM

DLDL

DMDM

Cost transferred out/transferred inTO/TITO/TI


indirectmaterials

IMIM

Factory OH Casting

Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI

Factory OH Melting



15/48


Finished Goods

WIP Casting

Cost of Goods Sold

DMDM

DLDL


indirectmaterials

IMIM

Factory OH Casting

Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI

DLDL

Factory overhead appliedFOAFOA

Direct labor used in productionDLDL

FOAFOA

FOAFOA

Factory OH Melting



16/48


Finished Goods

WIP Casting

Cost of Goods Sold

DMDM

DLDL


indirectmaterials

IMIM

Factory OH Casting

Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI

DLDL

FOAFOA

FOAFOA

Cost transferred out/transferred inTO/TITO/TI

TOTO

TITI

Factory OH Melting



17/48



Finished Goods

WIP Casting

Cost of Goods Sold

DMDM

DLDL


indirectmaterials

IMIM

Factory OH Casting

Actualcosts

incurred

FOAFOA Actualcosts

incurred

FOAFOA

TOTO TITI

DLDL

FOAFOA

FOAFOA

Cost of goods soldCOGSCOGS

TOTO

TITI COGSCOGS

COGSCOGS

Factory OH Melting


18/48


19/48

Melting Department of McDermott Steel Inc.

Inventory in process, July 1, 500 tons:

Direct materials cost, 500 tons $24,550

Conversion costs, 500 tons, 70% completed 3,600

Total inventory in process, July 1 $28,150Direct materials cost for July, 1,000 tons 50,000

Conversion costs for July 9,690

Goods transferred to Casting in July, 1,100 tons ?

Inventory in process, July 31, 400 tons, 25%complete as to conversion costs ?


20/48

Step 1: Determine the Units to be Assigned CostsStep 1: Determine the Units to be Assigned Costs

BeginningBeginning

InventoryInventory

500 Tons500 Tons

Work in Process Melting

StartedStarted

1,000 Tons1,000 Tons


21/48

BeginningBeginning

InventoryInventory

500 Tons500 Tons


StartedStarted


Transferred

1,100 Tons

In a perpetual

inventory system,

outflows are recorded

as they occur.



22/48

BeginningBeginning

InventoryInventory

500 Tons500 Tons


StartedStarted


Transferred

1,100 Tons

Ending

Inventory

400 Tons


Beginning InventoryBeginning Inventory 500 Tons500 Tons11


23/48

BeginningBeginning

InventoryInventory

500 Tons500 Tons


StartedStarted


Transferred

1,100 Tons

Ending

Inventory

400 Tons



Started & Completed ? Tons+22


24/48

BeginningBeginning

InventoryInventory

500 Tons500 Tons


StartedStarted


Transferred

1,100 Tons

Ending

Inventory

400 Tons



Started & Completed 600 Tons+22


25/48

BeginningBeginning

InventoryInventory

500 Tons500 Tons


StartedStarted


Transferred

1,100 Tons

Ending

Inventory

400 Tons


Started & Completed 600 Tons+22

=

Transferred OutTransferred Out 1,100 Tons1,100 Tons

+

Ending Inventory 400 Tons33

Total units 1,500 Tons=


Total tons to beTotal tons to be

assigned costsassigned costs


26/48

The equivalent units ofproduction are the number of

units that could have beencompleted within a given

accounting period.

Step 2: Calculate

equivalent

units ofproduction


27/48

Step 2: Calculate Equivalent Units of ProductionStep 2: Calculate Equivalent Units of Production

Materials Equivalent UnitsMaterials Equivalent UnitsTotal Percent Equivalent

Units Added Units

Inventory in process, July 1 500 0% 0

Started and completed in July 600 100% 600Transferred out to Casting Dept. 1,100 600


Total tons to be assigned cost 1,500 1,000


28/48


500500EU ofEU ofmaterialsmaterials

500500 tons beginning inventorytons beginning inventory

100% materials added in June100% materials added in June

JULY 1

600600 EU ofEU ofmaterialsmaterials

600 tons started and completed

100% materials added in July

JULY 31

400 EU ofmaterials

400 tons ending inventory

100% materials added in July

1,000 Equivalent Units

Inventory in

process, July 1

Note: Startedand completed

Inventory inprocess, July 31

No materialsequivalent units

added to beginninginventory for July


29/48


Conversion Equivalent UnitsConversion Equivalent Units


Started and completed in July 600 100% 600

Transferred out to Casting Dept. 1,100 750


Total tons to be assigned cost 1,500 850

Total Percent Equivalent

Units Added Units


30/48

350350 EUEU

500 tons beginning inventory

70% completed for70% completed forconversion in Juneconversion in June

JULY 1

600600 EUEU

600 tons started and

completed

100% completed for

conversion in July

JULY 31

100100EUEU

400 tons ending inventory

25% completed for25% completed forconversion in Julyconversion in July

850 Equivalent Units

Inventory inprocess, July 1


150150EUEU

300300 EUEU

Inventory in

process, July31 (75% to becompleted forconversion in

August)

30%

completed

for

conversion

in July


31/48

Step 3: Determine the Cost per Equivalent UnitStep 3: Determine the Cost per Equivalent Unit

Equivalent UnitsDirect Materials Conversion

Inventory in process, July 1 0 150

Started and completed in July

(1,100 500) 600 600Transferred out to Casting Dept.

in July 600 750

Inventory in process, July 31 400 100

Total tons to be assigned cost 1,000 850


32/48

Beginning

Inventory

$28,150


Materials

$50,000Conversion

Costs

$9,690

Conversion Equivalent Unit CostConversion Equivalent Unit Cost

Direct Materials Equivalent Unit CostDirect Materials Equivalent Unit Cost

$11.40

per EUof con-

version

=

$50,000 direct materials cost

1,000 direct materials equivalent units

$9,690 conversion cost

850 conversion equivalent units

Step 3: Determine the Cost per Equivalent UnitStep 3: Determine the Cost per Equivalent Unit

$50.00

per EU of

DM

=


33/48

Inventory in process, July 1

beginning balance $28,150

Equivalent units for completing

the July in-process inventory 0 150

Equivalent unit cost x $50.00 x $11.40

Cost of completed July 1 in-

process inventory $0 $1,710 1,710

Cost of July 1 in-process

inventory transferred to

Casting Department $29,860

Step 4: Allocate Costs to Transferred andStep 4: Allocate Costs to Transferred and

Partially Completed UnitsPartially Completed Units

Direct Materials Conversion TotalCosts Costs Costs


34/48

Units started and completed

in July 600 600


Cost to complete the units

started and completed in

July $ 30,000 $ 6,840 $36,840





35/48

Equivalent units in ending

inventory 400 100


Cost of ending inventory $ 20,000 $ 1,140 $21,140





36/48

Beginning

Inventory

$28,150

Materials

Costs

$50,000

Started and

Completed

$36,840

Beginning

Inventory

$29,860


Total Costs

Charged

$87,840

Ending

Inventory$21,140

Conversion

Costs

$9,690

Total Costs

Assigned

$87,840

M 600 x 100% x $50.00 = $30,000

C 600 x 100% x $11.40 = 6,840

$36,840

M 400 x 100% x $50.00 = $20,000

C 400 x 25% x $11.40 = 1,140$21,140

Beginning cost $28,150

M 500 x 0% x $50.00 = 0

C 500 x 30% x $11.40 = 1,710

$29,860

Total Costs Assigned $87,840

Costs




37/48

A cost of production reportis

prepared for each processingdepartment at periodical intervals.


38/48

Cost of Production ReportCost of Production Report

The cost of production report provides thefollowing production quantity and cost data:

The units for which the department

is accountable and the deposition ofthose units.

The production costs incurred by thedepartment and the allocation ofthose costs between completed and

partially completed units.


39/48

A cost of production reportalso is used to control costs.


40/48

UnitsUnits

Step 1 Step 2

Units charged to production:

Inventory in process, July 1 500

Received from materials 1,000

Total units accounted for 1,500Units to be assigned cost:

Inventory in process, July 1

(70% complete) 500 0 150

Started and completed in July 600 600 600

Transferred to CastingDept. 1,100 600 750Inventory in process, July 31

(25% complete) 400 400 100

Total units to be assigned cost 1,500 1,000 850

Whole DirectUnits Materials Conversion

Equivalent Units

Cost of Production ReportCost of Production ReportMeltingDepartmentMeltingDepartment


41/48

CostsCosts

Direct Materials Conversion Total Costs

Costs

Step 3

Unit costs:

Total costs for July in

Melting Department $50,000 $9,690

Total equivalent units

(from Slide 43) 1,000 850Cost per equivalent unit $ 50.00 $11.40



42/48

CostsCosts Direct Conversion TotalMaterials Costs Costs

Step 4

Costs charged to production:

Inventory in process, July 1 $28,150

Cost incurred in July 59,690

Total costs accounted for $87,840

Costs allocated to completed and

partially completed units

Inventory in process, July 1 $28,150

To complete inventory of July 1 $ 0 $1,710 1,710

Started and completed in July 30,000 6,840 36,840

Transferred to CastingDept. $66,700Inventory in process, July 31 $20,000 $1,140 21,140

Total costs assigned $87,840



43/48

Journal Entries for a Process Cost SystemJournal Entries for a Process Cost System

Materials 62,000

Accounts Payable 62,000

Work in ProcessMelting 50,000

Factory OverheadMelting 4,000Factory OverheadCasting 3,000

Materials 57,000


Work in ProcessCasting 4,500

Wages Payable 9,500

Factory OverheadMelting 1,000

Factory OverheadCasting 7,000

Accumulated Depreciation 8,000

a. Materials

purchased on

account.

b. Direct and indirect

materialsrequisitioned.

c. Direct labor

used.

d. Depreciation

expenses.

Transaction Journal Entry Debit Credit


44/48



Factory OverheadMelting 4,690

Factory OverheadCasting 9,640

Work in ProcessCasting 66,700Work in ProcessMelting 66,700

e. Factory overhead

applied.

f. Costs transferred toCasting

Department

g. Casting

Department

transferred toFinished Goods

h. Goods sold.

Journal Entries for a Process Cost SystemJournal Entries for a Process Cost System

Finished Goods 78,600


Cost of Goods Sold 73,700

Finished Goods 73,700

Transaction Journal Entry Debit Credit


45/48

JustJust--inin--Time Processing (JIT)Time Processing (JIT)

JIT is a business philosophy that focuses onreducing time and cost and eliminating poorquality.

JIT organizes work cells that perform several

manufacturing steps.Workers are cross-trained to perform more than

one task. This provides flexibility and workerpride and involvement in the final product.

Because products have limited movementbetween departments, the nonvalue-added costof transporting products and parts is reduced.


46/48

UpholsteryUpholstery

Dept.Dept.

AssemblyAssembly

Dept.Dept.


CuttingCuttingDept.Dept.

Traditional Production Line

DrillinDrilling Dept.g Dept.

SandingSandingDept.Dept.

StainingStainingDept.Dept.

VarnishingVarnishing

Dept.Dept.


47/48


Just-in-Time Production Line

Work Center OneWork Center OneCutting drilling

and sanding

Work Center TwoWork Center TwoStaining and

varnishing

Work Center ThreeWork Center ThreeUpholstery and

assembly


48/48

The EndThe End

Chapter 17Chapter 17

Documents

Product Cost Process